-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J/GIIg31KhBV6gMaq5A+k12UTE34wkz9ZKN9aIjSxGTzZzIE5/jN3bJ2pWaZ6dyp D6Bg4FvUBho7QwQB5oL0/w== 0000912057-97-007491.txt : 19970303 0000912057-97-007491.hdr.sgml : 19970303 ACCESSION NUMBER: 0000912057-97-007491 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19970228 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DELTAPOINT INC CENTRAL INDEX KEY: 0001003754 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770216760 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-17733 FILM NUMBER: 97548520 BUSINESS ADDRESS: STREET 1: 22 LOWER RAGSDALE DRIVE CITY: MONTEREY STATE: CA ZIP: 93940 BUSINESS PHONE: 4086484000 MAIL ADDRESS: STREET 1: 22 LOWER RAGSDALE DRIVE CITY: MONTEREY STATE: CA ZIP: 93940 SB-2/A 1 SB-2/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 28, 1997. REGISTRATION NO. 333-17733 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ POST-EFFECTIVE AMENDMENT NO. 1 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ DELTAPOINT, INC. (Exact name of Registrant as specified in its charter) CALIFORNIA 7372 77-0216760 (State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification Incorporation or Organization) Number)
------------------------------ 22 LOWER RAGSDALE DRIVE JOHN J. AMBROSE MONTEREY, CALIFORNIA 93940 CHIEF EXECUTIVE OFFICER (408) 648-4000 DELTAPOINT, INC. (Address, including zip code, and 22 LOWER RAGSDALE DRIVE telephone number, including area code, MONTEREY, CALIFORNIA 93940 of registrant's principal executive (408) 648-4000 offices) (Name, address, including zip code, and telephone number, including area code, of agent for service)
------------------------------ COPIES TO: BROOKS STOUGH, ESQ. HOWARD L. CHABNER, ESQ. Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP 155 Constitution Drive Menlo Park, CA 94025 (415) 321-2400 ------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. /X/ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED PER SECURITY OFFERING PRICE REGISTRATION FEE Common Stock, no par value (1)........ 300,896 $7.875(2) $2,369,556 $719.00
(1) Such securities have been registered for resale by the Selling Shareholders and their assigns and transferees on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Act"). (2) Estimated solely for the purpose of computing the amount of the registration fee in accordance with Rule 457(c) promulgated under the Securities Act of 1933. ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTUS 300,896 SHARES OF COMMON STOCK THE 300,896 SHARES (THE "SHARES") OF COMMON STOCK (THE "COMMON STOCK") OF DELTAPOINT, INC., A CALIFORNIA CORPORATION (THE "COMPANY"), COVERED BY THIS PROSPECTUS ARE OUTSTANDING SHARES OF COMMON STOCK OF THE COMPANY THAT MAY BE SOLD FROM TIME TO TIME BY CERTAIN SHAREHOLDERS OF THE COMPANY (THE "SELLING SHAREHOLDERS"). THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF THE SHARES BY THE SELLING SHAREHOLDERS. The Company has been advised by the Selling Shareholders that they may sell all or a portion of the Shares from time to time in the Nasdaq SmallCap Market or the Pacific Stock Exchange, to the extent such shares may be traded on such markets, in negotiated transactions or otherwise, and on terms and at prices then obtainable. The Selling Shareholders and any broker-dealers, agents or underwriters that participate with the Selling Shareholders in the distribution of any of the Shares may be deemed to be "underwriters" within the meaning of the Securities Act, and any commission received by them and any profit on the resale of the Shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. See "Plan of Distribution." The Company will bear all of the cost of preparing and printing the Registration Statement, Prospectus and any Prospectus supplements and all filing fees and legal and accounting expenses associated with registration under federal and state securities laws, which are estimated at $30,000. The Selling Shareholders will pay all other expenses including brokerage fees, if any, related to the distribution of the Shares. See "Plan of Distribution." On February 26, 1997, the last sale price of the Company's Common Stock, as reported on the Nasdaq SmallCap Market under the symbol DTPT, was $5.50. The Company was notified by Nasdaq on January 29, 1997 that, because, in Nasdaq's opinion, the Company failed to meet the Nasdaq listing standards, its Common Stock would no longer be listed on the Nasdaq SmallCap Market effective on February 6, 1997. The Company has filed with Nasdaq a notice of appeal of Nasdaq's decision. The Company's Common Stock will continue to be listed on the Nasdaq SmallCap Market pending the outcome of the appeal. There can be no assurance that the appeal will be successful. ------------------------ THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS FEBRUARY 28, 1997 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files periodic reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at Seven World Trade Center, 13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. In addition, registration statements and certain other documents filed with the Commission through its Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly available through the Commission's site on the Internet's World Wide Web, located at HTTP://WWW.SEC.GOV. The Registration Statement, including all exhibits thereto and amendments thereof, has been filed with the Commission through EDGAR. Copies of such material may also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Company's Common Stock is traded on the Nasdaq Small Cap Market under the symbol "DTPT." Reports, proxy statements and other information concerning the Company may also be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006. The Company has filed with the Commission a Registration Statement on Form SB-2, including amendments thereto, under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the shares of Common Stock. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and the exhibits and schedules filed therewith. Statements contained in this Prospectus regarding the contents of any contract or any other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or otherwise filed with the Commission, each statement being qualified in all respects by such reference. The Registration Statement may be inspected without charge at the offices of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part thereof may be obtained from such office upon the payment of the fees prescribed by the Commission. ------------------------ DeltaPoint and DeltaGraph are registered trademarks of the Company and Chart Server, Drag 'n Draw, DeltaPoint, WebAnimator, Web Tools and QuickSite are or may be trademarks of the Company. All other product, brand or trade names are trademarks or registered trademarks of their respective owners. 2 SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. THE COMPANY DeltaPoint, Inc. ("DeltaPoint" or the "Company") develops and markets Internet software tools designed to allow users to effectively and easily create, manage and enhance sites on the Internet's World Wide Web. The Company introduced QuickSite in February 1996 to enable novice and experienced site publishers to rapidly create, maintain and enhance robust Web sites. Since its introduction, the Company believes that QuickSite has received more awards than any other Web site creation and management tool, winning the PC WEEK Analyst's Choice award in March 1996, WINDOWS MAGAZINE recommended seal and the PC WEEK Labs IT Excellence Award in April 1996, and the PC COMPUTING 5 Star rating in June 1996. The Company introduced WebTools in March 1996 to allow developers, value-added resellers ("VARs") and corporate MIS directors to add Web publishing capabilities to existing applications and introduced WebAnimator in July 1996 to allow a broad range of Web users to easily add multimedia and interactive animation to a Web site. In addition, in September 1996 the Company introduced QuickSite Developer's Edition, a new high end version of QuickSite designed for professional Web developers and corporate Intranet developers. QuickSite Developer's Edition won the PC COMPUTING 5 Star rating in January 1997. A key element of the Company's objective of becoming a leading Internet software tools provider is to increase its strategic alliances with key partners. In September 1996, the Company entered into an agreement with IBM to develop and license a customized version of QuickSite for inclusion in IBM's recently announced World Distributor, an on-line interactive electronic commerce service. The Company has also entered into agreements with Borland International, Sony, McGraw-Hill, Earthlink, Compaq and Netcom Interactive to distribute existing or planned versions of QuickSite with their products or services. In the past, the Company has derived most of its revenues from the sale of charting and graphics software products. The Company currently offers DeltaGraph, an advanced cross-platform charting and graphics product. The Company continues to de-emphasize its charting and graphics products and expects that they will represent a declining percentage of its business in the future. The Company was incorporated in California in 1989, its headquarters are located at 22 Lower Ragsdale Drive, Monterey, California 93940, and its telephone number is (408) 648-4000. ------------------------ 3 SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, -------------------- 1995 1996 --------- --------- STATEMENT OF OPERATIONS DATA: Net revenues............................................................................... $ 4,043 $ 4,950 Gross profit............................................................................... 2,706 3,769 Loss from operations....................................................................... (2,486) (4,922) Net loss................................................................................... (2,632) (4,848) Net loss per share (1)..................................................................... $ (2.42) $ (2.17) Shares used to compute net loss per share (1).............................................. 1,086 2,231
DECEMBER 31, 1996 --------------- BALANCE SHEET DATA: Cash and cash equivalents................................................. $ 3,142 Working capital........................................................... 431 Total assets.............................................................. 6,346 Accumulated deficit....................................................... (13,666) Total shareholders' equity................................................ $ 1,041
- ------------------------ (1) For an explanation of the number of shares used to compute net loss per share, see Note 1 of Notes to Financial Statements. THE OFFERING Common Stock offered by the Selling Shareholders.......................... 300,896 shares Common Stock outstanding (1)........... 2,485,540 shares Nasdaq Small Cap Symbol................ DTPT
- ------------------------ (1) Excludes (i) 110,000 shares of Common Stock issuable upon exercise of a warrant (the "Representative's Warrant") granted to the representative of the several underwriters (the "Representative") in connection with the initial public offering of the Company's Common Stock on December 20, 1995 ("IPO"), (ii) 71,875 shares of Common Stock issuable pursuant to warrants outstanding at December 31, 1996 at an exercise price of $7.20 per share, (iii) 740,508 shares of Common Stock issuable pursuant to options outstanding at December 31, 1996, (iv) 330,769 shares of Common Stock issuable upon conversion of Convertible Notes (as defined below) issued in the Debt Financing (as defined below), and up to 592,307 shares of Common Stock issuable upon conversion of additional Convertible Notes that may be issued in the Debt Financing, based upon an assumed conversion price of $6.50 per share, (v) 16,538 shares of Common Stock issuable upon exercise of a placement agent's warrant (the "Placement Agent's Warrant") issued in the Debt Financing and up to 29,615 shares of Common Stock issuable upon exercise of a Placement Agent's Warrant that would be issued if additional Convertible Notes are issued in the Debt Financing, and (vi) shares of Series A Preferred Stock to be issued in the Series A Financing (as defined below) and shares of Common Stock issuable upon the conversion thereof. See "Management -- 1990 Key Employee Incentive Stock Option Plan," "Management -- 1992 Non-Statutory Stock Option Plan," "Management -- 1995 Stock Option Plan," "Description of Capital Stock -- Warrants and Convertible Notes; and -- Preferred Stock" and Notes 5, 8, 9 and 11 to Financial Statements. 4 RISK FACTORS The shares of Common Stock offered hereby involve a high degree of risk and should be considered only by persons who can afford the loss of their entire investment. See "Risk Factors" beginning on page 6. ------------------------ EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN THIS PROSPECTUS DOES NOT REFLECT THE EXERCISE OF OPTIONS OR WARRANTS AFTER DECEMBER 31, 1996. IN ADDITION, THIS PROSPECTUS CONTAINS FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY 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 "RISK FACTORS," MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." 5 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, EACH PROSPECTIVE INVESTOR SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY. NO INVESTOR SHOULD PARTICIPATE IN THE OFFERING UNLESS SUCH INVESTOR CAN AFFORD A COMPLETE LOSS OF HIS OR HER INVESTMENT. THE DISCUSSION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." RECENT AND EXPECTED LOSSES; ACCUMULATED DEFICIT; QUARTERLY FLUCTUATIONS IN PERFORMANCE The Company incurred a net loss of $4,848,000 for the year ended December 31, 1996, and had an accumulated deficit of $13,666,000 as of December 31, 1996. 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 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 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, 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 such 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 December 31, 1996, the Company's cash and cash equivalents was approximately $3,142,000, including approximately $1,949,000 in net proceeds from a convertible debt financing (the "Debt Financing"). In the Debt Financing, the Company issued $2,150,000 principal amount of 6% convertible subordinated notes (the "Convertible Notes") that are convertible at the option of the holders thereof into shares of Common Stock in three (3) separate tranches beginning 60, 90 and 120 days after the date of issuance of such Convertible Notes (the "Debt Financing Closing"), at a conversion price ("the Conversion Price") equal to the lower of (i) 80% of the average closing bid price 6 of the Common Stock, as reported by the Nasdaq SmallCap Market, for the five business days prior to the business day on which notice of conversion is transmitted by the note holder (or, in the event of automatic conversion as described below, five business days prior to the business day on which the conversion is deemed to take place) or (ii) the average closing offer price of the Common Stock, as reported by the Nasdaq SmallCap Market, for the five business days prior to the Debt Financing Closing. All unconverted Convertible Notes will convert automatically into Common Stock at the Conversion Price on the second anniversary of the Debt Financing Closing, or earlier in the event of a merger of the Company into another entity, a change in control of the Company or a sale of all or substantially all the Company's assets. The Conversion Price is subject to adjustment in certain circumstances. In addition, the Conversion Price is subject to reduction as specified in the Convertible Notes if the Company does not fulfill certain obligations to file a registration statement in a timely manner for the shares of Common Stock issuable upon conversion of the Convertible Notes. The Convertible Notes may be redeemed by the Company at 120% of the principal amount being redeemed, plus accrued interest, at the Company's sole election if the average closing offer price for the Common Stock for any five-day period is below $4.00. Moreover, no holder may convert any principal amount of Convertible Notes, without the Company's prior written consent, if such conversion would cause such holder's aggregate ownership of the Company's capital stock to exceed 4.9% of the Company's then issued and outstanding capital stock. Although the Company believes that its existing and available cash resources, including the expected proceeds from the Series A Financing (as defined below), should be sufficient to meet its operating requirements for at least the next 12 months, there can be no assurance that such cash resources will be sufficient to satisfy the Company's operating requirements. The Company's actual capital needs, however, will depend upon numerous factors, including the progress of the Company's software development activities, the cost of increasing the Company's sales and marketing activities and the amount of revenues 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. 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 operation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Financial Statements. 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 largely on the successful development, introduction and commercial acceptance of its Internet software tools. These consist of: QuickSite, 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; and QuickSite Developer's Edition, its enhanced version of QuickSite for Web site developers and corporate Intranet developers introduced in September 1996. 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 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. See "Business -- Strategy," "-- Products" and "-- Marketing and Distribution." 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 7 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. See "Business -- Products" and "-- Marketing and Distribution." RISKS ASSOCIATED WITH RETAIL DISTRIBUTION; SUBSTANTIAL CUSTOMER CONCENTRATION DeltaPoint sells its products to distributors for resale 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% and 21% of the Company's net revenues for the years ended December 31, 1995 and 1996, respectively. Sales to Ingram Micro Inc. constituted approximately 13% and 30% of the Company's net revenues for the years ended December 31, 1995 and 1996, 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. See "Business -- Marketing and Distribution." RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS The Company's revenues from international operations accounted for approximately 40% and 26% of the Company's net revenues in 1995 and 1996, respectively, of which approximately 87% and 79%, 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business -- Strategy" and "-- Marketing and Distribution." 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 8 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. See "Business - -- Marketing and Distribution" and "-- Research and Development." 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 the 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 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. 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 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 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 future competitors, the Company's business, financial condition and results of operations will be materially adversely affected. See "Business -- Competition." 