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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-27328
DELTAPOINT, INC.
(Exact Name of Registrant as specified in its charter)
California 77-0216760
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
22 Lower Ragsdale, Monterey, CA 93940
(Address of principal executive offices)
408-648-4000
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
------- ------
State the number of shares outstanding of each of the issuer's classes of
common equity, as of April 30, 1997: 2,567,873
Transitional Small Business Disclosure Format (check one) Yes No X
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DELTAPOINT, INC.
INDEX
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Page
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Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets
March 31, 1997 (unaudited) and December 31, 1996 3
Condensed Statements of Operations (unaudited)
Three months ended March 31, 1997 and 1996 4
Condensed Statements of Cash Flows (unaudited)
Three months ended March 31, 1997 and 1996 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
DELTAPOINT, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
MARCH 31, DEC. 31,
1997 1996
----------- ---------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................... $ 1,548 $ 3,142
Accounts receivable, net of allowance for doubtful
accounts of $118 and $118......................... 1,577 1,904
Inventories......................................... 100 133
Prepaid expenses and other current assets........... 326 557
-------- --------
Total current assets............................ 3,551 5,736
Property and equipment, net........................... 252 277
Purchased software, net............................... 261 299
Deposits and other assets............................. 29 34
-------- --------
$ 4,093 $ 6,346
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 1,389 $ 1,238
Accrued liabilities................................. 993 1,146
Reserve for returns................................. 483 771
Notes payable....................................... 2,150 2,150
Current portion of capital lease obligations........ -- --
-------- --------
Total current liabilities....................... 5,015 5,305
Commitments and contingencies
Shareholders' (deficit) equity :
Preferred Stock, no par value, 4,000,000 shares
authorized, none issued or outstanding............ --- ---
Common stock, no par value, 25,000,000 shares
authorized 2,489,873 and 2,485,540 shares were
issued and outstanding............................ 15,265 14,707
Accumulated deficit (16,187) (13,666)
-------- --------
Total shareholders' (deficit) equity........... (922) 1,041
-------- --------
$ 4,093 $ 6,346
-------- --------
-------- --------
The accompanying notes are an integral part of these condensed financial
statements.
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DELTAPOINT, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA, UNAUDITED)
THREE MONTHS ENDED
MARCH 31
-------------------
1997 1996
-------- --------
Net revenues......................................... $ 1,023 $ 760
Cost of revenues..................................... 320 338
-------- --------
Gross profit....................................... 703 422
-------- --------
Operating expenses:
Sales and marketing................................ 1,459 888
Research and development........................... 731 486
General and administrative......................... 238 769
-------- --------
2,428 2,143
-------- --------
Loss from operations................................. (1,725) (1,721)
Interest and other (expense) income.................. (796) 17
-------- --------
Net loss............................................. $ (2,521) $ (1,704)
-------- --------
-------- --------
Net loss per share................................... $ (1.01) $ (0.79)
-------- --------
-------- --------
Shares used in per share calculations................ 2,489 2,170
-------- --------
-------- --------
The accompanying notes are an integral part of these condensed financial
statements.
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DELTAPOINT, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
THREE MONTHS ENDED
MARCH 31
-------------------
1997 1996
-------- --------
Cash flows from operating activities:
Net loss............................................ $ (2,521) $ (1,704)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 70 37
Amortization of discounted conversion feature of
notes payable................................... 537 --
Change in assets and liabilities:
Accounts receivable............................. 327 46
Inventories..................................... 33 52
Prepaid expenses and other current assets....... 231 (36)
Accounts payable................................ 151 356
Accrued liabilities............................. (153) (32)
Reserve for returns............................. (288) 231
Deposits and other assets....................... 5 15
-------- --------
Net cash used in operating activities......... (1,608) (1,035)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment............... (7) (205)
-------- --------
Net cash used in investing activities......... (7) (205)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants,
net............................................... 21 831
Repayment of capitalized lease obligations.......... -- 4
-------- --------
Net cash provided by financing activities..... 21 835
-------- --------
Decrease in cash and cash equivalents................. (1,594) (405)
Cash and cash equivalents at beginning of period...... 3,142 4,629
-------- --------
Cash and cash equivalents at end of period............ $ 1,548 $ 4,224
-------- --------
-------- --------
The accompanying notes are an integral part of these condensed financial
statements.
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DELTAPOINT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 -- THE COMPANY AND BASIS OF PRESENTATION:
Founded in 1989, DeltaPoint, Inc. (the Company), has headquarters in
Monterey, California, and distribution partners in the United States, Europe
and Japan. DeltaPoint, Inc. provides developers of individual, corporate and
commercial Web sites with advanced Web site creation and management tools
based on database component technology. In addition, the Company provides
visualization software products that are designed to facilitate the
collection, interpretation and management of business and technical
information across multiple computing environments.
The condensed financial statements should be read in conjunction with
the audited financial statements contained in the Company's Annual Report on
Form 10-KSB. In the opinion of management, all adjustments, including normal
recurring accruals, necessary for a fair presentation of the Company's
financial position, results of operations and cash flows for the interim
periods presented have been made. The interim results are not necessarily
indicative of the results to be expected for the entire year.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share."
This statement is effective for the Company's year ending December 31, 1997.
