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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 31, 1997: 3,568,545
Transitional Small Business Disclosure Format (check one) Yes_____ No__X__
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DELTAPOINT, INC.
INDEX
PAGE
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets
June 30, 1997 (unaudited) and December 31,
1996......................................... 3
Condensed Statements of Operations
(unaudited)
Three months and six months ended June 30,
1997 and 1996................................ 4
Condensed Statements of Cash Flows
(unaudited)
Six 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................................... 9
Part II. OTHER INFORMATION
Item 1. Legal Proceedings............................ 24
Item 4. Submission of Matters to a Vote of Security
Holders...................................... 24
Item 6. Exhibits and Reports on Form 8-K............. 24
Signature............................................................ 25
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DELTAPOINT, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DEC. 31,
1997 1996
----------- ----------
<S> <C> <C>
(UNAUDITED)
Current assets:
Cash and cash equivalents.............................................................. $ 1,211 $ 3,142
Accounts receivable, net of allowance for doubtful accounts of $111 and $118........... 812 1,904
Inventories............................................................................ 117 133
Prepaid expenses and other current assets.............................................. 485 557
----------- ----------
Total current assets................................................................. 2,625 5,736
Property and equipment, net.............................................................. 235 277
Purchased software, net.................................................................. 224 299
Deposits and other assets................................................................ 30 34
----------- ----------
$ 3,114 $ 6,346
----------- ----------
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................................... $ 1,305 $ 1,238
Accrued liabilities.................................................................... 923 1,146
Reserve for returns.................................................................... 225 771
Notes payable.......................................................................... 38 2,150
Current portion of capital lease obligations........................................... -- --
----------- ----------
Total current liabilities............................................................ 2,491 5,305
Commitments and contingencies
Shareholders' equity:
Preferred Stock, no par value, 4,000,000 shares authorized, 2,500 shares designated as
Series A 1,530 shares issued and outstanding......................................... 1,530 --
Common stock, no par value, 25,000,000 shares authorized, 2,871,873 and 2,485,540
shares issued and outstanding........................................................ 15,847 14,707
Accumulated deficit.................................................................... (16,754 ) (13,666)
----------- ----------
Total shareholders' equity........................................................... 623 1,041
----------- ----------
$ 3,114 $ 6,346
----------- ----------
----------- ----------
</TABLE>
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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues........................................................... $ 472 $ 1,133 $ 1,495 $ 1,893
Cost of revenues....................................................... 150 283 470 621
--------- --------- --------- ---------
Gross profit......................................................... 322 850 1,025 1,272
--------- --------- --------- ---------
Operating expenses:
Sales and marketing.................................................. 782 1,163 2,241 2,051
Research and development............................................. 616 602 1,347 1,088
General and administrative........................................... 241 192 479 961
--------- --------- --------- ---------
1,639 1,957 4,067 4,100
--------- --------- --------- ---------
Loss from operations................................................... (1,317) (1,107) (3,042) (2,828)
Interest (expense) income, net......................................... (21) 22 (817) 39
Other income........................................................... 771 -- 771 --
--------- --------- --------- ---------
Net loss............................................................... $ (567) $ (1,085) $ (3,088) $ (2,789)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net loss per share..................................................... $ (0.21) $ (0.49) $ (1.20) $ (1.27)
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in per share calculations.................................. 2,652 2,217 2,571 2,193
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
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)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................................... $ (3,088) $ (2,789)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................................ 342 102
Amortization of discounted conversion feature of notes payable (note 2).................. 537 --
Gain on DeltaGraph disposition (note 4).................................................... (771) --
Change in assets and liabilities:
Accounts receivable...................................................................... 1,092 336
Inventories.............................................................................. 16 65
Prepaid expenses and other current assets................................................ (129) (1)
Accounts payable......................................................................... 67 410
Accrued liabilities...................................................................... (223) (283)
Reserve for returns...................................................................... (546) (158)
Deposits and other assets................................................................ 4 18
--------- ---------
Net cash provided by (used in) operating activities.................................... (2,699) (2,300)
--------- ---------
Cash flows from investing activities:
Acquisition of property and equipment...................................................... (24) (272)
DeltaGraph disposition..................................................................... 771 --
--------- ---------
Net cash used in investing activities.................................................. 747 (272)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants, net................................... 21 790
Repayment of capitalized lease obligations................................................. -- (45)
--------- ---------
Net cash provided by financing activities.............................................. 21 745
--------- ---------
Decrease in cash and cash equivalents........................................................ (1,931) (1,827)
Cash and cash equivalents at beginning of period............................................. 3,142 4,629
--------- ---------
Cash and cash equivalents at end of period................................................... $ 1,211 $ 2,802
--------- ---------
--------- ---------
</TABLE>
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 provided
visualization software products that were designed to facilitate the collection,
interpretation and management of business and technical information across
multiple computing environments until May 1, 1997 at which time the Company sold
its DeltaGraph product line.
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 ("FAS 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. FAS 128 will
require the retroactive restatement of all previously reported amounts upon
adoption. Due to the Company's net loss, the adoption of FAS 128 will not have a
material affect on the reported loss per share.
NOTE 2 -- NOTES PAYABLE / SERIES A PREFERRED STOCK:
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 six months ended June 30, 1997. The amortization of the discounted
conversion feature resulted in an increase to Common Stock of $537,000 during
the six months ended June 30, 1997. During the six months ended June 30, 1997,
holders of notes payable converted $2,112,000 in principal value into $1,530,000
of Series A Preferred Stock and 382,000 shares of Common Stock.
PREFERRED STOCK
The Company has authorized up to 4,000,000 shares of Preferred Stock
available for issuance upon approval of the Board of Directors. On June 30,
1997, the Company issued 1,530 shares of Series A Preferred Stock at a price of
$1,000 per share in exchange for $1,530,000 in principal value of convertible
notes outstanding. Each share of Series A Preferred Stock is convertible, at any
time, at the option of the holders into the number of shares of the Company's
Common Stock detemrined by dividing $1,000 by the
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lower of (i) 80% of the average of the fair market value of the Common Stock for
the five business days prior to the conversion date, or (ii) $3.50 per share.