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 anticipates 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. 9 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. See "Business -- Strategy" and "-- Competition." 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. See "Management -- Executive Officers and Directors" and " -- Employment Contracts." RISKS ASSOCIATED WITH MANAGING GROWTH In recent years, the growth of the Company's customer base and expansion of its product line 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. 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 (i.e., the disk media, operating manual and other documentation are inserted in shrink wrap packaging) by a related third party assembler that beneficially owns approximately 1.5% of the Company's Common Stock as of December 31, 1996. 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 10 operating results, particularly since the Company seeks to continually introduce new and enhanced products and is likely to face increasing price competition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 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 some of its products 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. See "Business -- Proprietary Rights and Licenses." Unisys Corporation ("Unisys") has alleged, in conversations with Company personnel, that certain of the Company's products contain technology that infringes or may infringe on a patent owned by Unisys. Unisys has asked the Company to license this patent from it pursuant to a license agreement which would require the Company to pay Unisys a license fee of 0.45% of the Company's revenues from the sale of each product covered by such proposed license agreement, subject to a minimum license fee of ten cents ($0.10) for each such product. The Company is investigating Unisys's allegations and has not entered into the proposed license agreement. Although the Company's investigation is at an early stage, the Company does not believe at this time that resolution of this matter would be likely to have a material adverse effect on the Company's business, financial condition or results of operations. However, there can be no assurance as to the ultimate resolution of this matter. 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. See "Business -- Property Rights and Licenses." CONCENTRATION OF SHARE OWNERSHIP As of January 31, 1997, the executive officers and directors of the Company and their affiliates, as a group, owned or controlled approximately 26.9% of the outstanding capital stock of the Company. As a result, such persons and entities will continue to exert significant influence over the business and affairs of the Company. See "Principal and Selling Shareholders." SHARES ELIGIBLE FOR FUTURE SALE Sales in the public market of substantial amounts of Common Stock (including sales in connection with an exercise of certain registration rights relating to shares of Common Stock) or the perception that such sales could occur could depress prevailing market prices for the Common Stock. 11 In addition to the shares of Common Stock registered for resale pursuant to the Registration Statement of which this Prospectus is a part, the Company is filing with the Commission a post-effective amendment to a registration statement covering the resale of up to 123,625 shares of Common Stock, 259,610 shares of Common Stock issued or issuable upon exercise of certain warrants and 71,875 warrants. In addition, the Company has agreed to use its best efforts to register for resale under the Securities Act the shares of Common Stock that are issuable upon conversion of the Convertible Notes before March 1, 1997 together with the shares of Common Stock issuable upon exercise of the Placement Agent's Warrant and to maintain the effectiveness of such registration for a minimum of two years. The Company is filing a registration statement covering such shares substantially concurrently herewith. See "Description of Capital Stock -- Registration Rights." Holders of Common Stock issuable upon conversion of the Series A Preferred Stock to be issued in the Series A Financing would have registration rights substantially equivalent to those that apply to holders of shares of Common Stock issuable upon conversion of the Convertible Notes. SUBSTANTIAL SHARES OF COMMON STOCK RESERVED The Company has reserved 198,413 shares of Common Stock for issuance upon exercise of outstanding warrants and 887,223 shares of Common Stock for issuance to key employees, officers, directors and consultants pursuant to option exercises or sales of Common Stock under the Stock Plans. In addition, the Company has reserved 330,769 shares of Common Stock for issuance upon conversion of the Convertible Notes, based on an assumed conversion price of $6.50 per share. In addition, if additional Convertible Notes are issued in the Debt Financing, the Company would be required to reserve up to an additional 621,922 shares of Common Stock for issuance upon conversion of such additional Convertible Notes and exercise of an additional Placement Agent's Warrant that would be issued, based on an assumed conversion price of $6.50 per share. The existence of the aforementioned warrants, options and notes and any other options or warrants may prove to be a hindrance to future equity financing by the Company. Further, the holders of such warrants, options and notes may exercise them at a time when the Company would otherwise be able to obtain additional equity capital on terms more favorable to the Company. See "Description of Capital Stock." VOLATILITY OF STOCK PRICE; POSSIBLE ILLIQUIDITY OF TRADING MARKET; SUBSTANTIAL RISK OF DE-LISTING FROM NASDAQ SMALLCAP MARKET The Company's stock price has exhibited volatility since the Company's IPO 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 industries 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 their operating performance. The shares of Common Stock are traded on the Nasdaq Small Cap Market, which is a significantly less liquid market than the Nasdaq National Market, and the Pacific Stock Exchange. The Company was notified by Nasdaq on January 29, 1997 that, because, in Nasdaq's opinion, the Company failed to meet the Nasdaq listing standards, its Common Stock would no longer be listed on the Nasdaq SmallCap Market effective on February 6, 1997. The Company has filed with Nasdaq a notice of appeal of Nasdaq's decision. The Company's Common Stock will continue to be listed on the Nasdaq SmallCap Market pending the outcome of the appeal. There can be no assurance that the appeal will be successful. If the Company is de-listed from the Nasdaq SmallCap Market, trading in the Common Stock would be conducted in the over-the-counter market on an electronic bulletin board established for securities that do not meet the Nasdaq listing requirements, or in what are commonly referred to as the "pink sheets." As a result, an investor would find it more difficult to dispose of, or to obtain accurate quotations as to the price of, the Company's securities. In addition, if the Company's securities are removed from the Nasdaq SmallCap Market, they will be subject to so-called "penny 12 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 could affect the ability or willingness of broker-dealers to sell and/or make a market in the Company's securities and the ability of purchasers of the Company's securities to sell their securities in the secondary market. In addition, if the market price of the Common Stock is less than $5.00 per share, even if the Common Stock continues to be listed on the Nasdaq SmallCap Market, the Company may become subject to certain penny stock rules which may further limit the market liquidity of the Common Stock and the ability of purchasers in this Offering to sell such securities in the secondary market. The Company has not previously paid any dividends on its Common Stock and for the foreseeable future intends to continue its policy of retaining any earnings to finance the development and expansion of its business. See "Dividend Policy." LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS As permitted by California General Corporation Law, the Company has included in its Restated Articles of Incorporation a provision to eliminate the personal liability of its directors for monetary damages for breach or alleged breach of their fiduciary duties as directors, subject to certain exceptions. In addition, the Bylaws of the Company provide that the Company is required to indemnify its officers and directors under certain circumstances, including those circumstances in which indemnification would otherwise be discretionary, and the Company is required to advance expenses to its officers and directors as incurred in connection with proceeding against them for which they may be indemnified. The Company has entered into indemnification agreements with its officers and directors containing provisions that are in some respects broader than the specific indemnification provisions contained in the California General Corporation Law. See "Management -- Limitations on Liability and Indemnification Matters." 13 PRICE RANGE OF COMMON STOCK The Company's Common Stock is traded on the Nasdaq Small Cap Market under the symbol DTPT and on the Pacific Stock Exchange under the symbol DTP.P. The table below sets forth the high and low closing sale prices of the Common Stock for the periods indicated, as reported by the Nasdaq Small Cap Market.
HIGH LOW --------- --------- YEAR ENDED DECEMBER 31, 1995 Fourth quarter (from December 20,1995)............................................. $ 8.75 $ 8.00 YEAR ENDED DECEMBER 31, 1996 First quarter...................................................................... $ 9.75 $ 6.50 Second quarter..................................................................... $ 17.25 $ 9.50 Third Quarter...................................................................... $ 13.75 $ 5.88 Fourth quarter..................................................................... $ 11.75 $ 6.00 YEAR ENDING DECEMBER 31, 1997 First quarter (through February 26, 1997).......................................... $ 8.25 $ 5.44 --------- ---------
On February 26, 1997, the closing sale price for a share of the Company's Common Stock, as reported on the Nasdaq SmallCap Market, was $5.50. The Company was notified by Nasdaq on January 29, 1997 that, because, in Nasdaq's opinion, the Company failed to meet the Nasdaq listing standards, its Common Stock would no longer be listed on the Nasdaq SmallCap Market effective on February 6, 1997. The Company has filed with Nasdaq a notice of appeal of Nasdaq's decision. The Company's Common Stock will continue to be listed on the Nasdaq SmallCap Market pending the outcome of the appeal. There can be no assurance that the appeal will be successful. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its Common Stock, and the Company currently intends to retain any future earnings to fund the development of its business and therefore does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. Holders of Series A Preferred Stock to be issued in the Series A Financing (as defined below) would be entitled to receive cumulative cash dividends prior to the payment of any cash dividends on the Common Stock. See "Description of Capital Stock -- Preferred Stock." 14 CAPITALIZATION The following table sets forth the short-term debt and capitalization of the Company at December 31, 1996:
DECEMBER 31, 1996 ------------------ (IN THOUSANDS) Short-term debt..................................................................... $ 2,150 -------- -------- Shareholders' 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, 2,485,540 shares issued and outstanding; (1)............................................................. $ 14,707 Accumulated deficit............................................................... (13,666) -------- Total shareholders' equity...................................................... $ 1,041 -------- Total capitalization.......................................................... $ 1,041 -------- --------
- ------------------------ (1) Excludes (i) 110,000 shares of Common Stock issuable upon exercise of a warrant (the "Representative's Warrant") granted to the representative of the several underwriters (the "Representative") in connection with the initial public offering of the Company's Common Stock on December 20, 1995 ("IPO"), (ii) 71,875 shares of Common Stock issuable pursuant to warrants outstanding at December 31, 1996 at an exercise price of $7.20 per share, (iii) 740,508 shares of Common Stock issuable pursuant to options outstanding at December 31, 1996, (iv) 330,769 shares of Common Stock issuable upon conversion of Convertible Notes, and up to 592,307 shares of Common Stock issuable upon conversion of additional Convertible Notes that may be issued in the Debt Financing, based upon an assumed conversion price of $6.50 per share, (v) 16,538 shares of Common Stock issuable upon exercise of the Placement Agent's Warrant issued in the Debt Financing and up to 29,615 shares of Common Stock issuable upon exercise of a Placement Agent's Warrant that would be issued if additional Convertible Notes are issued in the Debt Financing, and (vi) shares of Series A Preferred Stock to be issued in the Series A Financing (as defined below) and shares of Common Stock issuable upon the conversion thereof. See "Management -- 1990 Key Employee Incentive Stock Option Plan," "Management -- 1992 Non-Statutory Stock Option Plan," "Management -- 1995 Stock Option Plan," "Description of Capital Stock -- Warrants and Convertible Notes; and -- Preferred Stock" and Notes 5, 8, 9 and 11 to Financial Statements. 15 SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the Financial Statements and related Notes thereto appearing elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The statement of operations data for the years ended December 31, 1995 and 1996 and the balance sheet data at December 31, 1995 and 1996 have been derived from the audited financial statements of the Company included elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31, ---------------------- 1995 1996 ---------- ---------- STATEMENT OF OPERATIONS DATA (IN THOUSANDS, EXCEPT FOR PER SHARE DATA): Net revenues.......................................................... $ 4,043 4,950 Cost of revenues...................................................... 1,337 1,181 ---------- ---------- Gross profit........................................................ 2,706 3,769 ---------- ---------- Operating expenses: Sales and marketing................................................. 1,922 4,685 Research and development............................................ 2,036 2,618 General and administrative.......................................... 1,234 1,388 ---------- ---------- 5,192 8,691 ---------- ---------- Loss from operations.................................................. (2,486) (4,922) Interest income (expense)............................................. (146) 74 ---------- ---------- Net loss.............................................................. $ (2,632) $ (4,848) ---------- ---------- ---------- ---------- Net loss per share (1)................................................ $ (2.42) $ (2.17) ---------- ---------- ---------- ---------- Shares used to compute net loss per share (1)......................... 1,086 2,231 ---------- ---------- ---------- ----------
DECEMBER 31, ---------------------- 1995 1996 ---------- ---------- BALANCE SHEET DATA (IN THOUSANDS): Working capital........................................................................... $ 2,915 $ 431 Total assets.............................................................................. 6,764 6,346 Current liabilities....................................................................... 3,315 5,305 Total shareholders' equity................................................................ $ 3,449 $ 1,041
- ------------------------ (1) For an explanation of the number of shares used to compute net loss per share, see Note 1 of Notes to Financial Statements. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SECTION AND OTHER PARTS OF THIS PROSPECTUS CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND IN "RISK FACTORS" AND "BUSINESS." 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 Developer's 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 the Company has historically 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 and packaging 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, and a smaller percentage of aggregate revenues in the form of packaging fees, which are paid to the Company based on the manufacturing cost of products that the Company packages and ships for the customer over the life of the agreement. As a result, these agreements can lead to quarterly fluctuations in revenues and gross profit. Software product sales are recognized upon shipment of the product, net of appropriate allowances for estimated returns. Revenues from software royalty and packaging agreements are recognized upon shipment of a master copy of the software product and packaging 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. Net revenues increased from $4,043,000 in 1995 to $4,950,000 in 1996. The increase of net revenues was primarily attributable to a refocusing of the Company's business into the Internet market. The Company believes that net revenues may remain flat until it has realized significant revenues from its Internet software tools released in 1996, such as QuickSite, QuickSite Developer's Edition, WebTools and WebAnimator, and from products that the Company develops or acquires in the future. The Company's gross profit has historically fluctuated from quarter to quarter based on the mix of revenues derived from software product sales, and, for the reasons discussed above, royalty fees and packaging fees. The Company obtains higher than average gross profit on revenues derived from royalty fees because of the negligible costs associated with generating such revenues, and lower than average gross profit on packaging fees from these products, because packaging is sold at a price based on the manufacturing cost of the finished software product. The Company's gross profit has also fluctuated based on the mix of product revenues derived from sales of the Company's higher-margin 17 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 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 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. The Company incurred a loss for the year ended December 31, 1995, in part due to a charge to operations recorded in the fourth quarter of approximately $1,240,000 resulting from the acquisition of certain Internet technologies for the portion of the purchase price determined to be in-process research and development and a decline in revenues from traditional products. In addition, the Company incurred a loss of $4,848,000 for the year ended December 31, 1996, in part due to the Company's investment in marketing and research for its Internet product line. 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. See "Risk Factors -- Recent and Expected Losses; Accumulated Deficit; Quarterly Fluctuations in Performance." RESULTS OF OPERATIONS The following table sets forth for the periods indicated, certain statement of operations data as a percentage of net revenues.