The Statement redefines earnings per share under generally accepted
accounting principles. Under the new standard, primary earnings per share is
replaced by basic earnings per share and fully diluted earnings per share is
replaced by diluted earnings per share. If the Company had adopted this
Statement for the three month period ended March 31, 1996 and for the three
month period ended March 31, 1997, the Company's pro forma loss per share
would have been as follows:
Three Months Ended Three Months Ended
March 31, 1996 March 31, 1997
----------------- --------------
Basic loss per share.......... ($0.79) ($1.01)
Diluted loss per share........ ($0.79) ($1.01)
NOTE 2 - NOTES PAYABLE:
On December 31, 1996, the Company issued $2,150,000 of convertible
promissory notes payable. The notes bear interest at 6% payable semiannually
over their two year term. The notes convert into Common Stock automatically
at the end of the two year term and are convertible at the option of the
holder with a total of 33%, 67% and 100% of the principal value of the notes
convertible on or after March 1, March 31, and April 30, 1997, respectively.
The conversion price of the notes is the lower of (a) 80% of the average
closing bid price of the Company's Common Stock for the five days prior to
notice of conversion and (b) the average offer price of the Company's Common
Stock for the five business days prior to the notes' issuance, which is $6.70
per share. The Company recognized the value of the discounted conversion
feature, or $537,000, and deferred debt issuance costs, or $262,000, as
additional interest expense during the three months ended March 31, 1997.
The amortization of the discounted conversion feature resulted in an increase
to Common Stock of $537,000 during the three months ended March 31, 1997.
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NOTE 3 - NET LOSS PER SHARE:
Net loss per share is computed using the weighted-average number of
shares of common stock and common equivalent shares, when dilutive, from
convertible promissory notes payable (using the if-converted method) and from
stock options and warrants (using the treasury stock method). Pursuant to
Securities and Exchange Commission Requirements, common and common stock
equivalent shares, options and warrants issued by the Company during the
12-month period prior to the Company's initial public offering have been
included in the calculation as if they were outstanding for all periods
presented. Due to the net loss for the three month periods ended March 31,
1997 and 1996, the common stock equivalents were excluded from the net loss
per share calculation because their effect was anti-dilutive.
NOTE 4 -- SUBSEQUENT EVENTS
In April 1997, $148,000 in principal amount of the convertible
promissory notes payable was converted into 78,000 shares of Common Stock at
an average conversion price of $1.90 per share.
On April 16, 1997, the Company entered into a Letter of Intent with
InLet Divestiture Corp. ("IDC"), InLet, Inc. ("InLet") and certain
individuals pursuant to which the Company would purchase all of the capital
stock of IDC, whose sole significant asset is certain software (including
source code and related documentation). The purchase price would be (i)
$825,000 in cash, payable in installments, and (ii) the issuance of 260,000
shares of the Company's Common Stock. The Company will also pay a royalty to
InLet in an amount equal to five percent of the net revenues from all sales,
leases, licenses, sublicenses or other transactions pursuant to which units
of the software product are distributed. Half of the amount of royalties
would be paid in the Company's Common Stock. Pending the closing of the
purchase, the Company and IDC are negotiating an OEM agreement which would
grant the Company the exclusive right to distribute the software product.
The letter of intent contemplates that if the closing of the purchase does
not occur, the OEM agreement would continue in effect. Both parties'
obligations to consummate the purchase are contingent upon the closing of an
equity financing by the Company within 90 days of the date of the letter of
intent. Consummation of the transactions contemplated in the letter of
intent is subject to certain additional conditions, including negotiation of
a definitive purchase agreement and other agreements. There can be no
assurance that the transactions contemplated in the letter of intent will be
consummated.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THIS REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED IN "FACTORS THAT MAY AFFECT FUTURE RESULTS" BELOW, IN "RISK
FACTORS" IN PART I OF THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB AT AND FOR
THE YEAR ENDED DECEMBER 31, 1996 AND "RISK FACTORS" IN THE COMPANY'S
POST-EFFECTIVE AMENDMENT NO.4 TO REGISTRATION STATEMENT ON FORM SB-2
(REGISTRATION NO. 333-3784) AS FILED WITH THE COMMISSION ON APRIL 29, 1997.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS REPORT.
OVERVIEW
DeltaPoint was incorporated on February 1, 1989 to design, develop and
market visualization software products for personal computers. DeltaPoint
commenced shipments of its initial product, DeltaGraph, at the end of 1989.
In November 1995, the Company acquired technology required to develop
WebAnimator, a multimedia authoring tool for the Web. In December 1995, the
Company acquired technology to develop QuickSite, a Web site creation and
management tool which was released in February 1996. The Company introduced
WebTools in March 1996, WebAnimator in July 1996 and QuickSite Developers
Edition in September 1996. The Company plans to incur additional expenditures
to develop Internet software tools or new versions of existing software tools
over the next several quarters. Although prior to 1996 the Company derived
substantially all of its revenues from charting and graphics software
products for desktop applications, the Company's strategy is to realize a
significant and growing percentage of future revenues from the sale of
Internet software tools.