The conversion price is subject to adjustment in certain circumstances. The
shares of Series A Preferred Stock are also automatically convertible into
Common Stock on the second anniversary of their issue date or, if earlier, upon
the occurrence of certain other events. The holders of Series A Preferred Stock
are entitled to cumulative dividends at an annual rate of $90.00 per share,
payable quarterly. Dividends are payable in cash or, at the Company's election,
in shares of Common Stock valued at 80% of the average fair market value thereof
for the five business days prior to the day on which dividends are payable. Upon
liquidation of the Company or a merger of the Company that results in the
transfer of 50% or more of the voting power of the Company or the sale of all or
substantially all of the Company's assets, holders of Series A Preferred Stock
are entitled to receive $1,000 per share plus any accrued but unpaid dividends.
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). Due to the net loss for the six
month periods ended June 30, 1997 and 1996, the common stock equivalents were
excluded from the net loss per share calculation because their effect was
anti-dilutive.
NOTE 4 -- SALE OF DELTAGRAPH PRODUCT LINE:
On June 27, 1997, the Company completed the sale of its DeltaGraph product
line to SPSS, Inc. ("SPSS") with an effective date of May 1, 1997 for aggregate
proceeds of $1,310,000 in cash of which $910,000 was attributable to the sale of
the Delta Graph product line and $400,000 was attributable to services to be
rendered by the Company pursuant to a management agreement (the "Management
Agreement"). The Company received $910,000 on June 30, 1997. The Company will
recognize amounts due under the Management Agreement upon completion of all
obligations required under the agreement.
In the quarter ended June 30, 1997, the Company recorded a non-operating
gain related to the sale of the DeltaGraph product line in other income as
follows:
<TABLE>
<S> <C>
Total sales price................................................ $ 910,000
Less:
Expenses related to the sale................................. (105,000)
Net book value of assets transferred......................... (34,000)
---------
Gain on sale of DeltaGraph product line.......................... $ 771,000
---------
---------
</TABLE>
As a result of the Company's significant tax loss carry-forwards and other
tax benefits, the Company did not incur a tax expense related to this gain.
Following the effective date of this transaction, the Company no longer has
revenues related to the sales of the DeltaGraph product line. DeltaGraph
revenues were $3,067,000 and $659,000 for the year ended December 31, 1996 and
the six months ended June 30, 1997, respectively. Such revenues were 62.0% and
44.0% of total revenues for 1996 and the six months ended June 30, 1997,
respectively. During 1996 and the six months ended June 30, 1997, cost of
revenues and operating expenses directly attributable to DeltaGraph totaled
$1,800,000 and $530,000, respectively. Such revenues and expenses have not
continued subsequent to the disposition of the product.
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The proforma net revenues, related net loss and net loss per share of the
Company for the year ended December 31, 1996 and six months ended June 30, 1997
after giving effect to the DeltaGraph transaction as if it had been consummated
at January 1, 1996, are as follows:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE DECEMBER 31,
30, 1997 1996
(PRO FORMA) (PRO FORMA)
------------- -------------
<S> <C> <C>
Net Revenues.................................................... $ 883,000 $ 1,883,000
Net Loss........................................................ (3,988,000) (6,115,000)
Net Loss per Share.............................................. (1.55) (2.74)
</TABLE>
NOTE 5 -- PENDING AND RECENT ACQUISITIONS:
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 certain internet technologies
(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 would also pay royalties on
sales, licenses, sublicenses or other transactions pursuant to which units of
the software product are distributed. Half of the amount of royalties could be
paid in the Company's Common Stock. Pending the closing of the purchase, the
Company and IDC entered into an OEM agreement which grants 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. In addition, the Company entered into a
consulting agreement in which the Company is paying $20,000 a month in
consulting fees starting July 1, 1997. 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.
On July 11, 1997 the Company completed the acquisition of
Site/technologies/inc. ("Site"), a privately held company. In connection with
this acquisition, the Company issued a total of 550,000 shares of its Common
Stock with an aggregate market value of $825,000 on the date of acquisition to
the former stockholders of Site, in exchange for all outstanding shares of Site.
In addition, the Company agreed to pay royalties on sales of certain products.
8
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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. 5 TO
REGISTRATION STATEMENT ON FORM SB-2 (REGISTRATION NO. 333-3784) AS FILED WITH
THE COMMISSION ON JUNE 12, 1997. THE FOLLOWING DISCUSSION SHOULD BE READ IN
CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS REPORT.
OVERVIEW
CORPORATE EVENTS. The Company was incorporated on February 1, 1989 to
design, develop and market visualization software products for personal
computers. The Company commenced shipments of its initial product, DeltaGraph,
at the end of 1989. The Company conducted its initial public offering in
December 1995. Commencing with its acquisition of the technology required to
develop WebAnimator (a multimedia authoring tool for the Web) in November 1995,
the Company's strategy has been to realize a significant and growing percentage
of its revenues from the sale of Internet software products. Towards that end,
the Company acquired technology to develop QuickSite (a Web site creation and
management tool) in December 1995 (released version 1.0 in February 1996) and
introduced WebTools in March 1996, WebAnimator in July 1996, QuickSite
Developer's Edition in September 1996 and QuickSite 2.5 in May 1997.
DELTAGRAPH DISPOSITION. On June 27, 1997, as part of the Company's
continuing strategy to focus its development, sales and marketing efforts on
Internet software products, the Company consummated the "DeltaGraph Disposition"
pursuant to which the Company sold those assets related to its DeltaGraph
software product line to SPSS, Inc. ("SPSS") for $910,000 in cash. The
DeltaGraph product line consisted of an advanced multi-platform charting and
graphics software product for desktop applications. The effective date for the
disposition was May 1, 1997 and as part of the DeltaGraph Disposition,
DeltaPoint also agreed to assist in the transition of DeltaGraph to SPSS through
July 31, 1997. In return, SPSS agreed to make an additional $400,000 cash
payment to DeltaPoint on August 10, 1997. See Note 4 to the Notes to Condensed
Financial Statements.