YEAR ENDED DECEMBER 31, ------------------------ 1995 1996 ----------- ----------- Net revenues.................................................................... 100.0% 100.0% Cost of revenues................................................................ 33.1 23.9 ----- ----- Gross profit................................................................ 66.9 76.1 ----- ----- Operating expenses: Sales and marketing........................................................... 47.5 94.6 Research and development...................................................... 50.4 52.9 General and administrative.................................................... 30.5 28.0 ----- ----- Total operating expenses.................................................... 128.4 175.5 ----- ----- Loss from operations............................................................ (61.5) (99.4) Interest income (expense)....................................................... (3.6) 1.5 ----- ----- Net loss.................................................................... (65.1)% (97.9)% ----- ----- ----- -----
YEARS ENDED DECEMBER 31, 1995 AND 1996 NET REVENUES. Net revenues increased by 22.4% from $4,043,000 for 1995 to $4,950,000 for 1996. The increase in revenue was primarily attributable to the introduction of Internet products, especially of QuickSite, DeltaPoint's award-winning Web site creation and management tool. International sales accounted for 39.8% of net revenues during 1995 and 26.3% for 1996. The decrease in 18 international revenues was due to fewer Japanese license agreements offset partially by the release of QuickSite for 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 increased from 66.9% of net revenues in 1995 to 76.1% of net revenues in 1996, primarily as a result of lower inventory write-offs and an absence of packaging fees in 1996. 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 increased to $4,685,000 or 94.6% of revenues for 1996 from $1,922,000 or 47.5% of revenues in 1995. The increase in sales and marketing expenses was primarily due to an increase in headcount and an increase in the use of direct mail, telemarketing, consultants, print advertising, tradeshows and channel promotions used to promote the Company's Internet software tools which were released in 1996. The Company expects that sales and marketing costs will increase in future periods because the Company intends to 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 include personnel, consultants and amortization of purchased software. Research and development expenses increased to $2,618,000 or 52.9% of revenues for 1996 compared to $2,036,000 or 50.4% of revenues in 1995. The increase in research and development expenses was primarily due to a staffing increase for the development of QuickSite, QuickSite Developer's Edition, WebAnimator and DeltaGraph. In addition, the Company retained several consultants to aid in the development process. In 1995, the Company had a charge to operations of $1,240,000 resulting from the acquisition of certain Internet technologies for the portion of the purchase price determined to be in-process technology as such technology had not reached technological feasibility and had no alternative future use. The Company expects that research and development costs will 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 increased to $1,388,000 or 28.0% of revenues for 1996 compared to $1,234,000 or 30.5% of revenues in 1995. The increase in general and administrative expenses was primarily attributable to a severance expense charge of $505,000 relating to the departure of the Company's former Chief Executive Officer offset by a decrease in bad debt expenses of $176,000. The Company expects that general and administrative expenses will increase in absolute dollars in future periods to the extent that the Company expands its operations. PROVISION FOR INCOME TAXES. There was no provision for taxes in 1995 or 1996 due to net operating losses. At December 31, 1996, the Company had approximately $7,000,000 of federal net operating loss carryforwards which expire in varying amounts through 2011. Due to certain changes in the ownership of the Company, approximately $1,700,000 and $1,200,000 of these losses are subject to annual limitations of approximately $142,000 and $301,000, respectively. If certain additional changes in the Company's ownership occur, the Company's use of net operating loss carryforwards may be subject to a lower annual limitation. 19 LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1996, the Company had a working capital balance of $431,000 and shareholders' equity of $1,041,000. 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 approximately $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 $1,646,000 in 1995 and $4,618,000 in 1996. Net cash used in 1995 consisted primarily of a net loss of $2,632,000, an increase in accounts receivable of $642,000, largely because of significant sales of the Company's products in the last 30 days of the third quarter of 1995 with extended payment terms, a decrease in accounts payable of $751,000, partially offset by a $1,240,000 charge to operations from the acquisition of certain Internet technologies for the portion of the purchase price determined to be in-process technology and an increase in accrued liabilities of $670,000. Net cash used in 1996 consisted primarily of a net loss of $4,848,000. The Company obtained net cash from financing activities of $6,499,000 in 1995 and $3,474,000 in 1996. Net cash obtained in 1995 consisted primarily of $5,143,000 in net proceeds from the Company's initial public offering of common stock and other equity financing. Net cash from financing activities in 1996 consisted primarily of $831,000 in net proceeds from the exercise of the overallotment from the initial public offering of common stock, proceeds resulting from the exercise of stock options and warrants of $1,609,000 and the issuance of Convertible Notes with net proceeds of $1,949,000 offset by the payment of $865,000 for prior notes payable. For the year ended December 31, 1996, the Company's capital expenditures totaled approximately $343,000 and were attributable to acquisitions of personal computer and computer workstation equipment used to support the Company's development efforts. In November and December of 1995, the Company acquired technology required to develop WebAnimator, QuickSite, and WebTools. The Company acquired the technologies for an aggregate purchase price of $1,690,000 of which $1,090,000 was to be paid in cash. As of December 31, 1996, $1,090,000 of these aggregate cash payments had been made. The Company recorded a charge of $1,240,000 to operations in 1995 from the acquisition of these technologies for the portion of the purchase price determined to be in-process technology. As of December 31, 1996 the Company's cash and cash equivalents was $3,142,000, including approximately $1,949,000 in net proceeds from the Debt Financing in December 1996. See "Risk Factors -- Critical Need For Additional Capital; No Assurance of Future Financing." Although the Company believes that its existing and available cash resources, including the expected proceeds from the Series A Financing (as defined below), should be sufficient to meet its operating requirements for at least the next 12 months, there can be no assurance that such cash resources will be sufficient to satisfy the Company's operating requirements. To the extent the Company continues to incur losses or grows in the future, its operating and investing activities may use cash and, consequently, such losses or growth may 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, the cost of increasing the Company's sales and marketing 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. 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 operation. See "Risk Factors -- Critical Need for Additional Capital; No Assurance of Future Financing." 20 BUSINESS DeltaPoint, Inc. ("DeltaPoint" or the "Company") develops and markets Internet software tools designed to allow users to effectively and easily create, manage and enhance sites on the Internet's World Wide Web. The Company introduced QuickSite in February 1996 to enable novice and experienced site publishers to rapidly create, maintain and enhance robust Web sites. Since its introduction, the Company believes that QuickSite has received more awards than any other Web site creation and management tool, winning the PC WEEK Analyst's Choice award in March 1996, WINDOWS MAGAZINE recommended seal and the PC WEEK Labs IT Excellence Award in April 1996, and the PC COMPUTING 5 Star rating in June 1996. The Company introduced WebTools in March 1996 to allow developers, value-added resellers ("VARs") and corporate MIS directors to add Web publishing capabilities to existing applications and introduced WebAnimator in July 1996 to allow a broad range of Web users to easily add multimedia and interactive animation to a Web site. In addition, in September 1996 the Company introduced QuickSite Developer's Edition, a new high end version of QuickSite designed for professional Web developers and corporate Intranet developers. QuickSite Developer's Edition won the PC COMPUTING 5 Star rating in January 1997. A key element of the Company's objective of becoming a leading Internet software tools provider is to increase its strategic alliances with key partners. In September 1996, the Company entered into an agreement with IBM to develop and license a customized version of QuickSite for inclusion in IBM's recently announced World Distributor, an on-line interactive electronic commerce service. The Company has also entered into agreements with Borland International, Sony, McGraw-Hill, Earthlink, Compaq and Netcom Interactive to distribute existing or planned versions of QuickSite with their products or services. In the past, the Company has derived most of its revenues from the sale of charting and graphics software products such as DeltaGraph, an advanced multi-platform charting and graphics product. The Company has de-emphasized its charting and graphing products and expects that they will represent a declining percentage of its business. BACKGROUND The rapid growth of the Internet, combined with the emergence of the World Wide Web, the graphical multimedia-rich portion of the Internet, has resulted in the development of the Internet as a new mass communications medium. The demand to access the World Wide Web has fueled the rapid growth and proliferation of "Web browsers," such as the Netscape Navigator and Microsoft Internet Explorer, which allow users to passively view information on the World Wide Web. In addition, search engines such as those provided by Yahoo! and InfoSeek simplify the process of locating information on the Web. Increasingly, however, Web users are no longer satisfied simply to browse and search the Web. The worldwide, cost-effective communication benefits of the Web are leading many individuals and organizations to actively "publish" information on the Web by creating a Web "site," a collection of individual Web pages, each hand-crafted using a relatively new and quickly evolving tagging language called HTML. Many large corporations, having already established sophisticated Web sites for external communications, and are now encouraging smaller internal groups and departments to build private "Intranet" Web sites. Small businesses, home-based businesses, individuals and others are also creating Web sites to reach target audiences. For many individuals and organizations, establishing a robust Web site remains a time-consuming and expensive proposition. The free-form nature of HTML has inhibited the emergence to date of a standard for HTML page creation. Further, an increasing number of competing extensions and modifications to the HTML language continue to be proposed, making it difficult for Web site publishers to support the latest technical advances. 21 A first generation of third-party Web "page creation" tools has emerged. These limited-function tools focus on the creation of a single page at a time. Content within pages and between pages must be manually linked and manually maintained. Further, the content of the site has no inherent structural intelligence, making global changes, consistency of design and reorganization of sections difficult and time-consuming. A second generation of Web page creation tools, such as Microsoft's Front Page and NetObjects' Fusion, has also been introduced. Although this generation offers some ease-of-use improvements over the first generation, these products continue to be based on architectures that primarily emphasize the layout and design aspects of individual pages. The Company believes that a compelling Web site consists of a robust and growing collection of interrelated pages and links. As a result, the Company believes that effective software tools for creating and managing Web sites must not only simplify initial content creation but enable site authors to easily update, maintain, expand and manage their sites on an ongoing basis, regardless of whether the sites consist of five pages or 5,000 pages. Further, the Company believes that an open architecture is important to maintaining maximum flexibility as Internet standards emerge and evolve rapidly. DELTAPOINT APPROACH The Company offers a family of products that enables Web site creators to easily and cost-effectively generate, manage and enhance Web content using a structured approach. QuickSite and QuickSite Developer's Edition, the Company's Web site creation and management products, utilize an advanced product design featuring a database architecture and incorporate a series of query-based "wizards" that guide the site developer through a "point and click" process that results in a completed, fully linked Web site structure in minutes. The Company's database design enables the automatic generation and maintenance of links between Web pages, eliminating or reducing the need for any programmer or technical intervention. Additionally, this approach enables all components of an entire Web site to be captured, collected and easily managed as fully indexed data objects within the database engine. The Company believes that its database approach to Web site creation and management provides fundamental advantages over existing page creation methodologies which will become increasingly apparent as the volume and complexity of content contained in the Web sites increases. The Company's Web site creation and management tools are designed with full client-side functionality to free the site designer from costly server connection time during the site creation and testing process. Further, these tools utilize an open architecture that provides browsers and server independence. The Company intends to incorporate this level of flexibility into all of its Internet software tools. DELTAPOINT STRATEGY DeltaPoint's objective is to be a leading provider of software products that enable users of all experience levels to quickly and easily create, manage and enhance compelling sites on the World Wide Web. The Company's strategy for achieving this objective includes the following elements: CREATE BRAND AWARENESS. The Company intends to increase its brand awareness through a coordinated strategy of building brand equity in the QuickSite product name, emphasizing QuickSite's Web site management capabilities and database architecture, and demonstrating its growing acceptance through a growing array of relationships with industry leaders. Since March 1996, the Company has entered into agreements with companies such as IBM, Borland International, Sony, McGraw-Hill, Earthlink, Compaq and Netcom Interactive. To build brand identity, the Company also plans to increase and expand its print and online advertising efforts and to increase its participation in major industry conferences and trade shows. EXPAND DISTRIBUTION. The Company plans to expand distribution of its Internet software tools by increasing its retail distribution relationships to ensure wide commercial availability of its shrink- 22 wrapped products and by partnering with alternative channel and vertical segment leaders, including distribution and co-marketing relationships with key PC manufacturers and Internet Service Providers (ISPs) that can increase market penetration and that offer revenue sharing business models. BROADEN PRODUCT OFFERING. The Company intends to identify and develop, license or acquire technologies or products to extend market position in two areas: Web site creation and Web site management. In the area of Web site creation, the Company intends to continue expanding the range of pre-designed templates, graphics, forms and wizards contained within the QuickSite product. The Company also plans to develop and market complementary content enhancement products, such as WebAnimator, which allow Web site creators to improve content through special effects. In the area of Web site management, the Company expects to continue to update and enhance the management features of QuickSite. DEVELOP PRODUCTS THAT SUPPORT OPEN ARCHITECTURE. The Company plans to introduce Internet software tools based on an open, client-based architectures. The Company intends to develop Web products which will support any widely used Web browser, including Netscape Navigator and Microsoft Internet Explorer, as well as any major server software environment, including Windows NT, Netscape Commerce Server and Unix. Additionally, the Company plans to architech additional products that will enable the entire Web site creation process to occur on a client-side desktop personal computer. TARGET CORPORATE INTRANET MARKET. The design of the Company's Internet software tools enable them to be used with little or no modification in the corporate Intranet environment. The Company plans to develop and implement a focused effort to target the Intranet marketplace. Specifically, the Company plans to create a dedicated market development and sales team with specialized expertise in providing corporate solutions. DELTAPOINT PRODUCTS The Company introduced five Internet software tools in 1996. QuickSite is designed as a low cost, easy to use Web site creation and management tool that is designed to enable novice and experienced site publishers to rapidly create, maintain and grow a robust Web site. QuickSite Developer's Edition offers additional functionality and is targeted for software programmers, Webmasters, commercial Web site developers and corporate Web site managers. WebTools has been designed to enable developers, VAR's and corporate MIS directors to add Web publishing capabilities to existing applications. WebAnimator is designed to allow a broad range of Web users to easily add multimedia and interactive animation to a Web site. The Company's charting and graphics software products currently include DeltaGraph, a cross platform application which is used to transform numerical data into charts and graphs. QUICKSITE In December 1995, the Company acquired an exclusive license to core technologies which serve as the basis for a family of Web site creation and management software tools. QuickSite, the first of these tools which began shipping to retail distributors on March 28, 1996, is designed to enable non- technical individuals and organizational users to rapidly create and efficiently manage a Web site. The following are the key attributes of the DeltaPoint solution: EASE OF SITE CREATION. The Company has designed a collection of site creation wizards aimed at eliminating the initial stumbling blocks encountered by novice Web site authors. These wizards guide the user through a point-and-click process that designs and builds an entire Web site, complete with page links, table of contents, and other important site creation elements such as e-mail return addresses, copyright notices, consistent menu designs and flags for pages containing special content. The Company believes that QuickSite can significantly shorten the time required to design and build a Web site. Wizards also enable users to select and modify the stylistic elements of a site such as the 23 colors and textures of backgrounds, graphics, headers and footers. By masking the complexities of HTML, Java and other site creation conventions, these wizards eliminate the requirement for Web site authors to develop specialized technical expertise before they can become productive. EASILY UPDATABLE CONTENT. The Company's product architecture passively enforces a Web structure such that as the author populates the site, content components are captured as data objects which are automatically indexed and stored within the product's database engine. As a result, content can be more quickly updated and global changes can be reflected through an entire Web site with a few simple keystrokes. Further, any content element, including text, graphics, data files, and images, can be stored and re-used, savings users time as they build additional sites or add to existing sites. EXTENSIBLE ARCHITECTURE. By employing a componentized architecture, the Company provides an extensible platform that can adapt as new technical innovations evolve. Tables, forms, and other new extensions to HTML, as well as user-definable functions, are supported through a point-and-click component library management system. BROWSER AND SERVER INDEPENDENCE. QuickSite supports most Web browsers, including Netscape Navigator and Microsoft Internet Explorer, which together are estimated to account for over 90% of the current marketplace. Additionally, QuickSite is architected to enable all the entire Web site creation process to occur on a client-side desktop personal computer. The Company believes that this client-biased approach provides several key advantages, including: (i) elimination of dependencies on any single third-party Internet or network-server technology; (ii) lower overall cost by eliminating the need to connect to a server for interim testing of an in-progress site; and (iii) reduced risk of investing in the "wrong" server environment. QUICKSITE DEVELOPER'S EDITION QuickSite Developer's Edition is designed for Internet Web site developers and corporate Intranet developers. The QuickSite Developer's Edition gives professional Web site developers significantly enhanced control over the web site creation and management process. Among the new features included in QuickSite Developer's Edition are: (i) support for the emerging WWW Consortium web style sheets standard; (ii) 3D Web Site Builder, a visual VRML (virtual reality mark-up language) creation tool from Virtus included with the product; (iii) advanced web site automation, including the QuickScript scripting language, powerful page macros and unique caret technology that automate repetitive tasks that bog down large-scale projects; (iv) embedded "graphics factory" technology, based on a variety of DigitalStyle templates, that allows developers to create custom graphics and style elements on-the-fly, and also helps to enforce stylistic consistency throughout a site; and (v) sophisticated project reporting capabilities that help the developer track and document the on-going status of their work. WEBTOOLS WebTools is designed to allow database developers to add Web-enabling features to existing database applications. DeltaPoint will license WebTools to software development companies including Borland International in return for a license fee or royalty arrangement. Currently WebTools is available for Visual dBASE for Windows and for CA Clipper. WEBANIMATOR In November 1995, the Company acquired core technologies which serve as the basis for WebAnimator, a multimedia authoring tool for the Web from Richard Blum, d.b.a. Knowledge Vision ("Knowledge Vision"). WebAnimator is designed to enable a broad range of Web users to easily add multimedia and interactive animation to a Web site. The Company believes that WebAnimator represents an advance over current commercially available products by offering the following key attributes: (i) extensive use of predefined templates that will enable users to combine text, graphics and sound to produce multimedia rich content components; (ii) content components created in WebAnimator's native format are vector based and therefore are expected to be compressed to small files that 24 can be quickly downloaded and played from within a Web browser; (iii) graphic objects in WebAnimator act as interactive buttons that enable users to branch to different Web site locations; and (iv) advanced digital sound and motion synchronization tools are expected to enable users to easily and accurately add sound and motion to an animated content component. GRAPHICS PRODUCTS The Company's charting and graphics software product, DeltaGraph, can be used as either a stand-alone product or as a complement to software programs such as spreadsheets, databases and presentation graphics. DeltaGraph offers a broad range of business, scientific and technical charts with flexible formatting features that enables charts to be fine tuned with high resolution output. Presentation tools such as slide show managers and outliners enhance DeltaGraph's functionality. DeltaGraph is primarily used by chemists, biologists, geologists, pharmacists, and professionals in the financial services, aerospace and publishing industries. PRODUCTS UNDER DEVELOPMENT The Company believes that its future success depends in part on its ability to maintain and improve its core technologies, enhance and expand its products and develop new products that meet evolving customer requirements and industry standards. The Company's current efforts are focused on the development of products that further enhance development capablities in the areas of Web site creation and Web site management. 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 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 add-in market, the Company has encountered competition primarily from Netscape Communications Corporation, Macromedia, Inc., Adobe Systems Incorporated, Microsoft and Quarterdeck, Inc. 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 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 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 adversely affect the Company's business, financial condition and results of operations. 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. MARKETING AND SALES The Company markets and sells its products through the coordinated efforts of its corporate marketing department and its direct sales organization. For retail, the Company uses a two-tier 25 distribution model with product sold through Ingram, TechData, Merisel and other distributors to more than 500 retail outlets such as Best Buy, Computer City, Comp USA, Egghead, Fry's and others. The Company intends to expand the number of U.S. retail locations in 1997 and will seek to selectively add major new distributors. Internationally, the Company's strategy is to work with highly-motivated publishers who can invest in a full array of local services including marketing and localization support as well as provide access to distribution. The Company will continue to localize its products first for the Japanese market, which accounted for 35% of revenues in 1995 and 21% of revenue in 1996. Furthermore, the Company intends to pursue the expansion of its international presence by establishing new partnerships in key European markets such as the U.K. and Germany. The Company also allows fully functional versions of many of its products to be downloaded from its secure Web site server (Deltapoint.com). The downloadable versions enable worldwide access to the products 24-hours a day and allow people to become productive with and reliant on the product functionality. Users are prompted to purchase a license to the product with a 30-day grace period after which encrypted technology within the downloadable versions automatically disables the product. The Company will promote and encourage the availability of its downloadable products. The Company pursues relationships and alliances with a broad spectrum of industry leaders. Distribution alliances in the PC manufacturing area have been announced with Compaq and Sony, and in the ISP marketplace with Netcom Interactive, Earthlink, HoloNet and more than half a dozen regional ISPs. In addition, the Company has entered into an agreement with IBM to develop and license a customized version of QuickSite for inclusion in IBM's recently announced World Distributor electronic service and announced a relationship with McGraw Hill which will offer site licenses to QuickSite to school districts and State Boards of Education. To address the developers market, the Company has established an alliance with Borland International, a leading provider of language tools for software programmers. Under the agreement, Borland licensed the Company's WebTools product and bundled a version of QuickSite with all Borland products through the end of 1996. The Company also has announced relationships with technology partners such as DigitalStyle, a leading maker of on-the-fly graphics generation tools, and Virtus, a leading developer of Virtual Reality Modeling Language technology for creating 3D Web sites. Historically a significant portion of the Company's revenues have been derived from sales of upgrades of its DeltaGraph charting product to its user base through direct mail campaigns. Presently the Company is focusing on strengthening its distribution network by adding distributors and retailers, and entering into additional partner relationships that will enhance the distribution of the Company's Internet products. In addition, the Company intends to continue to implement its OEM strategy by pursuing other major PC manufactures of the Sony and Compaq caliber. In support of its sales organization, the Company conducts a number of marketing programs intended to promote and market the Company's Internet products. These efforts include product advertising, public relations and press tours, trade show participation, direct mail and telemarketing campaigns, preparation of marketing collateral and participation in industry programs, user groups and forums. The Company also maintains a QuickSite Web site on the World Wide Web that contains information on its products, distribution channels, awards, personnel and other information relating to the Company. As of December 31, 1996, the Company had 12 employees in marketing and sales. For the year ended December 31, 1996, the Company spent $4.7 million or 94.6% of revenue for sales and marketing expenses compared to $1.9 million and 47.5% of revenue in the year ended December 31, 1995. STRATEGIC ALLIANCES A key element of the Company's strategy is the continued creation and development of strategic alliances with key participants. The Company's goals in establishing these relationships are to create marketing alliances that will endorse and promote the Company's products to a larger potential 26 customer base than can be reached through the Company's direct marketing efforts. To date the Company has entered into strategic alliances with companies such as IBM, Borland International, Sony, McGraw-Hill, Earthlink, Compaq and Netcom Interactive. IBM. The Company entered into an agreement with IBM to develop and license to IBM a customized version of QuickSite for inclusion in IBM's recently announced World Distributor, an on-line interactive electronic commerce service. The agreement requires the Company to develop a customized version of QuickSite and requires IBM, to the extent it sublicenses or otherwise provides QuickSite on a revenue-bearing basis as part of its electronic commerce service, to pay the Company a royalty based on the number of copies of QuickSite so sublicensed or provided. The agreement may be terminated by IBM on 60 days' advance notice. BORLAND INTERNATIONAL. The Company entered into an agreement with Borland International in May 1996 under which Borland may bundle and distribute QuickSite with its programming tools through December 1996 in consideration for license fees, brand promotion activities and certain marketing services. SONY. The Company entered into an agreement in June 1996 whereby Sony will pre-install a custom version of the Company's QuickSite product on its new line of Vaio personal computer systems. This version of the product incorporates an encrypted algorithm that allows the Sony customers to use the full functionality of the product for a 30-day trial period after which the user is required to purchase the product electronically from DeltaPoint for continued use. In December 1996, an addendum to the contract was done. This agreement allows for Sony to pre-install and ship an unencrypted version of QuickSite on the Vaio personal computers. A royalty will be paid for each unit sold. MCGRAW-HILL SCHOOL SYSTEMS. In June 1996, the Company entered into an agreement under which McGraw-Hill will market and distribute QuickSite products and site licenses to the education sector, including school districts and state boards of education. EARTHLINK. The Company entered into an agreement in June 1996 with Earthlink, a leading Internet Service Provider, under which the companies will perform mutually beneficial cross-bundling and cross merchandising. Earthlink has agreed to purchase a minimum number of QuickSite licenses. COMPAQ. In July 1996, the Company entered into an agreement under with Compaq will offer QuickSite as part of an optional software bundle on one of its Pressario systems and has rights to bundle on other platforms for a per unit license fee. NETCOM INTERACTIVE. The Company entered into an agreement with Netcom Interactive in July 1996 under which the companies intend to cooperate on a custom developed, jointly marketed integrated offering. Many of these relationships are in the early stages of development and have not yet resulted in material revenue for the Company. Generally, existing agreements outlining the Company's alliances do not impose significant financial obligations or liabilities on either party and have terms no longer than one year. There can be no assurance these relationships will successfully develop to the extent that they will contribute materially to the Company's financial results in the future. RESEARCH AND DEVELOPMENT Historically, the Company has licensed or acquired core technologies and has expended its development expertise on transforming these technologies into commercially viable, easy-to-use products. In November 1995, the Company acquired core technology including source code and related documentation, required to develop WebAnimator from KnowledgeVision. The purchase price for the technology was $250,000, payable in installments. The Company will also pay a royalty based on net revenue from sales of WebAnimator, subject to a maximum. Under the terms of the acquisition agreement, the individual will work as a consultant to the Company to assist in developing WebAnimator. 