The Company's revenues consist of license revenues from sales of
software products to distributors, resellers and end users. In addition, the
Company derives license revenues from royalty agreements with certain
customers. Under these agreements, the Company typically receives a large
percentage of the aggregate revenues in the form of a nonrefundable royalty
paid upon shipping of the master copy of software, which allows the customer
to license a specified number of copies of the Company's software.
Software product sales are recognized upon shipment of the product, net
of appropriate allowances for estimated returns. Revenues from software
royalty agreements are recognized upon shipment of a master copy of the
software product if no significant vendor obligations remain under the term
of the license agreements and any amounts to be paid are nonrefundable.
Payments received in advance of revenue recognition are recorded as deferred
revenue. The Company grants distributors and resellers certain rights of
return, price protection and stock rotation rights on unsold merchandise.
Accordingly, reserves for estimated future returns and credits for price
protection and stock rotation rights are accrued at the time of shipment.
The Company's gross profit has historically fluctuated from quarter to
quarter based on the mix of revenues derived from software product sales.
The Company's gross profit has also fluctuated based on the mix of product
revenues derived from sales of the Company's higher-margin DeltaGraph product
and sales of lower-margin graphics utilities and Internet products where the
Company must pay royalties to third parties. The Company believes these
factors may impact its gross profit in the future. See "Risk
Factors--Substantial Dependence on Recent and Anticipated Product
Introductions."
The Company's limited operating history makes the prediction of future
operating results difficult or impossible. Future operating results will
depend on many factors, including the demand for the Company's products, the
mix of revenues derived from product sales and royalty and packaging fees,
the level of product and price competition, the Company's success in
expanding its direct sales efforts for its software products and indirect
distribution channels for its Internet products and the ability of the
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Company to successfully develop and market new products and control costs.
In particular, the Company's ability to achieve revenue growth and
profitability in the future will be significantly dependent on the timely
introduction and market acceptance of products the Company has recently
introduced or is developing and the ability of the Company to successfully
develop products for new and existing markets.
As of March 31, 1997, the Company has an accumulated deficit of
$16,187,000. The Company expects to incur losses from operations for at least
the next 12 months, and perhaps longer, particularly if revenues do not
increase significantly above current levels. There can be no assurance that
the Company will not incur significant additional losses until it
successfully develops or acquires new products or enhancements to existing
products that generate significant revenues and profits. Significant
additional equity or debt financing or a reduction in the level of operations
or sales of assets will be required to enable the Company to continue as a
going concern. See "Factors That May Affect Future Results - Recent Losses;
Accumulated Deficit and - Critical Need for Additional Capital; No Assurance
of Future Financing."
RESULTS OF OPERATIONS
NET REVENUES. Net revenues for the three month period ended March 31,
1997 increased by 34.6% to $1,023,000 from $760,000 for the corresponding
period in the prior year. The increase in revenue was primarily attributable
to Internet products introduced after March 31, 1996. For the three month
period ended March 31, 1997, international revenue increased to 37.3% of net
revenues compared to 13.0% for the period ended March 31, 1996. The increase
in international revenues was primarily due to the introduction of Internet
products in the Japanese market. The Company's domestic and international
sales are principally denominated in United States dollars. Movements in
currency exchange rates did not have a material impact on the total revenue
in the periods presented. However, there can be no assurance that future
movements in currency exchange rates will not have a material adverse effect
on the Company's future revenues and results of operations.
GROSS PROFIT. Cost of revenues consists of direct materials, labor,
overhead, freight, post customer support, royalties and contract
manufacturing costs associated with the manufacturing of the Company's
products. The Company believes that these and other factors will contribute
to the fluctuations of gross profit as a percentage of revenue. Gross profit
for the three month period ended March 31, 1997 increased as a percentage of
net revenues to 68.7% from 55.5% for the corresponding period in the prior
fiscal year. The Company's gross profit has varied quarter to quarter as a
result of a number of factors including changes in customer and product mix,
inventory write-offs due to new product releases, third party royalty
obligations for the Company's Internet products and packaging revenues from
the Company's Japanese distributor.
SALES AND MARKETING. Sales and marketing expenses include sales
commissions, compensation of sales and marketing personnel and cost of
promotional activities. Sales and marketing expenses for the three month
period ended March 31, 1997 increased to $1,459,000 or 142.6% of net revenues
compared to $888,000 or 116.8% of revenues for the corresponding period in
the prior year. The increase in sales and marketing expenses was primarily
due to an increase in the use of direct mail, telemarketing, consultants, and
channel promotions used in the continued promotion of the Company's Internet
software tools and the activities associated with the launch of the Company's
QuickSite 2.5 web authoring tool which is scheduled to be released in the
second quarter of 1997. The Company expects that, if the Company obtains
additional financing, sales and marketing expenses would increase in future
periods because the Company would add sales and marketing personnel to
support the anticipated introduction of new products and updated versions of
the Company's existing products.