In addition, to further focusing the Company on Internet software products,
the DeltaGraph disposition provided the Company with much needed liquidity.
RECENT AND PENDING ACQUISITION. On July 11, 1997, the Company consummated
the "Site Tech Acquisition" pursuant to which the Company acquired from
Site/technologies/inc. ("Site"), among other things, SiteSweeper 1.0, a Web site
quality control and maintenance product. The Company is currently developing
SiteSweeper 2.0, which is being designed to enable Web development and
management professionals to maintain the integrity of mission critical Web based
business environments. The Company is planning to introduce SiteSweeper 2.0 in
the third quarter of 1997, at the earliest. The Company does not intend to
actively market or distribute SiteSweeper 1.0. In connection with the Site Tech
Acquisition, the Company issued a total of 550,000 shares of Common Stock with
an aggregate fair value of $825,000 on the acquisition date to the former
stockholders of Site in exchange for all outstanding shares of Site. In
addition, the Company also agreed to pay the specified royalties on sales of
certain products developed from the technologies acquired from Site.
On April 16, 1997, DeltaPoint entered into the Letter of Intent for the
"Inlet Technology Acquisition" with, among others, Inlet, Inc. ("Inlet")
pursuant to which the Company agreed to acquire from Inlet certain Internet
technologies. As consideration for the Inlet Technology Acquisition, the Company
has agreed to pay to Inlet an aggregate of $825,000 in cash (payable in
installments) and 260,000 shares of the Company's Common Stock payable at
closing. There can be no assurance that the Inlet Technology
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Acquisition will be consummated. Such transaction is contingent on a number of
factors including negotiation of definitive documentation and consummation by
the Company of an equity offering. See Note 5 to the Notes to Condensed
Financial Statements.
To the extent that the Company is able to secure sufficient financing, the
Company plans to incur additional expenditures to develop or acquire Internet
software products or develop new versions of existing products over the next
several quarters.
POTENTIAL NAME COMPANY NAME CHANGE TO SITETECH INC. In connection with the
Site Tech Acquisition, the Company obtained the rights to the name
Site/technologies/inc. The Company is currently contemplating changing its legal
name to SiteTech Inc. or a similar name. Any such name change would require an
amendment to the Company's Articles of Incorporation and, as a result, would
require shareholder approval. In anticipation of any such name change, the
Company may commence branding and marketing its products using the name SiteTech
or a similar name.
REVENUES. 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. In addition, the Company currently
plans to introduce products targeted at the small to medium businesses ("SMBs")
and corporate department user markets for scalable Web site development and
management solutions. In connection with the planned introduction of these
products, the Company plans to significantly increase its use of non-retail
distribution channels including VARs, OEMs and Internet Service Providers
("ISPs").
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.
IMPACT OF DELTAGRAPH DISPOSITION. As a result of the DeltaGraph
Disposition, the Company's future operating results will not be comparable to
its historical operating results and should not be relied upon as an indication
of future operating results. Moreover, the Company's future profitability will
be entirely dependent on the success of its Internet software products. Set
forth below on an actual and pro forma basis giving effect to the DeltaGraph
Disposition are the Company's net revenues, operating losses and gross profit
for the six months ended June 30, 1997 and the year ended December 31, 1996. The
sale of DeltaGraph is not expected to result in a significant reduction in
operating expenses as the Company plans to continue its investment in developing
new and updated versions of its Internet software products.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED FOR THE YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
---------------------- ----------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Net Revenues.................................................. $ 1,495 $ 836 $ 4,950 $ 1,883
Loss from Operations.......................................... $ (3,042) $ (3,171) $ (4,922) $ (6,189)
Gross Profit Percentage....................................... 68.6% 66.5% 76.1% 72.3%
</TABLE>
HISTORIC AND ANTICIPATED LOSSES. The Company incurred net losses of
$4,848,000 for the year ended December 31, 1996 and $3,088,000 for the six
months ended June 30, 1997, and had an accumulated deficit of $16,754,000 as of
June 30, 1997. The Company expects to incur losses for at least the next 12
months,
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and possibly longer. The Company's future operating results will depend on many
factors, including the successful development, introduction and commercial
acceptance of the Company's Internet software products (including Internet
software products targeted by the Company at the SMB and corporate department
user markets); continued emergence of the evolving Internet software product
market; the Company's success in expanding its use of non-retail distribution
channels for SMB and corporate department user Internet software solutions
including VARs, OEMs and ISPs; the mix of revenues derived from product sales
and royalty fees and the level of product and price competition. In particular,
there can be no assurance that the Company will be successful in its efforts to
introduce additional products targeted at the SMB or the corporate department
user market or to expand its distribution channels in order to service these
markets.
FLUCTUATIONS. 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 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 such 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. 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 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, to the extent
that the Company succeeds in its strategy to target the SMB and corporate
departmental user markets, among other things, the Company's results of
operations and financial condition may be subject to greater or different
fluctuations as a result of potentially larger individual product sales,
seasonality, a longer sales cycle and longer payment terms. There can be no
assurance the Company will be profitable on a quarter to quarter or any other
basis in the future.
SERIES A PREFERRED STOCK; CONVERTIBLE NOTES. In December 1996, the Company
issued $2,150,000 in principal amount of its 6% Convertible Subordinated
Debentures ("Convertible Notes"). In April through June 1997, $582,000 in
principal amount of Convertible Notes was converted into shares of Common Stock,
and on June 30, 1997 all but $37,500 of the remaining principal value of the
Convertible Notes was converted into shares of the Company's Series A Preferred
Stock ("Series A Preferred Stock"). The Series A Preferred Stock and Convertible
Notes are convertible into shares of Common Stock generally at a price equal to
80% of the five day average closing price on the OTC Bulletin Board for the five
business days prior to conversion. During the quarter ended March 31, 1997, the
Company recognized the value of the discounted conversion feature and deferred
debt issuance costs of aggregating $799,000 as additional interest expense. The
Company does not expect to record any similar charges related to these
securities in future quarters.