27 In December 1995, the Company acquired core technology, including source code and related documentation, required to develop QuickSite, from Global Technologies and from certain individuals. The purchase price for the technology was (i) $800,000 in cash, payable in installments and (ii) the issuance of 100,000 shares of Common Stock. The Company will also pay a royalty during the first two years of commercial shipments of QuickSite based on net revenues from sales of QuickSite, subject to a maximum and subject to the right of the Company to pay a portion of the royalty in its Common Stock. Pursuant to the agreement, the individual became an employee of the Company to assist in the development of QuickSite. The Company has made substantial investments in research and development through both internal development and technology acquisition. The Company believes its future performance will depend in large part on its ability to maintain and enhance its current product line, develop new products, maintain technological competitiveness and meet an expanding range of customer requirements. As of December 31, 1996 the Company had 19 employees in its research and development organization. The Company's research and development expenses for the years ended December 31, 1995 and 1996 were $2.0 million and $2.6 million, respectively. The Company plans to continue to make significant investments in research and development. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." PROPRIETARY RIGHTS AND LICENSES The Company relies on a combination of copyright, trademark, trade secret laws, confidentiality procedures and other intellectual property protection methods to protect its proprietary rights. The Company owns certain registered trademarks in the United States and abroad. Although the Company relies to a great extent on trade secret protection for much of its technology, and generally obtains written confidentiality agreements from its employees, there can be no assurance that third parties will not independently develop the same or similar technology, obtain unauthorized access to the Company's proprietary technology or misuse the technology to which the Company has granted access. The Company believes that, due to the rapid proliferation of new technology in the industry, legal protection through means such as the patent and copyright laws will be less influential on the Company's ability to compete than such factors as the creativity of its development staff and its ability to develop new markets and to service its customers. The Company licenses its products to individual end users primarily under "shrink wrap" license agreements that are included in products shipped by the Company and that are not signed by the licensees and therefore may be unenforceable under the laws of certain jurisdictions. These agreements provide that by breaking the "shrink wrap" a software purchaser agrees to be bound by the terms and conditions of the license agreement. There has been substantial industry litigation regarding patent, trademark and other intellectual property rights involving technology companies. In the future, litigation may be necessary to enforce any patents issued to the Company, to protect trade secrets, trademarks and other intellectual property rights owned by the Company, to defend the Company against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others. Any such litigation could be costly and result in a diversion of management's attention, which could have material adverse effects on the Company's business, financial condition and results of operations. Adverse determinations in such litigation could result in the loss of the Company's proprietary rights, subject the Company to significant liabilities, require the Company to seek licenses from third parties or prevent the Company from manufacturing or selling its products, any of which could have material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Limited Intellectual Property Protection." The laws of certain foreign countries treat the protection of proprietary rights of the Company in its products differently from those in the United States, and in many cases the protection afforded by such foreign laws is weaker than in the United States. The Company believes that its products and their use do not infringe the proprietary rights of third parties. There can be no assurance, however, that infringement claims will not successfully be made. 28 The Company has received and will continue to receive from time to time communications from third parties asserting infringement upon intellectual property rights of such parties as a result of either features or content of its software products. 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 for which the ultimate resolution could have a material adverse effect on the Company's business financial condition and results of operations. Unisys Corporation ("Unisys") has alleged, in conversations with Company personnel, that certain of the Company's products contain technology that infringes or may infringe on a patent owned by Unisys. Unisys has asked the Company to license this patent from it pursuant to a license agreement which would require the Company to pay Unisys a license fee of 0.45% of the Company's revenues from the sale of each product covered by such proposed license agreement, subject to a minimum license fee of ten cents ($0.10) for each such product. The Company is investigating Unisys's allegations and has not entered into the proposed license agreement. Although the Company's investigation is at an early stage, the Company does not believe at this time that resolution of this matter would be likely to have a material adverse effect on the Company's business, financial condition or results of operations. However, there can be no assurance as to the ultimate resolution of this matter. In June 1992, the Company entered into an agreement (the "Halcyon License Agreement") with Halcyon Software, Inc. ("Halcyon") pursuant to which Halcyon granted the Company a non-exclusive, perpetual, sub-licensable license to prepare, make, reproduce, use, perform, modify, adapt, sell or otherwise dispose of or distribute the following programs and derivative works thereof, whether or not in combination with or incorporated into any other product: Snap, Thumbnail, Viewer, Conversion, Trace and Paint (the "Products"). The Company pays Halcyon a royalty equal to two to five percent of the Company's net revenues received from sales of the Products, depending on the extent to which the Products incorporate technology not provided by Halcyon. To date, the Company has paid Halcyon non-refundable license fees in the amount of $150,000. No further royalty payments are payable until accrued royalty payments exceed $150,000. Pursuant to the Halcyon License Agreement, in November 1992 the Company granted Don Hsi an option to purchase 18,867 shares of Common Stock at an exercise price of $6.63 per share. The option lapsed on February 20, 1996 without being exercised. The Halcyon License Agreement has an indefinite term, but is terminable at the Company's option upon written notice if the Company determines in good faith that it is not technically and commercially advantageous to continue with a Product. The Company has also licensed from Altura Software Inc. ("Altura") the Mac2Win Software for use in creating a Windows platform version of DeltaGraph and WebAnimator. The Company was granted a non-exclusive license to copy, distribute and sublicense the Mac2Win Software only when packaged with, and as part of, DeltaGraph and WebAnimator ported to run on the Windows platforms. The Company has made a series of payments to Altura in the total amount of $72,000. License fees of $6,000 per month are payable by the Company in advance during each month the agreement remains in effect. The Company also pays a royalty equal to three percent of net revenues received from sales of DeltaGraph and WebAnimator ported for the Windows platform with a first year minimum of $36,000 and a minimum of $48,000 for the next two years. The license agreement is terminable by the Company upon 30 days prior written notice and the payment of all amounts owed to Altura. In November 1995, the Company acquired core technology, including source code and related documentation, required to develop WebAnimator from Knowledge Vision. The purchase price for the technology was $250,000, payable in installments. The Company will also pay a royalty based on net revenues from sales of WebAnimator, if any, subject to a maximum. Under the terms of the acquisition agreement, the individual works as a consultant to the Company to assist in developing WebAnimator. In December 1995, the Company acquired core technology, including source code and related documentation, required to develop QuickSite, from Global Technologies Corporation, and an individual. The purchase price for the technology was (i) $800,000 in cash, payable in installments, and 29 (ii) the issuance of 100,000 shares of the Company's Common Stock. The Company will also pay a royalty during the first two years of commercial shipments of QuickSite based on net revenues from sales of QuickSite, if any, subject to a maximum and subject to the right of the Company to pay a portion of the royalty in Common Stock. Pursuant to the agreement, the individual became an employee of the Company to assist in developing QuickSite. FACILITIES The Company currently leases an approximately 12,000 square foot office suite located at 22 Lower Ragsdale Drive, Monterey, California under a lease that expires in September 1998 with a monthly rental of approximately $16,200. The Company holds an option to renew such lease at the end of the initial term for an additional three year term. The Company believes that these new facilities will be adequate to meet its requirements for the near term and that additional space will be available on commercially reasonable terms if needed. LEGAL PROCEEDINGS There are no material pending legal proceedings against the Company. EMPLOYEES As of December 31, 1996, DeltaPoint had 45 full-time employees located throughout the United States. This number includes 24 persons in Research and Development and Technical Support, 12 persons in Marketing, Sales and Sales Support and 9 persons in Operations and Finance. None of the Company's employees is represented by a labor union or is subject to a collective bargaining agreement. DeltaPoint believes that its relations with its employees are good. 30 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The current executive officers and directors of the Company, and their ages as of January 31, 1997 are as follows:
NAME AGE POSITION - ------------------------------------ ---- ------------------------------------ John J. Ambrose..................... 35 Chief Executive Officer and Director Donald B. Witmer.................... 43 Chief Operating Officer, Chief Financial Officer and Director William G. Pryor.................... 46 Vice President of Development and Director John Hummer......................... 48 Director Patrick Grady....................... 29 Director
MR. AMBROSE joined the Company in April 1996 as Chief Executive Officer. From October 1994 until March 1996 he served as Vice President, Marketing and Corporate Officer and Director at Phoenix Publishing Systems, Inc., a software publishing company. From August 1986 until October 1994 Mr. Ambrose was employed by Phoenix Technologies, Ltd., a software development company where his positions included Manager Marketing Communications, Director, European Market Development, Director, Worldwide Business Development and Director, Product Management and Business Development. Mr. Ambrose holds a B.S. in Humanities and Social Science from Drexel University and an M.S. from Columbia University. MR. WITMER joined the Company as Vice President of Finance and Administration and Chief Financial Officer in November 1995, became a director of the Company in December 1995 and became Chief Operating Officer in February 1996. From 1990 to 1995 he served as controller and then Chief Financial Officer of Catalyst Semiconductor, Inc. From 1987 to 1990, Mr. Witmer served as an accountant for Price Waterhouse LLP, independent accountants. Prior to joining Price Waterhouse LLP, Mr. Witmer was a senior controller at United Technologies and a legislative analyst for the State of Montana. Mr. Witmer holds a B.A. in History from Northern Montana College and an M.B.A. from the University of Montana. Mr. Witmer is a Certified Public Accountant. MR. PRYOR co-founded the Company in February 1989 and has served as Vice President of Development and as a director since such time to the present. From June 1988 to February 1989, Mr. Pryor served as a Director of Product Development at Access Technology, Inc. From May 1986 to June 1988, he served as Vice President of Research and Development at Working Software, a developer of word processing software. Prior thereto, Mr. Pryor served as President of Pryority Software, an entertainment software publisher. Mr. Pryor holds an A.A. in Liberal Arts from the Monterey Peninsula College. MR. HUMMER has been a director of the Company since October 1990. In 1989, Mr. Hummer founded, and is currently a partner at, Hummer Winblad Venture Partners. Mr. Hummer serves as a director of several privately held companies including Books That Work, Centerview Software and Netgravity. From April 1991 to February 1995 he was a director of Powersoft Corporation prior to its acquisition by Sybase Incorporated and from August 1990 to April 1995 he was a director of Wind River Systems, Inc. Mr. Hummer received a B.A. in English from Princeton University and an M.B.A. from the Stanford Graduate School of Business. MR. GRADY became a director of the Company in August 1996. Mr. Grady is currently Managing Director Venture Capital of H.J. Meyers & Co. Inc. From June 1993 to March 1996 Mr. Grady served as Senior Vice President of Corporate Finance at H.J. Meyers & Co., Inc. from March 1991 to May 1993 he was Vice President of Corporate Finance at Josephthal, Lyon & Ross. Mr. Grady also serves as a director of Borealis Technology Corp & SoloPoint, Inc. 31 Directors receive reimbursement of expenses incurred in attending Board meetings. Except as otherwise described in this Prospectus, the Company has not paid cash or other compensation to its directors. See "-- 1995 Stock Option Plan." EXECUTIVE COMPENSATION The following table sets forth the compensation earned by the Company's Chief Executive Officer and two other executive officers who earned salary and bonus for the 1996 fiscal year in excess of $100,000 and one former chief executive officer (collectively, the "Named Officers") for services rendered in all capacities to the Company and its subsidiaries for that fiscal year: SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------- AWARDS ------------- ANNUAL COMPENSATION NUMBER OF ---------------------------------------------------------- SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS COMPENSATION($) OPTIONS COMPENSATION($) - --------------------------- --------- -------------- ------------- ---------------- ------------- ---------------- John J. Ambrose (1) 1996 $ 78,461(2) $ 25,000(3) $ 4,500(4) 145,000 $ 26(5) Chief Executive Officer, 1995 0 0 0 0 0 and Director Raymond R. Kingman, Jr. (1) 1996 32,000 0 900(6) 0 141,253(7) Chairman of the Board, 1995 108,000 0 4,708(6) 100,000 66(5) President and Chief Executive Officer Donald B. Witmer 1996 120,000 0 30,000(9) 50,000 251(5) Chief Operating Officer, 1995 19,845(8) 0 5,000(9) 135,000 0 Chief Financial Officer and Director William G. Pryor 1996 104,950 0 0 0 87(5) Vice President of 1995 92,500 0 0 100,000 87(5) Development and Director