RESEARCH AND DEVELOPMENT. Research and development expenses for the
three month period ended March 31, 1997 increased to $731,000 or 71.5% of net
revenues compared to $486,000 or 63.9% of revenues for the corresponding
period in the prior year. The increase in research and development
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expenses was primarily due to a staffing increase for the development of
QuickSite (including the custom version for IBM). In addition, the Company
retained several consultants to aid in the development process. The Company
expects that, if the Company obtains additional financing, research and
development expenses would increase in future periods due to further
development of the Company's new products and updated and cross platform
versions of the Company's existing products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three month period ended March 31, 1997 decreased to $238,000 or 23.3% of net
revenues compared to $769,000 or 101.2% of revenues for the corresponding
period in the prior year. The decrease in general and administrative expenses
was primarily attributable to a severance expense charge in the first quarter
of 1996 of $505,000 relating to the departure of one of the Company's
founders. The Company expects that, if the Company obtains additional
financing, general and administrative expenses would increase in future
periods to the extent that the Company expands its operations.
INTEREST AND OTHER (EXPENSE) INCOME. Interest and other (expense)
income includes interest payable on the Company's convertible promissory
notes payable, amortization of the discounted conversion feature as of the
issuance date of the Company's convertible promissory notes payable and
amortization of deferred costs incurred in connection with the issuance of
such notes payable, offset by interest income earned on cash and cash
equivalents. Interest expense increased by $817,000 to $820,000 during the
first quarter of fiscal 1997 from $3,000 during the comparable 1996 period.
This increase was primarily attributable to amortization of the discounted
conversion feature of convertible promissory notes payable and the related
deferred issuance costs which totaled $799,000 during the quarter ended March
31, 1997.
PROVISION FOR INCOME TAXES. There was no provision for taxes during the
three month periods ended March 31, 1997 and 1996 due to net operating losses
and the availability of net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had a working capital deficit of
$1,464,000 and shareholders' deficit of $922,000. The Company has financed
its operations primarily through private and public sales of equity
securities, borrowings under a term loan and the private sale of debt
securities. Since inception, the Company has received $15 million in proceeds
from private sales of preferred stock and convertible debt and from the
Company's initial public offering of common stock.
The Company used net cash in operations of $1,608,000 in the three month
period ended March 31, 1997 and $1,035,000 for the corresponding period of
the prior year. Net cash used in 1997 consisted primarily of a net loss of
$2,521,000 which includes interest charges totaling $799,000 relating to the
convertible promissory notes payable amortized from the date of issuance
through the earliest available conversion date of the notes. Net cash used
in 1996 consisted primarily of a net loss of $1,704,000 offset by an
increase in accounts payable of $356,000 and the reserve returns of $231,000.
Net cash provided by financing activities totaled $21,000 in the three
month period ended March 31, 1997 and $835,000 for the corresponding period
of the prior year. Net cash from financing activities in 1997 consisted
primarily of the exercise of stock options for $21,000. Net cash from
financing activities in 1996 consisted primarily of $831,000 in net proceeds
from the Company's overallotment from the initial public offering of common
stock completed in 1995.
The Company's capital expenditures related primarily to purchases of
personal computers and computer workstations to support the Company's
development work and other property and equipment. For the three month period
ended March 31, 1997 the Company's capital expenditures totaled approximately
$7,000.
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At March 31, 1997 the Company's cash and cash equivalents was
$1,548,000. See "Factors That May Affect Future Results - Recent Losses;
Accumulated Deficit and - Critical Need for Additional Capital; No Assurance
of Future Financing." To the extent the Company continues to incur losses or
grows in the future, its operating and investing activities will use cash
and, consequently, such losses or growth will require the Company to obtain
additional sources of financing. In addition, the Company's actual capital
needs will depend upon numerous factors, including the progress of the
Company's software development activities and the amount of cash generated
from operations, none of which can be predicted with certainty. There can be
no assurance that the Company will not require additional capital sooner than
currently anticipated. Management is currently pursuing additional capital
financing, although recent attempts to secure such financing on acceptable
terms have been unsuccessful. There can be no assurance that any additional
required financing will be available to the Company on acceptable terms, or
at all. If the Company is unable to obtain additional financing, it will be
required to reduce discretionary spending in order to maintain operations at
a reduced level, seek a merger partner or sell assets. The inability to
obtain required financing or reduce discretionary spending or sell assets
would have a material adverse effect on the Company's business, financial
condition and results of operation and would prevent the Company from
continuing as a going concern. See "Factors That May Affect Future Results -
Recent Losses; Accumulated Deficit - Critical Need for Additional Capital; No
Assurance of Future Financing."
FACTORS THAT MAY AFFECT FUTURE RESULTS
RECENT LOSSES; ACCUMULATED DEFICIT
The Company incurred a net loss of $2,521,000 for the three month period
ended March 31, 1997 and had an accumulated deficit of $16,187,000 as of
March 31, 1997. The Company expects to incur losses for at least the next
12 months, and perhaps longer. There can be no assurance that the Company
will not incur significant additional losses until it successfully markets
and sells existing Internet software tools or develops or acquires new
Internet software tools or enhancements to existing Internet software tools
that generate significant revenues.