CRITICAL NEED FOR CAPITAL; GOING CONCERN ASSUMPTION. As of July 31, 1997,
the Company's cash and cash equivalents totaled approximately $350,000. The
Company anticipates that its existing capital resources and cash generated from
operations, if any, will be sufficient to meet the Company's cash
11
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requirements at its anticipated level of operations only through October 1997.
The Company has recently retained an investment banking firm to assist it in
raising additional equity capital through a potential equity offering. There can
be no assurance that any equity offering will be consummated or that any other
required financing will be available to the Company on acceptable terms, or at
all. In addition, due to the Company's accumulated losses, the report of the
Company's independent accountants with respect to the Company's financial
statements for 1995 and 1996 contains an explanatory paragraph concerning the
Company's ability to continue as a going concern. Additional equity or debt
financing or the sale of additional assets will be required to enable the
Company to continue its operations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
NET REVENUES. Net revenues for the three month period ended June 30, 1997
decreased by 58.3% to $472,000 from $1,133,000 for the corresponding period in
the prior year. The decrease in revenue was primarily attributable to the sale
of the DeltaGraph product line which accounted for $51,000 of net revenues in
the three month period ended June 30, 1997 as compared to $607,000 in the three
month period ended June 30, 1996.
For the three month period ended June 30, 1997, international revenue
decreased to 3.2% of net revenues compared to 24.8% of net revenues for the
period ended June 30, 1996. The decrease in international revenue was
attributable to the sale of the DeltaGraph product line. The Company's
international sales are principally denominated in U.S. dollars. Movements in
currency exchange rates did not have a material impact on net revenues 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, 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 June 30, 1997 decreased as a percentage of net revenues to 68.4% from
75.0% 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. Historically, the Company's gross profit on the sale of DeltaGraph
products was consistent with the Company's overall gross profit. However, the
Company anticipates gross profit as a percentage of revenue will decline in
future periods, as is reflected in the quarter to quarter comparison, as
Internet product sales increase due to the third-party royalty obligations
associated with such sales.
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 June 30, 1997 decreased in absolute dollars to $782,000 or 165.6% of net
revenues compared to $1,163,000 or 102.6% of revenues for the corresponding
period in the prior year. The decrease in sales and marketing expenses, in
absolute dollars, was primarily due to the Company's decrease in overall
marketing activities due to cash flow contraints. 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 June 30, 1997 increased in absolute dollars to $616,000 or
130.5% of net revenues compared to $602,000 or
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53.1% of revenues for the corresponding period in the prior year. The increase
in research and development expenses was primarily due to a staffing increase
for the development of QuickSite (including the custom version for an OEM). 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. In the third quarter of 1997, the Company expects
to incur a charge to operations in connection with the consummation of the Site
Tech Acquisition and, if consummated, the Inlet Technology Acquisition to the
extent that a portion of the applicable purchase price is determined to be
in-process research and development.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three month period ended June 30, 1997 increased in absolute dollars to $241,000
or 51.1% of net revenues compared to $192,000 or 16.9% of revenues for the
corresponding period in the prior year. The increase in general and
administrative expenses was primarily attributable to the mix of general and
administrative employees and increased legal and financial advisory expenses.
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 (EXPENSE) INCOME, NET. Interest (expense) income, net includes
interest payable on the Company's convertible promissory notes payable, offset
by interest income earned on cash and cash equivalents. Interest expense
increased to $32,000 during the second quarter of fiscal 1997 from $23,000
during the comparable 1996 period. This increase was primarily attributable to
the interest due on the convertible promissory notes payable.
OTHER INCOME. Other income for the three months ended June 30, consists
entirely of the one-time gain resulting from the DeltaGraph Disposition
consummated on June 27, 1997.
PROVISION FOR INCOME TAXES. There was no provision for taxes during the
three month periods ended June 30, 1997 and 1996 due to net operating losses and
the availability of net operating loss carryforwards.
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
NET REVENUES. Net revenues for the six month period ended June 30, 1997
decreased by 21.0% to $1,495,000 from $1,893,000 for the corresponding period in
the prior year. The decrease in revenue was primarily attributable to the sale
of the DeltaGraph product line which accounted for $659,000 of net revenue in
the six month period ended June 30, 1997 as compared to $1,140,000 in the six
month period ended June 30,1996. Net revenues attributable to Internet products
for the six month period ended June 30, 1997 and 1996 were $760,000 and
$637,000, respectively. Included in the increase of Internet revenues is a
one-time license fee of $150,000 received from an OEM.
For the six month period ended June 30, 1997, international revenue
increased to 26.8% of net revenues from 18.8% of net revenue in the
corresponding period in the prior year. The increase in international revenues
was primarily due to the introduction of Internet products in the Japanese
market. In light of the DeltaGraph Disposition, the Company expects that in the
near-term international revenues attributable to Internet products may decline
until the relationship with its Japanese distributor (who principally sold
DeltaGraph products) is clarified or other international distribution channels
can be established.
GROSS PROFIT. Gross profit for the six month period ended June 30, 1997
increased as a percentage of net revenues to 68.6% from 67.2% for the
corresponding period in the prior year. The Company's gross profit on an actual
basis and as a percentage of net revenue 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 and third party royalty
obligations for the Company's Internet products. Historically, gross profit on
the sale of DeltaGraph products was consistent with the Company's overall gross
profit. However, the
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Company anticipates gross profit as a percentage of revenue will decline in
future periods as Internet product sales increase due to the third-party royalty
obligations associated with such sales.
SALES AND MARKETING. Sales and marketing expenses for the six month period
ended June 30, 1997 increased to $2,241,000 or 149.9% of net revenues from
$2,051,000 or 108.3% of net 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
products and the activities associated with the launch of the Company's
QuickSite 2.5 web authoring tool which was released in May 1997. The Company
expects that sales and marketing costs will continue to increase in future
periods as the Company expands its use of non-retail distribution channels
including VARs, OEMs and ISPs and adds sales and marketing personnel to support
such expansion and the anticipated introduction of new products.