- ------------------------ (1) Mr. Kingman resigned as Chief Executive Officer and a director of the Company, effective April 5, 1996. Mr. Ambrose joined the Company as Chief Executive Officer on April 22, 1996. (2) Mr. Ambrose joined the Company in April 1996; his annual salary is currently set at $120,000. (3) Represents a signing bonus of $25,000. (4) Represents a $500 per month car allowance. (5) Represents life insurance premiums made by the Company with respect to insurance policies on the lives of Messrs. Ambrose, Kingman, Pryor and Witmer. (6) Represents a $300 per month car allowance. (7) Represents a $22 life insurance premium and a severance payment of $141,231. (8) Mr. Witmer joined the Company in November 1995. (9) Represents a $2,000 per month housing allowance and a $500 per month car allowance. 32 EMPLOYMENT CONTRACTS On November 10, 1995, the Company entered into employment agreements with Raymond R. Kingman, Jr., who served as President and Chief Executive Officer of the Company until his resignation as an officer and director on April 5, 1996, and William G. Pryor, Vice President of Development. The agreements provide for a grant to each individual of an option to purchase 100,000 shares of Common Stock at an exercise price of $3.50 per share. The option is immediately exercisable but subject to a right of repurchase by the Company at the original exercise price paid per share upon the optionee's cessation of service prior to vesting in such shares. The repurchase right lapses and the optionee vests in a series of equal monthly installments over 36 months, beginning on the one-month anniversary of the grant date, and lapses in full upon a specified Change in Control of the Company. A Change in Control includes liquidation or dissolution of the Company or a merger or consolidation in which at least fifty percent (50%) of the Company's shares are transferred to an entity different than the entity holding such shares prior to such Change in Control. Each option has a maximum term of ten (10) years, subject to earlier termination in the event of the optionee's cessation of service with the Company. The agreement also provides that each of Messrs. Kingman and Pryor will receive a severance payment in the amount of six to twelve months of his base salary and other benefits if his employment is terminated in certain circumstances, such as an involuntary termination other than for cause (six months base salary) or an involuntary termination within twenty-four months of a Change in Control (twelve months base salary). In November, 1995, the Company entered into an employment agreement with Donald B. Witmer, pursuant to which Mr. Witmer became Vice President of Finance and Administration and Chief Financial Officer of the Company. The agreement provides for an annual salary of $120,000, a $2,000 per month housing allowance and a $500 per month car allowance. The agreement also provides for a grant of an option to purchase 135,000 shares of Common Stock at an exercise price of $3.50 per share. The option is immediately exercisable but subject to a right of repurchase by the Company at the original exercise price paid per share upon the optionee's cessation of service prior to vesting in such shares. The repurchase right lapses and the optionee vests in a series of equal monthly installments over 36 months, beginning on the date Mr. Witmer commences employment, and lapses in full upon a specified Change in Control of the Company, as defined above. The option has a maximum term of ten (10) years, subject to earlier termination in the event of the optionee's cessation of service with the Company. The agreement also provides that Mr. Witmer will receive a severance payment in the amount of six to twelve months of his base salary and other benefits if his employment is terminated in certain circumstances, such as an involuntary termination other than for cause (six months base salary plus bonus and other benefits) or an involuntary termination within twenty-four months of a Change in Control (twelve months base salary plus bonus and other benefits). In March 1996 John J. Ambrose executed an offer letter with the Company, pursuant to which Mr. Ambrose became Chief Executive Officer in April 1996. The offer letter provides for an annual salary of $120,000, a signing bonus of $25,000 and a grant of an option to purchase 145,000 shares of Common Stock. On April 5, 1996, the Company entered into a Separation Agreement and Release with Mr. Kingman in connection with his resignation which, among other things, provided for certain payments and other financial compensation. Pursuant to the Separation Agreement, the Company agreed to pay Mr. Kingman a severance payment of $108,000 and to accelerate vesting of 62,500 of his 100,000-share option grant. The Company also agreed to provide continued health care for a period of up to 12 months. EXECUTIVE BONUS PLAN The Company plans to adopt a bonus plan for executive officers that would provide for payment of cash bonuses based on individual and overall Company performance in 1997. Aggregate bonuses payable under the plan would not exceed 10% of the Company's 1997 net income. Adoption of the plan is subject to approval by the Company's Compensation Committee. 33 STOCK OPTION INFORMATION The following table contains information concerning stock option grants made to the Named Officers during the year ended December 31, 1996. No stock appreciation rights were granted to these individuals during such year. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS (1) ----------------------------------------------------- NUMBER OF SECURITIES % OF TOTAL EXERCISE UNDERLYING OPTIONS GRANTED PRICE OPTIONS TO EMPLOYEES IN ($/SH) EXPIRATION NAME GRANTED FISCAL YEAR (2) DATE - ------------------------------------------------------------------ ----------- --------------- ----------- ---------- John J. Ambrose................................................... 145,000 33% $ 9.50 04/21/06 Raymond R. Kingman, Jr............................................ 0 0 0 -- Donald B. Witmer.................................................. 10,000 2% 9.50 04/21/06 Donald B. Witmer.................................................. 40,000 9% 7.50 11/03/06 William G. Pryor.................................................. 0 0 0 --
- ------------------------ (1) Each of the options listed in the table is immediately exercisable. The shares purchasable thereunder are subject to repurchase by the Company at the original exercise price paid per share upon the optionee's cessation of service prior to vesting in such shares. The repurchase right lapses and the optionee vests in a series of equal monthly installments over thirty-six months of service commencing on the date of grant of the option. These options were granted at an exercise price equal to the fair market value of the Company's Common Stock as determined by the Board of Directors of the Company on the date of grant. Each option has a maximum term of ten (10) years, subject to earlier termination in the event of the optionee's cessation of employment with the Company. (2) The exercise price may be paid in cash, in shares of the Company's Common Stock valued at fair market value on the exercise date or through a cashless exercise procedure involving a same-day sale of the purchased shares. The Company may also finance the option exercise by loaning the optionee sufficient funds to pay the exercise price for the purchased shares, together with any federal and state income tax liability incurred by the optionee in connection with such exercise. The following table sets forth information concerning option holdings for the year ended December 31, 1996 with respect to each of the Named Officers. No stock appreciation rights were exercised during such year or were outstanding at the end of that year. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END (1) SHARES ACQUIRED VALUE -------------------------------- -------------------------------- NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - --------------------------- --------------- ----------- ----------- ------------------- ----------- ------------------- John J. Ambrose............ 0 $ 0 145,000 0 $ 0 0 Raymond R. Kingman, Jr..... 72,000 379,517 5,894 0 4,028 0 Donald B. Witmer........... 0 0 185,000 0 337,500 0 William G. Pryor........... 0 0 101,894 0 250,000 0
- ------------------------ (1) Based on the closing price per share of the Company's Common Stock as listed on the Nasdaq Small Cap Market as of December 31, 1996 of $6.00, less the per share exercise price. 34 1990 KEY EMPLOYEE INCENTIVE STOCK OPTION PLAN The Company's 1990 Key Employee Incentive Stock Option Plan (the "1990 Plan") was originally adopted by the Board of Directors and approved by the Company's shareholders effective July 1, 1990 and was restated by the Board on June 17, 1992, which restatement was approved by the shareholders on August 27, 1992. The 1990 Plan authorizes for issuance 38,922 shares of Common Stock. As of December 31, 1996, 2,143 shares had been issued under the 1990 Plan, options to purchase an aggregate of 36,420 shares were outstanding and 359 shares remained available for future grant. Shares of Common Stock subject to outstanding options which expire or terminate prior to exercise will be available for future issuance under the 1990 Plan. Under the 1990 Plan, key employees (including officers) may, at the discretion of the plan administrator, be granted options to purchase shares of Common Stock at an exercise price not less than the fair market value of such shares on the grant date. Options granted under the 1990 Plan become exercisable for 25% of the option shares on the first anniversary of the grant date and for the balance of the shares in 36 equal monthly installments thereafter, unless otherwise provided by the plan administrator. In the event the Company or its shareholders enter into an agreement to dispose of all or substantially all of the assets or stock of the Company by means of a sale, a reorganization, a liquidation or otherwise, each outstanding option shall become immediately exercisable in full for all of the option shares. Each such option shall thereupon terminate. Each option shall have a maximum term of ten (10) years. The 1990 Plan may be administered by the Board or the Compensation Committee of the Board. The plan administrator has complete discretion to determine which eligible individuals are to receive option grants, the number of shares subject to each such grant, the status of any granted option as either an incentive option or a non-statutory option under the Federal tax laws, the vesting schedule to be in effect for each option grant and the maximum term for which each granted option is to remain outstanding. The exercise price for options granted under the 1990 Plan may be paid in cash or in outstanding shares of Common Stock. The Board may amend or modify the 1990 Plan at any time. Certain amendments require shareholder approval. The 1990 Plan will terminate on June 30, 2000, unless sooner terminated by the Board. 1992 NON-STATUTORY STOCK OPTION PLAN The Company's 1992 Non-Statutory Stock Option Plan (the "1992 Plan") was originally adopted by the Board of Directors and approved by the Company's shareholders effective July 1, 1992 and was restated by the Board on June 17, 1992, which restatement was approved by the shareholders on August 27, 1992. The 1992 Plan authorizes for issuance 28,301 shares of Common Stock. As of December 31, 1996, no shares had been issued under the 1992 Plan, options to purchase an aggregate of 8,063 shares were outstanding and 20,238 shares remained available for future grant. Shares of Common Stock subject to outstanding options which expire or terminate prior to exercise will be available for future issuance under the 1992 Plan. Under the 1992 Plan, key employees (including officers) and consultants of the Company or of any subsidiary and certain entities may, at the discretion of the plan administrator, be granted non-statutory options to purchase shares of Common Stock at an exercise price not less than the fair market value of such shares on the grant date. Options granted under the 1992 Plan are fully vested and immediately exercisable on the grant date. In the event the Company or its shareholders enter into an agreement to dispose of all or substantially all of the assets or stock of the Company by means of a sale, a reorganization, a liquidation or otherwise, each outstanding option shall thereupon terminate. In no event, may an option have a term of more than five (5) years. 35 The 1992 Plan may be administered by the Board or the Compensation Committee of the Board. The plan administrator has complete discretion to determine which eligible individuals are to receive option grants, the number of shares subject to each such grant and the terms and conditions of exercise with respect to each option grant. The exercise price for options granted under the 1992 Plan may be paid in cash, in outstanding shares of Common Stock, or through the net exercise of the option. Shares may be deducted from the shares to be issued upon exercise of an option granted under the 1992 Plan to satisfy the optionee's income tax withholding obligations. Options may also be exercised on a cashless basis through the same-day sale of the purchased shares. The plan administrator has the authority to effect, from time to time, the cancellation of outstanding options under the 1992 Plan, in exchange for the grant of new options for the same or different number of option shares with an exercise price per share based upon the fair market value of the Common Stock on the new grant date. The Board may amend or modify the 1992 Plan at any time. Certain amendments require shareholder approval. The 1992 Plan will terminate on June 30, 2002, unless sooner terminated by the Board. 