The Company's independent accountant's report on its financial
statements as of and for the years ended December 31, 1996 and 1995 contains
an explanatory paragraph indicating that the Company's accumulated deficit
and historical operating losses raise substantial doubts about its ability to
continue as a going concern. The factors leading to, and the existence of,
the explanatory paragraph may materially adversely affect the Company's
relationship with customers and suppliers, its ability to obtain revenue and
manufacture products and its ability to obtain financing. Although the
financial statements have been prepared assuming the Company will continue as
a going concern, additional equity or debt financing or a reduction in the
level of operations or a sale of assets will be required to enable the
company to continue its operations. Management is currently pursuing
additional capital financing, although recent attempts to secure such
financing on acceptable terms have not been successful. If the Company is
unable to obtain such financing, it will be required to seek financing from
other sources or reduce discretionary spending or sell assets in order to
maintain operations at a reduced level. Among other things, the Company may
seek to raise additional financing through a corporate partnering
relationship or by selling assets and may seek to reduce discretionary
spending by reducing existing programs. The accompanying financial
statements do not include any adjustments that may result from the outcome of
these uncertainties.
The Company's results of operations have historically varied
substantially from quarter to quarter and the Company expects they will
continue to do so. In the past, the Company's operating results have varied
significantly as a result of a number of factors, including the size and
timing of customer orders or license agreements, product mix, the revenues
derived from product sales and license fees, the existence and terms of
royalty and packaging arrangements, seasonality, the timing of the
introduction and customer acceptance of new products or product enhancements
by the Company's competitors, new product or
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version releases by the Company, changes in pricing policies by the Company
or its competitors, marketing and promotional expenditures, research and
development expenditures and changes in general economic conditions.
Furthermore, the Company has often recognized a substantial portion of its
revenues in the last month of the quarter, with these revenues frequently
concentrated in the last week or weeks of the quarter.
The Company's operating and other expenses are relatively fixed in the
short term. As a result, variations in timing of revenues can cause
significant variations in quarterly results of operations. For example, if
the Company obtains additional financing, the Company intends to continue to
make significant expenditures to enhance its sales and marketing activities
and to continue to make significant expenditures for research and development
activities. As such expenditures occur, the Company may be unable to reduce
these expenditures quickly if revenue is less than expected. The Company
generally does not operate with a significant order backlog and a substantial
portion of its revenue in any quarter is derived from orders booked in that
quarter, which are difficult to forecast and which are typically concentrated
at the end of the quarter. Accordingly, the Company's sales expectations are
based almost entirely on its internal estimates of future demand and not on
firm customer orders. Due to the foregoing factors, the Company believes that
quarter to quarter comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. In addition, there can be no assurance the Company will be
profitable on a quarter to quarter or any other basis in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Financial Statements."
CRITICAL NEED FOR ADDITIONAL CAPITAL; NO ASSURANCE OF FUTURE FINANCING
As of March 31, 1997, the Company's cash and cash equivalents was
approximately $1,548,000. The Company's actual capital needs will depend upon
numerous factors, including the progress of the Company's software
development activities and the amount of revenues generated from operations,
none of which can be predicted with certainty. The Company has a critical
need for additional capital. Recent attempts to secure capital financing
have been unsuccessful. There can be no assurance that any additional
required financing will be available to the Company on acceptable terms, or
at all. The inability to obtain required financing would have a material
adverse effect on the Company's business, financial condition and results of
operations. In order to continue as a going concern, the Company would be
required to significantly reduce the level of its operations, seek a merger
partner or sell assets. There can be no assurance that the Company would be
able to accomplish any of such actions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
SUBSTANTIAL DEPENDENCE ON RECENTLY INTRODUCED INTERNET SOFTWARE TOOLS
Prior to 1996, DeltaPoint derived substantially all of its product
revenues from licenses of DeltaGraph, its advanced charting and graphics
software product. However, DeltaPoint's future revenue growth will continue
to depend substantially on the successful development, introduction and
commercial acceptance of its Internet software tools. These consist of
QuickSite 1.0, its web page creation and site management product introduced
in February 1996; WebTools, its Web publishing capability tool introduced in
March 1996; WebAnimator, its multimedia authoring tool for the World Wide
Web, introduced in July 1996; QuickSite Developer's Edition, its enhanced
version of QuickSite for Web site developers and corporate Intranet
developers introduced in September 1996; and QuickSite 2.5, its updated
version of QuickSite 1.0, which it plans to release in the second quarter of
1997. Commercial acceptance of the Company's Internet software tools will
require the Company to establish additional distribution channels and sales
and marketing methods, of which there can also be no assurance, because these
products will be targeted to existing customers as well as to a significantly
different potential end user population. There can be no assurance that the
Company can successfully manage the introduction of new versions of its
existing Internet software tools or any other potential Internet software
tools or that any of its existing or potential
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<PAGE>
products will achieve significant market acceptance. Failure of any of the
Company's existing or potential products to achieve significant market
acceptance will have a material adverse effect on the Company's business,
financial condition and results of operation.
DEPENDENCE ON INTERNET
Sales of the Company's Internet software tools will depend in part upon
a robust industry and infrastructure for providing Internet access and
carrying Internet traffic. The Internet continues to be at an early stage of
development. There can be no assurance that the infrastructure or
complementary products necessary to make the Internet a viable commercial
marketplace will be developed, or, if developed, that the Internet will
become a viable commercial marketplace. If the Internet does not become a
viable commercial marketplace, the commercial benefits derived from the
Company's Internet software tools would be materially adversely effected.