RESEARCH AND DEVELOPMENT. Research and development expenses for the six
month period ended June 30, 1997 increased to $1,347,000 or 90.1% of net
revenues compared to $1,088,000 or 57.5% of net revenues for the corresponding
period in the prior year. The increase in research and development expenses was
primarily due to a staffing increase (including the retention of several
consultants) for the development of QuickSite. The Company expects that research
and development costs will increase in future periods due to continued
development of the Company's new Internet products and updated versions of the
Company's existing products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the six
month period ended
June 30, 1997 decreased to $479,000 or 32.0% of net revenues compared to
$961,000 or 50.8% of net revenues for the corresponding period in the prior
year. The decrease in general and administrative expenses was primarily
attributable to a severance charge in the first quarter of 1996 of $505,000
relating to the departure of the Company's Chief Executive Officer.
INTEREST (EXPENSE) INCOME, NET. Interest (expense) income, net includes
interest payable on the Company's Convertible Notes during the six months ended
June 30, 1997, the recognition of the discounted conversion feature on the
Convertible Notes and amortization of the related deferred debt issuance costs,
offset by interest income earned on cash and cash equivalents. Interest expense
during the first six months of 1997 increased to $852,000 from $26,000 during
the first six months of 1996. This increase was primarily attributable to the
recognition of the discounted conversion feature of the Convertible Notes and
the related deferred debt issuance costs which totaled $799,000.
OTHER INCOME. Other income for the six months ended June 30, consists
entirely of the one-time gain resulting from the DeltaGraph Disposition
consummated on June 27, 1997.
PROVISION FOR INCOME TAXES. There was no provision for taxes during the six
month periods ended June 30, 1997 and 1996 due to the Company's net operating
losses.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company had a working capital balance of $134,000
and shareholders' equity of $623,000. The Company has financed its operations
primarily through private and public sales of equity securities, borrowings
under a term loan (no longer in place), the private sale of debt securities and,
recently, the sale of the DeltaGraph product line. Since inception, the Company
has received approximately $15 million in proceeds from private sales of
preferred stock, convertible debt and from the Company's initial public offering
of Common Stock.
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The Company used net cash in operations of $2,699,000 in the six month
period ended June 30, 1997 and $2,300,000 for the corresponding period of the
prior year. Net cash used in the first six months of 1997 consisted primarily of
a net loss of $3,088,000 offset by other working capital changes. Net cash used
in operations during the six months ended June 30, 1996 consisted primarily of a
net loss of $2,789,000.
Net cash provided by financing activities totaled $21,000 in the six month
period ended June 30, 1997 and $745,000 for the corresponding period of the
prior year. Net cash from financing activities in the first six months of 1997
consisted of the exercise of stock options. Net cash from financing activities
in 1996 consisted primarily of $831,000 in net proceeds from the exercise of the
overallotment option from the Company's initial public offering offset by
approximately $77,000 for related registration expenses. The Company also repaid
capital lease obligations of $45,000.
Net cash provided by investing activities during the six months ended June
30, 1997 totaled $747,000 and primarily resulted from the DeltaGraph
Disposition. For the six month periods ended June 30, 1997 and 1996, the
Company's capital expenditures totaled approximately $24,000 and $272,000,
respectively, and were attributable to acquisitions of personal computer and
computer workstation equipment used to support the Company's development
efforts.
The Company At June 30, 1997 the Company's cash and cash equivalents was
$1,211,000. 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 additional 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 AND EXPECTED LOSSES; ACCUMULATED DEFICIT; GOING CONCERN ASSUMPTIONS;
FUTURE CAPITAL NEEDS; NO ASSURANCE OF FUTURE FINANCING.
The Company incurred net losses of $4,848,000 for the year ended December
31, 1996 and $3,088,000 for the six months ended June 30, 1997, and had an
accumulated deficit of $16,754,000 as of June 30, 1997. The Company expects to
incur losses for at least the next 12 months, and possibly longer. There can be
no assurance that the Company will not incur significant additional losses, will
generate positive cash flow from its operations, or that the Company will attain
or thereafter sustain profitability in any future period.
The Company's independent accountants' report on its financial statements as
of and for the years ended December 31, 1995 and 1996 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 Company may require substantial additional funds in the
future, and there can be no assurance that any independent accountants' report
on the Company's future financial statements will not include a similar
explanatory paragraph if the Company is unable to raise sufficient funds or
generate
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sufficient cash from operations to cover the cost of its operations. The
existence of the explanatory paragraph may have a material adverse effect on,
among other things, the Company's relationships with prospective customers and
suppliers, and therefore could have a material adverse effect on the Company's
business, financial condition and results of operations. See Note 1 of Notes to
Financial Statements contained in the Company's Annual Report on Form 10-KSB.
As of July 31, 1997, the Company's cash and cash equivalents totaled
approximately $350,000. The Company anticipates that its existing capital
resources and cash generated from operations, if any, will be sufficient to meet
the Company's cash requirements at its anticipated level of operations only
through October 1997. The Company has recently retained an investment banking
firm to assist it in raising additional equity capital through a potential
equity offering. There can be no assurance that any equity offering will be
consummated or that any other required financing will be available to the
Company on acceptable terms, or at all. The Company's future capital
requirements will depend upon numerous factors, including the amount of revenues
generated from operations and the progress of the Company's software
acquisition, development and introduction efforts, none of which can be
predicted with certainty. If financing is not available, the Company could be
required to reduce or suspend its operations, seek an acquisition partner or
sell securities on terms that may be highly dilutive or otherwise
disadvantageous to the Company's stockholders. The Company has experienced in
the past, and may continue to experience, operational difficulties and delays in
its product development and marketing activities due to working capital
constraints. Any such difficulties or delays could have a materially adverse
effect on the Company's business, financial condition and results of operations.