1995 STOCK OPTION PLAN The Company's 1995 Stock Option Plan (the "1995 Plan") was adopted by the Board of Directors on November 8, 1995, and approved by shareholders of the Company in December, 1995. The Company initially reserved 620,000 shares of Common Stock for issuance under the 1995 Plan. On February 15, 1996 and April 22, 1996, the Board of Directors approved a total share increase of 200,000 shares to be reserved for issuance under the 1995 Plan to 820,000 shares, which was subsequently approved by the Company's shareholders. As of December 31, 1996, 81,000 shares had been issued under the 1995 Plan, options for 696,025 shares were outstanding and 42,975 shares reserved for issuance under the 1995 Plan remained available for future grant. Shares of Common Stock subject to outstanding options which expire or terminate prior to exercise will be available for future issuance under the 1995 Plan. Under the 1995 Plan, employees (including officers) and independent consultants may, at the discretion of the plan administrator, be granted options to purchase shares of Common Stock at an exercise price not less than 85% of the fair market value of such shares on the grant date. Non-employee members of the Board of Directors will be eligible solely for automatic option grants under the 1995 Plan. The 1995 Plan may be administered by the Compensation Committee of the Board. The Compensation Committee has complete discretion to determine which eligible individuals are to receive option grants, the number of shares subject to each such grant, the status of any granted option as either an incentive option or a non-statutory option under the Federal tax laws, the vesting schedule to be in effect for each option grant and the maximum term for which each granted option is to remain outstanding. In no event, however, may any one participant in the 1995 Plan acquire shares of Common Stock under the 1995 Plan in excess of 360,000 shares of Common Stock. The exercise price for options granted under the 1995 Plan may be paid in cash or in outstanding shares of Common Stock. Options may also be exercised on a cashless basis through the same-day sale of the purchased shares. The Compensation Committee may also permit the optionee to pay the exercise price through a promissory note payable in installments over a period of years. The amount financed may include any Federal or state income and employment taxes incurred by reason of the option exercise. Each option granted to an officer of the Company subject to the short-swing profit restrictions of the Federal securities laws includes a special stock appreciation right that provides that, upon the acquisition of more than 50% of the Company's outstanding voting stock pursuant to a hostile tender 36 offer, such option, if outstanding for at least six months, may be surrendered to the Company in exchange for a cash distribution to the officer based upon the tender offer price per share of Common Stock at the time subject to the surrendered option. The Compensation Committee has the authority to effect, from time to time, the cancellation of outstanding options under the 1995 Plan in return for the grant of new options for the same or different number of option shares with an exercise price per share based upon the fair market value of the Common Stock on the new grant date. In the event the Company is acquired by merger, consolidation or asset sale, except as provided otherwise in specific option grants, the shares of Common Stock subject to each option outstanding at the time under the 1995 Plan will immediately vest in full, except to the extent the Company's repurchase rights with respect to those shares are to be assigned to the acquiring entity, and options will accelerate to the extent not assumed by the acquiring entity. The Compensation Committee also has discretion to provide for the acceleration of one or more outstanding options under the 1995 Plan and the vesting of shares subject to outstanding options upon the occurrence of certain hostile tender offers. Such accelerated vesting may be conditioned upon the subsequent termination of the affected optionee's service. Under the automatic grant program, each individual who first joins the Board as a non-employee director on or after the effective date of the 1995 Plan will receive at that time, an automatic option grant for 20,000 shares of Common Stock. In addition, at each annual shareholders meeting, beginning in 1997, each non-employee director will automatically be granted at that meeting, whether or not he or she is standing for re-election at that particular meeting, a stock option to purchase 1,000 shares of Common Stock, provided such individual has served on the Board for at least six months prior to such meeting. Each option will have an exercise price equal to the fair market value of the Common Stock on the automatic grant date and a maximum term of ten years, subject to earlier termination following the optionee's cessation of Board service. Each option will be immediately exercisable for all of the shares but the shares will be subject to repurchase at original cost. The repurchase right shall lapse and the optionee vest in a series of three equal annual installments over the optionee's period of Board service, beginning one year from the grant date. However, vesting of the shares will automatically accelerate upon (i) an acquisition of the Company by merger, consolidation or asset sale, (ii) a hostile take-over of the Company effected by tender offer for more than 50% of the outstanding voting stock or proxy contest for Board membership or (iii) the death or disability of the optionee while serving as a Board member. In the event that more than 50% of the Company's outstanding voting stock were to be acquired pursuant to a hostile tender offer, each automatic option grant that has been outstanding for at least six months may be surrendered by the optionee in return for a cash distribution from the Company based upon the tender offer price per share of Common Stock at the time subject to the canceled option. The Board may amend or modify the 1995 Plan at any time. The 1995 Plan will terminate on November 7, 2005, unless sooner terminated by the Board. 401(K) PLAN During 1992, the Company established a deferred compensation plan (the "401(k) Plan") pursuant to Section 401(k) of the Internal Revenue Code (the "Code"), whereby substantially all employees are eligible to contribute up to 20% of their pre-tax earnings, not to exceed amounts allowed under the Code. The Company may make contributions to the 401(k) Plan at the discretion of the Board of Directors. No Company contributions have been made to the 401(k) Plan by the Company. LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS The Company has adopted provisions in its Restated Articles of Incorporation that eliminate to the fullest extent permissible under California law the liability of its directors to the Company for monetary damages. Such limitation of liability does not affect the availability of equitable remedies 37 such as injunctive relief or rescission. The Company's Bylaws provide that the Company shall indemnify its directors and officers to the fullest extent permitted by California law, including in circumstances in which indemnification is otherwise discretionary under California law. The Company has entered into indemnification agreements with its officers and directors containing provisions which may require the Company, among other things, to indemnify the officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from willful misconduct of a culpable nature), and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. At the present time, there is no pending litigation or proceeding involving a director, officer, employee or other agent of the Company in which indemnification would be required or permitted. The Company is not aware of any threatened litigation or proceeding which may result in a claim for such indemnification. 38 CERTAIN TRANSACTIONS TRANSACTIONS WITH FOUNDERS On May 31, 1994, the Company entered into a Software Acquisition Agreement with Cary Wyman, a founder pursuant to which Mr. Wyman acquired all the rights, title and interest in and to certain software products. In addition, the Company received from Mr. Wyman all of Mr. Wyman's right, title and interest in and to 11,792 shares of DeltaPoint's Common Stock previously owned and held by and in the name of Mr. Wyman. PRIVATE PLACEMENT TRANSACTIONS The Company has issued and sold the following securities to persons who are principal shareholders or directors of the Company. Each share of Series A, Series B, Series C and Series D Preferred Stock was affected by a one-for-5.3 reverse stock split before giving effect to the conversion of such outstanding Preferred Stock upon the closing of the Company's initial public offering in December 1995 (the "IPO"):
SHARES OF SHARES OF SHARES OF SHARES OF WARRANTS TO SHARES OF COMMON SERIES A SERIES B SERIES C SERIES D PURCHASE STOCK ISSUED UPON PREFERRED PREFERRED PREFERRED PREFERRED COMMON PROMISSORY NOTE INVESTOR (1) STOCK (2) STOCK (3) STOCK (4) STOCK (5) STOCK (6) CONVERSION (7) - -------------------------------------- ----------- ----------- ----------- ----------- ------------- ----------------- Entities Affiliated with Hummer Winblad Venture Partners (8)......... 55,341 22,641 43,620 26,801 27,629 31,667 Entities Affiliated with Oak Investment Partners V. Fund, L.P..... -- 60,377 34,269 48,242 45,209 31,667
- ------------------------------ (1) Shares held by all affiliated persons and entities have been aggregated. See "Principal and Selling Shareholders." (2) The shares were issued in October 1990. The per share purchase for the Series A Preferred Stock was $18.10 per share. (3) The shares were issued in June 1992. The per share purchase price for the Series B Preferred Stock was $33.13. (4) The shares were issued in April 1994. The per share purchase price for the Series C Preferred Stock was $5.78. (5) The shares were issued in May 1995. The per share purchase price for the Series D Preferred Stock was $9.33. The consideration paid for such stock was a combination of cash and cancellation of indebtedness. (6) The warrants were issued in March 1992, March 1993 and May 1995. (7) Represents shares of Common Stock issued upon the conversion of the notes at a conversion price of $3.25 per share. Of the $300,000 principal amount of the notes, $150,000 was issued to Hummer Winblad Venture Partners ("Hummer Winblad Ventures") and an affliate and $150,000 was issued to Oak Investment Partners V., L.P. ("Oak Investment") and an affliate. In November 1995, Hummer Winblad Ventures and Oak Investment and their respective affliates agreed to convert the principal amount of said notes, plus accrued interest, into an aggregate of 63,334 shares of Common Stock. In consideration for such agreement, in November 1995 the Company issued each of Hummer Winblad Ventures and Oak Investment warrants to purchase 31,667 shares of Common Stock exercisable at a price of $7.20 per share for a period of 30 months following December 26, 1995 and at a price of $8.40 per share thereafter through November 6, 2000. See "Description of Capital Stock -- Convertible Notes and Warrants." (8) Mr. Hummer, an affiliate of Hummer Winblad Venture Partners and Hummer Winblad Technology Fund ("Hummer Winblad Technology"), is a director of the Company. In November 1995, the Company issued 125,000 units (the "Unit Offering"), each unit consisting of two shares of Series E Preferred Stock and a warrant to purchase one share of Common Stock, for $8.00 per unit. Each share of Series E Preferred Stock converted into one share of Common Stock upon the closing of the Company's initial public offering in December, 1995. Hummer Winblad Ventures purchased 3,125 units, Oak Investment purchased 6,113 units and its affliate, Oak V Affiliates Fund, L.P. ("Oak Affiliates") purchased 137 units. American High Growth Equities Retirement Fund Trust purchased 50,000 units. See "Description of Capital Stock -- Warrants and Convertible Notes." In November 1996, the Company issued 30,970 shares of Common Stock to Oak Investment, 697 shares of Common Stock to Oak Affiliates, 30,084 shares of Common Stock to Hummer Winblad Ventures and 1,583 shares of Common Stock to Hummer Winblad Technology, all pursuant to the conversion of the notes described in the chart and footnote 7 above. 39 In December 1996, the Company issued an aggregate of 145,547 shares of Common Stock to Oak Investment and Oak Affiliates at a price of $5.00 per share pursuant to the exercise of warrants, including the warrants described in the chart and footnote 7 above, of which warrants to purchase 62,421 shares were acquired from Hummer Winblad Ventures and Hummer Winblad Technology. In December 1996, the Company issued $2,000,000 in principal amount of Convertible Notes to High Risk Opportunities Hub Fund Ltd. pursuant to the Debt Financing. Based on an assumed conversion price of $6.50 per share, such Convertible Notes are convertible at the option of the holder into 102,564 shares of Common Stock on or after March 1, 1997, an additional 102,564 shares on or after March 31, 1997 and an additional 102,564 shares on or after April 30, 1997; provided, however, that the holder may not convert Convertible Notes, without the Company's prior written consent, if such conversion would cause such holder's aggregate ownership of the Company's capital stock to exceed 4.9% of the Company's then issued and outstanding capital stock. See "Description of Capital Stock -- Warrants and Convertible Notes." The Company believes that the foregoing transactions were in its best interests. All future transactions by the Company with officers, directors, 5% shareholders and their affiliates will be entered into only if the Company believes that such transactions are reasonably expected to benefit the Company and the terms of such transactions are no less favorable to the Company than could be obtained from unaffiliated parties. H.J. MEYERS & CO., INC. Patrick W. Grady, a director of the Company, is a Managing Director Venture Capital of H.J. Meyers & Co., Inc. ("H.J. Meyers"). The Company retained H.J. Meyers to act as placement agent in connection with the Unit Offering. For acting as placement agent, H.J. Meyers received a fee of 10% of the aggregate proceeds from the Unit Offering and a non-accountable expense allowance of 3% of such gross proceeds. The Company also agreed to indemnity H.J. Meyers for certain liabilities, including those arising under the Securities Act, for serving as placement agent. The Company also retained H.J. Meyers as managing underwriter in the IPO. For acting as managing underwriter, H.J. Meyers received a portion of the 6% underwriting commission, a non-accountable expense allowance equal to 2.5% of the gross proceeds from the IPO and a warrant to purchase 110,000 shares of Common Stock exercisable for a four-year period commencing December 20, 1996. The exercise price of the Representative's Warrant is $7.20 per share. The Company has granted the holder of the Representative's Warrant certain registration rights with respect to the warrant and the shares of Common Stock issuable upon its exercise. The Company also agreed to indemnify H.J. Meyers for certain liabilities, including those arising under the Securities Act, for serving as managing underwriter. The Company also retained H.J. Meyers to act as placement agent in connection with the Debt Financing. Under the terms of the placement agent agreement, H.J. Meyers is entitled to receive a placement fee of 7% of the gross proceeds from the Debt Financing, reimbursement of accountable expenses not to exceed 1% of such gross proceeds and a warrant to purchase a number of shares of Common Stock equal to 5% of such gross proceeds divided by 6.5 (the "Placement Agent's Warrant"). The warrant is exercisable for five years and has an exercise price of $6.50 per share of Common Stock. The Company has agreed to grant the holder of the warrant certain registration rights with respect to the warrant and the shares of Common Stock issuable upon its exercise. See "Registration Rights." The Company has also agreed to indemnify H.J. Meyers for certain liabilities, including those arising under the Securities Act, for serving as placement agent in connection with the Debt Financing. 40 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of January 31, 1997, and as adjusted to reflect the sale of shares offered hereby, by (i) each person who is known by the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each director of the Company, (iii) each Named Officer (iv) all directors and executive officers as a group, and (v) by the Selling Shareholders. Except as otherwise indicated, the Company believes that the beneficial owners of the Common Stock listed below, based on information furnished by such owners have investment and voting power with respect to such shares, subject to community property laws where applicable.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO OWNED AFTER OFFERING OFFERING SHARES TO ---------------------- BE SOLD IN ---------------------- NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT OFFERING NUMBER PERCENT - ----------------------------------------------------------- --------- ----------- ----------- --------- ----------- Entities affiliated with Hummer Winblad Venture Partners (1)........................ 186,321 7.5% 58,467 127,854 5.1% 5900 Hollis St., Suite R Emeryville, CA 94608 Entities affiliated with Oak Investment Partners V, L.P. (2)...................................... 332,601 13.4% 79,908 252,693 10.1% One Gorham Island Westport, CT 06880 Raymond R. Kingman, Jr. (3)................................ 5,894 *% -- 5,894 *% William G. Pryor (4)....................................... 144,535 5.6% -- 144,535 5.6% c/o DeltaPoint, Inc. 22 Lower Ragsdale Drive Monterey, CA 93940 Donald B. Witmer (5)....................................... 203,750 7.6% -- 203,750 7.6% c/o Delta Point, Inc. 22 Lower Ragsdale Drive Monterey, CA 93940 John Ambrose (6)........................................... 145,000 5.5% -- 145,000 5.5% c/o DeltaPoint, Inc. 22 Lower Ragsdale Drive Monterey, CA 93940 John Hummer (1)............................................ 186,321 7.5% 58,467 127,854 5.1% Patrick W. Grady (7)....................................... 146,538 5.6% -- 146,538 5.6% William A. French (8)...................................... 41,667 1.7% 25,000 16,667 *% Global Technology.......................................... 50,000 2% 50,000 0 0.0% 155 Snowberry Way Dillon, CO 80435 David Kaplow............................................... 50,000 2% 50,000 0 0.0% Gregory Walberg............................................ 37,521 1.5% 37,521 0 0.0% All directors and executive officers as a group (5 persons) (9)........................................................ 826,144 26.9% 58,467 767,677 25.0%