RISKS ASSOCIATED WITH RETAIL DISTRIBUTION; SUBSTANTIAL CUSTOMER
CONCENTRATION
DeltaPoint sells its products to distributors for resale as well as
directly to certain retailers, including computer superstores and mass
merchandisers. Sales to a limited number of distributors and retailers have
constituted, and are anticipated to continue to constitute, a significant
portion of DeltaPoint's retail software sales. In particular, revenues from
licenses sold to Nippon Polaroid Kabushiki Kaisha, the Company's Japanese
distributor, constituted approximately 35%, 21% and 33% of the Company's net
revenues for the years ended December 31, 1995, 1996 and the three months
ended March 31, 1997, respectively. Sales to Ingram constituted approximately
13%, 30% and 12% of the Company's net revenues for the years ended December
31, 1995, 1996 and the three months ended March 31, 1997, respectively. Any
termination or significant disruption of DeltaPoint's relationship with any
major distributor or retailer, or a significant reduction in sales volume
attributable to any of such entities, could, unless or until replaced,
materially adversely affect the Company's business, financial condition and
results of operations. A deterioration in financial condition or other
business difficulties of a distributor or retailer could render the Company's
accounts receivable from such entity uncollectible, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that DeltaPoint's existing
distributors and retailers will continue to provide DeltaPoint's products
with adequate levels of shelf space or promotional support. In addition,
personal computer hardware and software companies have generally reported
declines in gross margins and greater product returns as they have increased
sales through the mass merchandise distribution channel. The Company expects
that its margins will be similarly affected as it increases sales through
this channel.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company's revenues from international operations accounted for
approximately 40% , 26% and 37% of the Company's net revenues in 1995, 1996
and the three month period ended March 31, 1997, respectively, of which
approximately 87%, 79% and 88% , respectively, were derived from sales in
Japan. The Company expects that revenues from these international operations
will continue to represent a large percentage of its net revenues.
International revenues are subject to a number of risks, including greater
difficulties in accounts receivable collection, longer payment cycles,
exposure to currency fluctuations, political and economic instability and the
burden of complying with a wide variety of foreign laws and regulatory
requirements. The Company also believes that it is exposed to greater levels
of software piracy in international markets because of the weaker protection
afforded to intellectual property in some foreign jurisdictions.
13
<PAGE>
RAPID TECHNOLOGICAL CHANGE; RISK OF PRODUCT DELAYS; RISK OF PRODUCT DEFECTS
The markets in which the Company competes are characterized by ongoing
technological developments, frequent new product announcements and
introductions, evolving industry standards and changing customer
requirements. The introduction of products embodying new technologies and the
emergence of new industry standards and practices can render existing
products obsolete and unmarketable. The Company's future success depends upon
its ability on a timely basis to enhance its existing products, introduce new
products that address the changing requirements of its customers and
anticipate or respond to technological advances, emerging industry standards
and practices in a timely, cost-effective manner. There can be no assurance
that the Company will be successful in developing, introducing and marketing
new products or enhancements to existing products or will not experience
difficulties that could delay or prevent the successful development,
introduction or marketing of these products, or that its new products and
product enhancements will adequately meet the requirements of the marketplace
and achieve any significant degree of commercial acceptance. Software
products such as those offered by the Company often contain errors or "bugs"
that can adversely affect the performance of the product or damage a user's
data. The Company has in the past discovered software defects in its products
that have adversely affected its business and operating results. If the
Company is unable, for technological or other reasons, to develop and
introduce new products or enhancements of existing products in a timely
manner or if new versions of existing products contain unacceptable levels of
product defects or do not achieve a significant degree of market acceptance,
or any of the above situations occur there could be a material adverse effect
on the Company's business, financial condition and results of operations.
COMPETITION
The Company competes on the basis of certain factors, including product
quality, first-to-market product capabilities, product performance, ease of
use, customer support and price. The Company believes it currently competes
favorably overall with respect to these factors.
The markets in which the Company competes are highly competitive and
characterized by rapid technological change, frequent new product
introductions, short product lives, evolving industry standards and
significant price erosion over the life of a product. The Company anticipates
increased competition in these markets from both existing vendors and new
market entrants. In the charting market, the Company has, to date,
encountered competition primarily from larger vendors such as Adobe Systems
Incorporated, Microsoft Corporation ("Microsoft"), Software Publishing
Corporation, Lotus, Corel Corporation, and Computer Associates International,
Inc. In the structured drawing market, the Company has, to date, encountered
competition primarily from larger vendors such as Corel, Visio and Micrografx
Incorporated. In the Internet software tools market, the Company has
encountered competition primarily from Netscape Communications Corporation,
Macromedia, Inc., Adobe Systems Incorporated, Microsoft, NetObjects and
Quarterdeck, Inc. IBM agreed in March 1997 to acquire a majority interest in
NebObjects. In addition, the Company expects that existing vendors and new
market entrants will develop products that will compete directly with the
Company's products and that competition will increase significantly to the
extent that markets for the Company's products grow. Increased competition is
likely to result in price reductions, reduced gross margins and loss of
market share, any of which could have a material adverse effect on the
Company's business, financial condition and results of operation. Most of the
Company's current and potential competitors have substantially greater
financial, technical, marketing, sales and customer support resources,
greater name recognition and larger installed customer bases than the
Company. Because there are minimal barriers to entry into the software
market, the Company believes sources of competition will continue to
proliferate. The market for the Company's products is characterized by
significant price competition, and the Company expects it will face
increasing pricing pressures. There can be no assurance the Company will be
able to maintain its historic pricing structure, and an inability to do so
would have a material adverse effect on the Company's business, financial
condition and results of operations. If the Company is unable to compete
effectively against current and
14
<PAGE>
future competitors, the Company's business, financial condition and results
of operations will be materially adversely affected.