DEPENDENCE ON INTERNET SOFTWARE PRODUCTS AND RELATED STRATEGY; DEPENDENCE ON
CONTINUED EMERGENCE OF INTERNET SOFTWARE MARKET
Prior to 1996, the Company derived substantially all of its product revenues
from licenses of its DeltaGraph charting and graphics software products. With
the DeltaGraph Disposition, the Company's future operating results will depend
on the successful development, introduction and commercial acceptance of the
Company's Internet software products. The Company's current Internet software
products 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 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, introduced in May 1997. In addition, the Company currently plans
to develop and market a family of products targeted at the SMB and enterprise
department user markets for scalable Web site development and management
solutions, including SiteSweeper 2.0 an updated version of SiteSweeper 1.0
acquired in the Site Tech Acquisition (planned for release in the third quarter
of 1997, at earliest), and a client/server, multi-authoring, dynamic site
development and management product based on the technology to be acquired in the
Inlet Technology Acquisition (planned for release in the fourth quarter of 1997,
at the earliest). The Company's future operating results are dependent on the
commercial acceptance of the products targeted at the SMB and enterprise
department user markets and the size of these targeted markets. There can be no
assurance that the Company's strategy of targeting the SMB and enterprise
department user markets will be successful, that the Inlet Technology
Acquisition will be consummated, that the Company can successfully manage the
introduction and distribution of new versions of its existing Internet software
products or any other potential Internet software products, or that any of its
existing or potential products will achieve significant market acceptance.
Failure of any of the Company's existing or potential products (particularly
those targeted at the SMB and enterprise department user markets) to achieve
significant market acceptance would have a material adverse effect on the
Company's business, financial condition and results of operation. See "-- Risks
Associated with Inlet Technology Acquisition and Site Tech Acquisition; General
Acquisition Risks" and "-- Distribution Risks; Substantial Reseller Customer
Concentration."
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RISKS ASSOCIATED WITH INLET TECHNOLOGY ACQUISITION AND SITE TECH ACQUISITION;
GENERAL ACQUISITION RISKS
In an effort to capitalize on the emerging opportunities in the SMB and
enterprise department user markets for scalable Web site development and
management solutions, the Company consummated the Site Tech Acquisition in July
1997 and has entered into the pending Inlet Technology Acquisition. The Company
currently plans to introduce SiteSweeper 2.0, an updated version of the
SiteSweeper 1.0 product acquired in the Site Tech Acquisition (planned for
release in the third quarter of 1997, at the earliest) and a client/server,
multi-authoring site, dynamic development and management product based on the
technology to be acquired in the Inlet Technology Acquisition (planned for
release in the fourth quarter of 1997, at the earliest). There can be no
assurance that the Inlet Technology Acquisition, which is contingent on certain
closing conditions, including consummation of an equity offering by the Company
and the negotiation of a definitive purchase agreement and other agreements,
will be consummated. Although the Company will continue to have a license to the
technology to be acquired in the Inlet Technology Acquisition if the transaction
is not consummated, the Company may be required to pay greater royalties and the
license may be non-exclusive. Furthermore, there can be no assurance that any
technology acquired in the Site Tech Acquisition or the Inlet Technology
Acquisition can be successfully developed or integrated into the Company's
current technology on a timely basis or at all, or that any products based on
this technology will receive market acceptance. In order to market products to
the SMB and enterprise departmental user markets, the Company must significantly
increase its non-retail distribution channels. See "-- Distribution Risks;
Substantial Reseller Customer Concentration". The failure to successfully
develop and integrate the acquired technologies into the Company's Web site
development and management technology or to successfully market products based
upon the acquired technologies would adversely impact the Company's strategy of
marketing to the SMB and enterprise department user markets (in addition to
individuals and small office/home officer ("SOHO") professionals) and would have
a material adverse effect on the Company's business, operating results and
financial condition.
The Company frequently evaluates potential acquisitions of complementary
businesses, products and technologies. As part of the Company's expansion plans,
the Company may acquire companies that have an installed base of products not
yet offered by the Company, have strategic distribution channels or customer
relationships, or otherwise present opportunities which management believes may
enhance the Company's competitive position. The success of any acquisition could
depend not only upon the ability of the Company to acquire such businesses,
products and technologies on a cost-effective basis, but also upon the ability
of the Company to integrate the acquired operations or technologies effectively
into its organization, to retain and motivate key personnel of the acquired
businesses, and to retain the significant customers of the acquired businesses.
Any acquisition, depending upon its size, could result in the use of a
significant portion of the Company's cash, or if such acquisition is made
utilizing the Company's securities, could result in significant dilution to the
Company's shareholders. Moreover, such transactions involve the diversion of
substantial management resources and evaluation of such opportunities requires
substantial diversion of administrative, marketing and sales and engineering and
technological resources. In addition, such transactions could result in large
one-time write-offs or the creation of goodwill or other intangible assets that
would result in amortization expense. For example, in the quarter ended
September 30, 1997, the Company expects that a significant portion of the Site
Tech purchase price will be expensed as in-process technology because the
acquired technology has not reached technological feasibility and has no
alternative future use. A similar charge is expected in connection with the
pending Inlet Technology Acquisition. The failure to successfully evaluate,
negotiate, effect and integrate acquisition transactions could have a material
adverse effect on the Company's business, operating results and financial
condition.
DEPENDENCE ON LIMITED NUMBER OF KEY PERSONNEL; KEY MANAGEMENT OPENINGS;
PERSONNEL LIMITATIONS; ABILITY TO MANAGE GROWTH
The Company's success depends substantially upon the contributions of
several key personnel, some of whom, such as the Company's Chief Executive
Officer, Jeffrey Ait, were only recently hired by the
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Company. The Company is currently seeking to hire a Chief Financial Officer and
a Vice President of Sales. The failure to attract and retain key personnel could
have a material adverse effect on the Company's business, financial condition
and results of operations.
As a result of its cash constraints, and in connection with its reduced
level of operations and its focus on Internet software products, the Company has
significantly rationalized it workforce, including administrative and
engineering resources. While the Company endeavors to identify and develop,
license or acquire technologies or products to extend product functionality and
market position in the areas of Web site development and management, its ability
to successfully undertake these activities could be limited by, among other
things, existing administrative, engineering and other resource limitations. The
failure to attract and retain adequate levels of engineering, sales and
marketing and other resources needed to timely respond to customer needs or
market conditions or to develop products to address targeted markets would have
a material adverse effect on the Company's business, financial condition and
results of operations. See "-- Distribution Risks; Substantial Reseller Customer
Concentration" and "-- Rapid Technological Change; Risk of Product Delays; Risk
of Product Defects."