RELIANCE ON MICROSOFT
Microsoft Windows has gained widespread market acceptance as the
dominant computer operating system. Accordingly, the Company's products have
been and it is intended that they will continue to be designed to function in
the Microsoft Windows, Windows '95 or Windows NT environments, and the
Company anticipates that future products will also be designed for use in
these Microsoft environments. Because the Company expects that its
Microsoft-based applications of these products will account for a significant
portion of new license revenue for the foreseeable future, sales of these
products would be materially and adversely affected by market developments
adverse to Microsoft Windows, Windows '95 and Windows NT. The Company's
ability to develop products using the Microsoft Windows, Windows '95 and NT
environments is substantially dependent on its ability to gain timely access
to, and to develop expertise in, current and future developments by
Microsoft, of which there can be no assurance. Moreover, the abandonment by
Microsoft of its current operating system, product line or strategy, or the
decision by Microsoft to develop and market products that directly or
indirectly compete with the Company's products would have a material adverse
effect on the Company's business, financial condition and results of
operations
DEPENDENCE ON LIMITED NUMBER OF KEY PERSONNEL
The Company's success depends to a significant extent upon the
contributions of several key personnel, some of whom were only recently hired
by the Company. The failure to attract and retain key personnel could have a
material adverse affect on the Company's business, financial condition and
results of operations.
RISKS ASSOCIATED WITH MANAGING BUSINESS
In recent years, the transition of the Company's business to Internet
software tools has challenged, and is expected to continue to challenge, the
Company's management and operations, including its sales, marketing, customer
support, research and development and finance and administrative operations.
The Company's future performance will depend in part on its ability to manage
growth, should it occur, both in its domestic and international operations
and to adapt its operational and financial control systems, if necessary, to
respond to changes resulting from such growth. The Company intends to
continue to invest in improving its financial systems and controls in
connection with anticipated increases in the level of its operations.
Although the Company believes that its systems and controls are adequate for
its current level of operations, the Company anticipates that it may need to
add additional personnel and expand and upgrade its financial systems to
manage any future growth. The failure of the Company's management to respond
to and manage growth effectively could have a material adverse effect on the
Company's business, financial condition and results of operations.
RELIANCE ON SOLE PRODUCT ASSEMBLER
All of the Company's software products are currently assembled by a
related third party assembler that beneficially owns approximately 1.5% of
the Company's Common Stock as of March 31, 1997. Although reliance on third
party assemblers is common in the software industry and DeltaPoint believes
that other assemblers are available, the Company has no formal contract with
the assembler and the termination or interruption of this assembly
arrangement could have a material adverse effect on the Company's business,
financial condition and results of operations until an alternate assembler is
secured.
15
<PAGE>
RISKS ASSOCIATED WITH PRODUCT RETURNS; PRICE PROTECTION
Consistent with industry practice, the Company allows distributors,
retailers and end users to return products for credits towards the purchase
of additional products. In addition, DeltaPoint's promotional activities,
including free trial and satisfaction guaranteed offers, and competitors'
promotional or other activities could cause returns to increase sharply at
any time. Further, the Company expects that the rate of product returns could
increase to the extent that the Company introduces new versions of its
existing products. For example, product returns may increase above historical
levels as a result of new product introductions. In addition, if the Company
reduces its prices, the Company credits its distributors for the difference
between the purchase price of products remaining in their inventory and the
Company's reduced price for such products. Although the Company provides
allowances for anticipated returns and price protection obligations, and
believes its existing policies have resulted in the establishment of
allowances that are adequate and have been adequate in the past, there can be
no assurance that such product returns and price protection obligations will
not exceed such allowances in the future and as a result will not have a
material adverse effect on future operating results, particularly since the
Company seeks to continually introduce new and enhanced products and is
likely to face increasing price competition.
LIMITED INTELLECTUAL PROPERTY PROTECTION
The Company's ability to compete effectively depends in large part on
its ability to develop and maintain proprietary aspects of its technology.
Despite precautions taken by the Company, it may be possible for unauthorized
third parties to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Moreover, the laws of
some foreign countries do not protect the Company's proprietary rights in its
products to the same extent as do the laws of the United States. The Company
licenses its products primarily under "shrink wrap" license agreements that
are included in products shipped by the Company and are not signed by
licensees, therefore they may be unenforceable under the laws of certain
jurisdictions. In addition, some aspects of the Company's products are not
subject to intellectual property protection.
The Company cannot be certain that others will not independently develop
substantially equivalent or superseding proprietary technology, or that an
equivalent product will not be marketed in competition with the Company's
products, thereby substantially reducing the value of the Company's
proprietary rights. There can be no assurance that any confidentiality
agreements between the Company and its employees will provide adequate
protection for the Company's proprietary information in the event of any
unauthorized use or disclosure of such proprietary information.