The Company's rationalization of its workforce has challenged, and is
expected to continue to challenge, the Company's management and operations,
including its marketing and sales, 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. The Company anticipates that it will need to add additional
personnel beyond its present needs 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.
DISTRIBUTION RISKS; SUBSTANTIAL RESELLER CUSTOMER CONCENTRATION
The Company currently sells its software products targeted at the individual
and SOHO professional market to distributors for resale to certain retailers,
including computer superstores and mass merchandisers. The Company plans to
expand distribution of its Internet software products in this retail
distribution channel by increasing distribution relationships both domestically
and internationally. The Company also intends to increase the number of products
available for sale through the retail channel, which the Company believes is
essential in securing adequate retail shelf space and retailer promotional
support. The retail distribution channel is highly competitive and there can be
no assurance as to the Company's ability to expand its distribution in this
channel. In addition, there can be no assurance that the Company will be able to
successfully develop additional products for distribution through this channel.
See "-- Competition."
The Company intends to introduce products targeted at the SMB and enterprise
department user markets. Successful development of products targeted at the SMB
and enterprise department user markets will depend in part on the Company's
ability to successfully integrate the technology acquired in the Site Tech
Acquisition and the Inlet Technology Acquisition. See "-- Risks Associated with
Inlet Technology Acquisition and Site Tech Acquisition; General Acquisition
Risks." In addition, the Company has not historically sold products targeted at
these markets and, in order to do so, must develop a sales and marketing
department with specialized expertise in the development of value added reseller
("VAR"s), original equipment manufacturer ("OEM") and Internet Service Provider
("ISP") relationships to provide SMB and enterprise department users Internet
software solutions. There can be no assurance that the Company will be able to
develop such a sales and marketing team on a timely basis or at all. In
addition, this market is competitive and there can be no assurance that the
Company will be successful in establishing significant relationships with VARs,
OEMs or ISPs or, if developed, there can be no assurance
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as to amount of support that the Company's products will receive from these
VARs, OEMs or ISPs who may offer products that compete with the Company's
products. See "-- Competition." To the extent that the Company succeeds in its
strategy to target the SMB and enterprise department user markets, among other
things, the Company's results of operations may be subject to greater or
different fluctuations as a result of potentially larger individual product
sales, a longer sales cycle and longer payment terms.
Sales to a limited number of distributors and retailers in the retail
distribution channel have constituted, and are anticipated to continue to
constitute in the near term, a significant portion of the Company's retail
software sales. In particular, revenues from licenses sold to Nippon Polaroid
Kabushiki Kaisha, the Company's Japanese distributor, constituted approximately
11% of the Company's revenues from the sale of Internet products for the year
ended December 31, 1996 and for the six months ended June 30, 1997. See "--
Risks Associated with International Operations." Sales to Ingram Micro Inc.
constituted approximately 45% and 30% of the Company's revenues from the sale of
Internet products for the year ended December 31, 1996 and for the six months
ended June 30, 1997, respectively. Any termination or significant disruption of
the Company's relationship with any major distributor or retailer, or any
significant reduction in sales volume attributable to any of such entities,
would, 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 the
Company's existing distributors and retailers will continue to provide the
Company's products with adequate levels of shelf space or promotional support.
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 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 or plans to compete are highly
competitive and characterized by rapid technological change, frequent new
product introductions, short product lives,
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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 market for Internet software tools targeted at individual and SOHO
professional users, the Company has encountered competition primarily from
Microsoft, Adobe Systems Incorporated, SoftQuad, Inc. Systems and NetObjects,
Incorporated (majority owned by IBM). In the market for Internet software
solutions targeted at the SMB and corporate departmental user markets, in
addition to these competitors, the Company expects competition from HAHT
Software Incorporated, Wallop Software Incorporated, Aziza, a division of
Objectivity Incorporated, Eventus Software Incorporated, Interwoven Corporation
and Vignette Corporation. In addition, some existing vendors in the enterprise
wide Internet software solution market (such as IBM/Lotus, Oracle Corporation,
Informix Software Inc. and Sybase Incorporated, Inc.) may enter into the
Company's existing and planned markets. 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 operations. 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 that it will face increasing pricing pressures. There can be no
assurance the Company will be able to maintain its historic pricing structure
for its existing products or will be able to obtain its desired pricing
structure for planned products. If the Company is unable to do so or if the
Company is unable to compete effectively against current and future competitors,
the Company's business, financial condition and results of operations will be
materially adversely affected.
In the future, vendors of operating system software or other software (such
as office or back office software suites) may continue to enhance their products
(including separate products that are bundled together) to include functionality
that is provided by the Company's current and planned products. This enhancement
could be achieved through the addition of functionality to operating system
software or other software or the bundling of Internet software tools with
operating system software or other products. For example, Microsoft incorporates
into its BackOffice product its Web page creation software product, FrontPage.
The inclusion of the functionality of Internet software tool products as
standard features of operating system software or other software could render
the Company's products obsolete and unmarketable, particularly if the quality of
such functionality were comparable, or perceived to be comparable, to that of
the Company's products. Furthermore, even if the Internet software tool
functionality provided as standard features by operating systems or other
software is more limited than that of the Company's products, there can be no
assurance that a significant number of customers would not elect to accept such
functionality in lieu of purchasing additional software. If the Company were
unable to develop new Internet software tool products to further enhance
operating systems or other software and to replace successfully any obsolete
products, the Company's business, financial condition and results of operations
would be materially adversely affected.
DEPENDENCE ON LIMITED NUMBER OF KEY PERSONNEL; KEY MANAGEMENT OPENINGS;
PERSONNEL LIMITATIONS; ABILITY TO MANAGE GROWTH
The Company's success depends substantially upon the contributions of
several key personnel, some of whom, such as the Company's Chief Executive
Officer, Jeffrey Ait, were only recently hired by the Company. The Company is
currently seeking to hire a Chief Financial Officer and a Vice President of
Sales. The failure to attract and retain key personnel could have a material
adverse effect on the Company's business, financial condition and results of
operations.
20
<PAGE>
As a result of its cash constraints, and in connection with its reduced
level of operations and its focus on Internet software products, the Company has
significantly rationalized it workforce, including administrative staff and
certain engineering resources. While the Company endeavors to identify and
develop, license or acquire technologies or products to extend product
functionality and market position in the areas of Web site development and
management, its ability to successfully undertake these activities could be
limited by, among other things, existing engineering resource limitations. The
failure to attract and retain adequate levels of engineering resources and other
sales and marketing resources in order to timely respond to customer needs or
market conditions or to develop products to address targeted markets would have
a material adverse effect on the Company's business, financial condition and
results of operations. See "-- Distribution Risks; Substantial Reseller Customer
Concentration."
The Company's rationalization of its workforce 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. The Company anticipates that it will need to add additional
personnel beyond its present needs 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. See
"Management's Discussion and Analysis of 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 1.3% of the Company's
Common Stock as of June 30, 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.
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.
21
<PAGE>
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
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 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.
RECENT DE-LISTING FROM NASDAQ SMALLCAP MARKET; POTENTIAL DELISTING FROM PACIFIC
EXCHANGE; POSSIBLE INABILITY OF PRINCIPAL MARKET MAKER TO MAKE A MARKET IN THE
COMPANY'S COMMON STOCK
The Company's Common Stock was quoted on the Nasdaq SmallCap Market from
December 1995 until March 18, 1997 and is traded on the Pacific Exchange
(formerly the Pacific Stock Exchange) and quoted on the OTC Bulletin Board and
the "pink sheets." The Common Stock 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. The shares of
Common Stock are currently quoted on the Pacific Exchange. The Company has been
notified by the Pacific Exchange that it may take action to delist the shares of
Common Stock as a result of, among other things, the Company's failure to
maintain certain requirements for continued listing. As a result of the
foregoing, 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
22
<PAGE>
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 the
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. While the Company
intends to apply for relisting on the Nasdaq SmallCap Market upon the
consummation of any equity offering and intends to take actions to prevent
delisting from the Pacific Exchange, there can be no assurance that relisting
will occur or that delisting will not occur in the future. Even if the Company
achieves relisting for the Common Stock on the Nasdaq SmallCap Market, the
liquidity of the Common Stock will remain limited as the Nasdaq SmallCap Market
and the Pacific Exchange are a significantly less liquid markets then the Nasdaq
National Market. If the Company should continue to experience losses from
operations, it may be unable to maintain the standards for continued quotation
on the Nasdaq SmallCap Market (if relisted) and the Pacific Exchange, and the
shares of Common Stock could be subject to removal from the Nasdaq SmallCap
Market and the Pacific Exchange.
Any limitation on the ability of H.J. Meyers & Co., Inc. ("H.J. Meyer"), the
principal market maker in the Company's Common Stock, to make a market in the
Company's Common Stock could adversely impact the liquidity or trading price of
the Company's Common Stock, which could have a material adverse impact on the
market price of the Company's Common Stock. The Chicago office of the Securities
and Exchange Commission is conducting a private, nonpublic investigation of H.J.
Meyers pursuant to a Formal Order of Investigation issued by the Commission. The
investigation is focused on whether H.J. Meyers may have violated applicable
securities laws and the rules and regulations thereunder, with respect to sales
of certain securities. The Company is currently unable to assess the potential
impact of the outcome of the Staff's investigation on the H.J. Meyer's ability
to make a market in the Company's Common Stock or trading in the Company's
securities.
23
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no material pending legal proceedings against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders on June 20, 1997, the
following individuals were elected to the Board of Directors:
VOTES FOR VOTES WITHHELD
--------- --------------
Jeffrey F. Ait................ 2,235,288 52,375
Donald B. Witmer.............. 2,235,388 52,225
John Hummer................... 2,235,588 52,025
Patrick Grady................. 2,221,188 69,425
The following proposals were approved at the Company's Annual Meeting:
AFFIRMATIVE NEGATIVE VOTES BROKER
VOTES VOTES WITHHELD NON-VOTES
----------- -------- -------- ---------
1. Amendment to the 1995
Stock Option Plan,
increasing the reserved
shares by 400,000....... 1,073,158 118,040 14,600 1,081,815
2. Ratify the appointment of
Price Waterhouse LLP as
independent auditors for
the fiscal year ended
December 31, 1997....... 2,251,963 30,300 5,350 --
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On July 11, 1997, the Company filed an 8-K for the disposition of the
DeltaGraph product line. The filing included pro-forma financial statements.
On July 25, 1997, the Company filed an 8-K for the acquisition of
Site/technologies/inc.
24
<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: __________________________________
Jeffrey F. Ait
CHIEF EXECUTIVE OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
Date: August 14, 1997
25
<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 ON 10QSB 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,211
<SECURITIES> 0
<RECEIVABLES> 923
<ALLOWANCES> 111
<INVENTORY> 117
<CURRENT-ASSETS> 2,625
<PP&E> 1,354
<DEPRECIATION> 1,119
<TOTAL-ASSETS> 3,114
<CURRENT-LIABILITIES> 2,491
<BONDS> 0
0
1,530
<COMMON> 15,847
<OTHER-SE> (16,754)
<TOTAL-LIABILITY-AND-EQUITY> 3,114
<SALES> 1,495
<TOTAL-REVENUES> 1,495
<CGS> 470
<TOTAL-COSTS> 470
<OTHER-EXPENSES> 4,067
<LOSS-PROVISION> 4
<INTEREST-EXPENSE> 852
<INCOME-PRETAX> (3,859)
<INCOME-TAX> 0
<INCOME-CONTINUING> 771
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,088)
<EPS-PRIMARY> (1.20)
<EPS-DILUTED> (1.20)
</TABLE>