Although the Company is not currently engaged in any intellectual
property litigation or proceedings, there can be no assurance that the
Company will not become involved in such proceedings. An adverse outcome in
litigation or similar adversarial proceedings could subject the Company to
significant liabilities to third parties, require disputed rights to be
licensed from others or require the Company to cease the marketing or use of
certain products, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. The
Company may be required to obtain licenses to patents or proprietary rights
of others, and there can be no assurance that any licenses required under any
patents or proprietary rights would be made available on terms acceptable to
the Company, if at all.
VOLATILITY OF STOCK PRICE; POSSIBLE ILLIQUIDITY OF TRADING MARKET
The Company's stock price has exhibited substantial volatility since the
Company's initial public offering in December 1995. The trading price of the
Company's Common Stock could be subject to significant fluctuations in
response to variations in quarterly operating results, changes in analysts'
estimates, announcements of technological innovations by the Company or its
competitors, general
16
<PAGE>
conditions in the Internet tools and visualization software industry and
other factors. In addition, the stock market is subject to price and volume
fluctuations that affect the market prices for companies in general, and
small capitalization, high technology companies in particular, and are often
unrelated to operating performance.
The shares of Common Stock were quoted on the Nasdaq SmallCap Market
from December 1995 until March 18, 1997 and are traded on the Pacific Stock
Exchange and quoted on the OTC Bulletin Board and the "pink sheets". The
Company was delisted from the Nasdaq SmallCap Market effective March 19, 1997
because of Nasdaq's determination that the Company failed to maintain certain
requirements for continued listing. As a result, it is more difficult to
dispose of, or to obtain accurate quotations as to the price of the Company's
Common Stock. In addition, because the Company's Common Stock was removed
from the Nasdaq SmallCap Market and its market price is less than $5.00 per
share, it is subject to so-called "penny stock" rules that impose additional
sales practice and market making requirements on broker-dealers who sell
and/or make a market in such securities. Consequently, removal from the
Nasdaq SmallCap Market, and the applicability of such "penny stock" rules
could adversely affect ability or willingness of broker-dealers to sell
and/or make a market in the Company's Common Stock and the ability of
purchasers of the Company's Common Stock to sell their securities in the
secondary market.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no material pending legal proceedings against the Company.
ITEM 5. OTHER INFORMATION
On April 16, 1997, the Company entered into a Letter of Intent
with InLet Divestiture Corp. ("IDC"), InLet, Inc. ("InLet") and
certain individuals pursuant to which the Company would purchase
all of the capital stock of IDC, whose sole significant asset is
certain software (including source code and related
documentation). The purchase price would be (i) $825,000 in
cash, payable in installments, and (ii) the issuance of 260,000
shares of the Company's Common Stock. The Company will also pay
a royalty to InLet in an amount equal to five percent of the net
revenues from all sales, leases, licenses, sublicenses or other
transactions pursuant to which units of the software product are
distributed. Half of the amount of royalties would be paid in
the Company's Common Stock. Pending the closing of the purchase,
the Company and IDC are negotiating an OEM agreement which would
grant the Company the exclusive right to distribute the software
product. The letter of intent contemplates that if the closing
of the purchase does not occur, the OEM agreement would continue
in effect. Both parties' obligations to consummate the purchase
are contingent upon the closing of an equity financing by the
Company within 90 days of the date of the letter of intent.
Consummation of the transactions contemplated in the letter of
intent is subject to certain additional conditions, including
negotiation of a definitive purchase agreement and other
agreements. There can be no assurance that the transactions
contemplated in the letter of intent will be consummated.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter ended March 31,
1997.
EXHIBITS
10.28* Offer letter dated as of March 24, 1997 between the
Registrant and Jeffrey F. Ait
-----------------------------------------------------------------------
* Incorporated by reference to Registrant's Amendment No. 1 to
Registration Statement on Form SB-2 filed April 9, 1997 (File No.
333-22565).
18
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DELTAPOINT, INC.
By: /s/ Donald B. Witmer
------------------------------
Donald B. Witmer
Chief Operating Officer and
Chief Financial Officer and
(Principal Accounting Officer)
Date: May 14, 1997
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEETS AND CONDENSED STATEMENTS OF OPERATIONS FOUND ON PAGES 3
AND 4 OF THE COMPANY'S FORM 10-QSB FOR THE YEAR-TO-DATE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,548
<SECURITIES> 0
<RECEIVABLES> 1,695
<ALLOWANCES> 118
<INVENTORY> 100
<CURRENT-ASSETS> 3,551
<PP&E> 1,337
<DEPRECIATION> 1,085
<TOTAL-ASSETS> 4,093
<CURRENT-LIABILITIES> 5,015
<BONDS> 0
0
0
<COMMON> 15,265
<OTHER-SE> (16,187)
<TOTAL-LIABILITY-AND-EQUITY> 4,093
<SALES> 1,023
<TOTAL-REVENUES> 1,023
<CGS> 320
<TOTAL-COSTS> 320
<OTHER-EXPENSES> 2,428
<LOSS-PROVISION> 5
<INTEREST-EXPENSE> 820
<INCOME-PRETAX> (2,521)
<INCOME-TAX> 0
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<NET-INCOME> (2,521)
<EPS-PRIMARY> (1.01)
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