- ------------------------ * Less than 1%. (1) Consists of 181,877 shares of Common Stock held by Hummer Winblad Venture Partners and 4,444 shares of Common Stock held by Hummer Winblad Technology Fund ("Hummer Winblad 41 Technology"). Mr. Hummer, a director of the Company, is a General Partner of Hummer Winblad Equity Partners, which is the General Partner of Hummer Winblad Venture Partners and Hummer Winblad Technology. Mr. Hummer disclaims beneficial ownership of the securities held by these entities except to the extent of his pecuniary interest therein arising from his general partnership interest in Hummer Winblad Equity Partners. (2) Consists of 325,289 shares of Common Stock, held by Oak Investment Partners V, L.P. ("Oak Investment") and 7,312 shares of Common Stock held by Oak V Affiliates Fund, L.P. ("Oak Affiliates"). Edward F. Glassmeyer is a general partner of Oak Investment and Oak Affiliates. Mr. Glassmeyer disclaims beneficial ownership of the securities held by these entities, except to the extent of his pecuniary interest therein arising from his general partnership in Oak Investment. See "Description of Capital Stock -- Convertible Notes and Warrants." Oak Affiliates is an affiliate of Oak Investment. (3) Includes 5,894 shares of Common Stock, subject to stock options currently exercisable or exercisable before April 5, 1997. See "Management -- Employment Contracts." (4) Includes 101,894 shares of Common Stock subject to stock options currently exercisable or exercisable within sixty (60) days after January 31, 1997, including an option to purchase 100,000 shares of Common Stock granted on November 10, 1995 that is immediately exercisable but subject to a right of repurchase upon termination of employment that lapses in equal monthly installments over 36 months and lapses in full upon a specified change in control. See "Management -- Stock Option Information." (5) Consists of 12,500 shares of Common Stock, an immediately exercisable warrant to purchase 6,250 shares of Common Stock and an option to purchase 135,000, 10,000 and 40,000 shares of Common Stock, respectively granted on November 10, 1995, April 22, 1996 and November 4, 1996, respectively that is immediately exercisable but subject to a right of repurchase upon termination of employment that lapses in equal monthly installments over 36 months and lapses in full upon a specified change in control. See "Management -- Employment Contracts." (6) Consists of an immediately exercisable option to purchase 145,000 shares of Common Stock granted on April 22, 1996 that is immediately exercisable but subject to a right of repurchase upon termination of employment that lapses in equal monthly installments over 36 months and lapses in full on a specified change in control. See "Management -- 1995 Stock Option Plan." (7) Includes an option to purchase 20,000 shares of Common Stock granted on August 13, 1996 that is immediately exercisable but subject to a right of repurchase upon termination of service as a director that lapses in equal annual installments over three years and lapses in full on a specified change in control. See "Management -- 1995 Stock Option Plan." Also includes 110,000 shares of Common Stock that may be acquired by H.J. Meyers upon exercise of the Representative's Warrant commencing on December 20, 1996 and 16,538 shares of Common Stock that may be acquired by H.J. Meyers upon exercise of the Placement Agent's Warrant issued in the Debt Financing. Mr. Grady, a director of the Company, is a Managing Director -- Venture Capital of H.J. Meyers. Mr. Grady disclaims beneficial ownership of the securities that may be acquired by H.J. Meyers except to the extent of his pecuniary interest therein. (8) Includes 16,667 shares of Common Stock subject to stock options currently exercisable within sixty (60) days of January 31, 1997. (9) Consists of 241,462 shares of Common Stock, immediately exercisable warrants to purchase 132,788 shares of Common Stock and 451,894 shares of Common Stock subject to stock options currently exercisable or exercisable within sixty (60) days of January 31, 1997. 42 DESCRIPTION OF CAPITAL STOCK As of January 31, 1997 the Company is authorized to issue 25,000,000 shares of Common Stock, no par value, and 4,000,000 shares of Preferred Stock, no par value. COMMON STOCK As of January 31, 1997, there were 2,489,873 shares of Common Stock outstanding held of record by approximately 46 shareholders. The holders of Common Stock are entitled to one vote per share on all matters to be voted on by shareholders. In the election of directors, however, cumulative voting is authorized for all shareholders if any shareholder gives notice at a meeting, prior to voting for the election of directors, of his or her intention to cumulate votes. Subject to the prior rights of holders of Preferred Stock, if any, the holders of Common Stock are entitled to receive such dividends, if any, as may be declared from time to time by the Board of Directors in its discretion from funds legally available therefor. The Common Stock has no preemptive or other subscription rights and there are no conversion rights or redemption or sinking fund provisions with respect to such shares. All of the outstanding shares of Common Stock are fully paid and non-assessable. PREFERRED STOCK At the closing of the Company's IPO in December 1995, all previously outstanding shares of Preferred Stock were converted into Common Stock. As of January 31, 1997, the Company is authorized to issue up to 4,000,000 shares of undesignated Preferred Stock. The Board of Directors will have the authority to issue the undesignated Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued shares of undesignated Preferred Stock, as well as to fix the number of shares constituting any series and the designations of such series, without any further vote or action by the shareholders. The Board of Directors, without shareholder approval, may issue Preferred Stock with voting and conversion rights which could materially adversely affect the voting power of the holders of Common Stock. The issuance of Preferred Stock could also decrease the amount of earnings and assets available for distribution to holders of Common Stock. In addition, the issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company. The Company has reached an agreement with Berckeley Investment Group Ltd. ("Berckeley") to issue and sell to Berckeley an aggregate of 1,000 shares of Series A Preferred Stock to be designated, at a purchase price of $1,000 per share, for cash in the aggregate amount of $1,000,000 (the "Series A Financing"). Each share of Series A Preferred Stock would be convertible at any time, at the option of the holder, into such number of shares of Common Stock as may be determined by dividing the original purchase price of a share of Series A Preferred Stock by 80% of the market price of Common Stock on the conversion date, subject to certain adjustments; provided, however, that no holder may convert Series A Preferred Stock, without the Company's prior written consent, if such conversion would cause such holder's aggregate ownership of the Company's capital stock to exceed 4.9% of the Company's then issued and outstanding capital stock. Such shares would also be convertible automatically two years from their issue date or, if earlier, upon the occurrence of certain other events. The holder of Series A Preferred Stock would be entitled to cumulative cash dividends at an annual rate of $85.72 per share. 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 (a "Liquidation Event"), holders of shares of Series A Preferred Stock would be entitled to receive from the proceeds from such Liquidation Event the aggregate purchase price of any shares of Series A Preferred Stock held by such holders plus any accrued but unpaid dividends, subject to certain adjustments. Holders of Common Stock issuable upon conversion of the Series A Preferred Stock to be issued in the Series A Financing would have registration rights substantially equivalent to those that apply to holders of shares of Common Stock issuable upon conversion of the Convertible Notes. 43 WARRANTS AND CONVERTIBLE NOTES The Company issued warrants to purchase an aggregate of 125,000 shares of Common Stock on November 6, 1995. The warrants are exercisable for a five-year period commencing on November 6, 1995. The exercise price of the warrants is $7.20 per share of Common Stock through June 26, 1998 and $8.40 per share of Common Stock thereafter through November 6, 2000. The warrants contain anti-dilution provisions providing adjustment in the event of any recapitalization, stock dividend, stock split or similar transaction. The warrants do not entitle the holder thereof to any rights as a shareholder of the Company until such warrant is exercised and shares are purchased thereunder. The warrants and the shares of Common Stock issuable upon exercise thereof may not be offered for sale except in compliance with the applicable provisions of the Securities Act. Holders of warrants have registration rights as summarized below. A registration statement covering such warrants and shares of Common Stock issuable upon the exercise thereof is being filed substantially concurrently herewith. See "Registration Rights." Of these warrants, warrants to purchase an aggregate of 53,125 shares were exercised during December, 1996 and warrants to purchase an aggregate of 71,875 shares were outstanding at January 31, 1997. The Company issued to the Representative the Representative's Warrant to purchase for investment a maximum of 110,000 shares of Common Stock. The Representative's Warrant is exercisable for a four-year period commencing December 20, 1996. The exercise price of the Representative's Warrant will be $7.20 per share. The Representative's Warrant will not be transferable prior to its exercise date except to officers of the Representative and members of the selling group and officers and partners thereof. The Representative's Warrant contains anti-dilution provisions providing adjustment in the event of any recapitalization, stock dividend, stock split or similar transaction. The Representative's Warrant does not entitle the Representative to any rights as a shareholder of the Company until such warrant is exercised and shares are purchased thereunder. The Representative's Warrant and the shares of Common Stock thereunder may not be offered for sale except in compliance with the applicable provisions of the Securities Act. The Company has agreed that, if it shall cause to be filed with the Securities and Exchange Commission either an amendment to the Registration Statement filed upon the initial public offering of the Company in December, 1995 or a separate registration statement, the Representative has the right during the five-year period which commenced on December 19, 1995 to include in such amendment or Registration Statement Representative's Warrant and the shares of Common Stock issuable upon its exercise at no expense to the Representative Additionally, the Company has agreed that, upon written request by a holder or holders of 50% or more of the warrant which is made during the exercise period of the warrant, the Company will, on two separate occasions, register the warrant and the shares of Common Stock issuable upon exercise thereof. The initial such registration will be at the Company's expense and the second such registration will be at the expense of the holder(s) of such Warrant. The Company also retained H.J. Meyers to act as placement agent in connection with the Debt Financing. Under the terms of the placement agent agreement, H.J. Meyers is entitled to receive a placement fee of 7% of the gross proceeds from the Debt Financing, reimbursement of accountable expenses not to exceed 1% of such gross proceeds and a warrant to purchase a number of shares of Common Stock equal to 5% of such gross proceeds divided by 6.5 (the "Placement Agent's Warrant"). The warrant will be exercisable for five years and will have an exercise price of $6.50 per share of Common Stock. The Company has agreed to grant the holder of the warrant certain registration rights with respect to the warrant and the shares of Common Stock issuable upon its exercise. In addition, if additional Convertible Notes are issued in the Debt Financing, the Company would be required to reserve up to an additional 621,922 shares of Common Stock for issuance upon conversion of such additional Convertible Notes and exercise of an additional Placement Agent's Warrant that would be issued, based on an assumed conversion price of $6.50 per share. In December 1996, the Company raised approximately $1,949,000 in net proceeds from the Debt Financing. The Company issued $2,150,000 principal amount of Convertible Notes that are convertible at the option of the holders thereof into shares of Common Stock in three (3) separate tranches 44 beginning 60, 90 and 120 days after the Debt Financing Closing, at a conversion price (the "Conversion Price") equal to the lower of (i) 80% of the average closing bid price of the Common Stock, as reported by the Nasdaq SmallCap Market, for the five business days prior to the business day on which notice of conversion is transmitted by the note holder (or, in the event of automatic conversion, as described below, five business days prior to the business day on which the conversion is deemed to take place) or (ii) the average closing offer price of the Common Stock, as reported by the Nasdaq SmallCap Market, for the five business days prior to the Debt Financing Closing. All unconverted Convertible Notes will convert automatically into Common Stock at the Conversion Price on the second anniversary of the Debt Financing Closing, or earlier in the event of a merger of the Company into another entity, a change in control of the Company or a sale of all or substantially all the Company's assets. The Conversion Price is subject to adjustment in certain circumstances. In addition, the Conversion Price is subject to reduction as specified in the Convertible Notes if the Company does not fulfill certain obligations to file a registration statement in a timely manner for the shares of Common Stock issuable upon conversion of the Convertible Notes. The Convertible Notes may be redeemed by the Company at 120% of the principal amount being redeemed, plus accrued interest, at the Company's sole election if the average closing offer price for the Common Stock for any five-day period is below $4.00. Moreover, no holder may convert any principal amount of Convertible Notes, without the Company's prior written consent, if such conversion would cause such holder's aggregate ownership of the Company's capital stock to exceed 4.9% of the Company's then issued and outstanding capital stock. REGISTRATION RIGHTS The Company has filed a registration statement on Form SB-2 (No. 333-3784) covering an aggregate of 148,625 shares of Common Stock issued upon conversion of Series E Preferred Stock, 261,172 shares of Common Stock issuable or issued upon exercise of warrants and 261,172 warrants (of which warrants to purchase 189,297 shares of Common Stock were exercised in December 1996). Substantially concurrently herewith, the Company is filing a post effective amendment to such registration statement covering 123,625 of such shares of Common Stock, 259,610 of such shares of Common Stock issued or issuable upon exercise of warrants and the 71,875 warrants that remain outstanding. Further, the Company has agreed that, thereafter to the extent necessary to permit resale of such Common Stock, the Company shall use its best efforts to maintain the effectiveness of such registration statement and keep current the prospectus included therein until the Company is satisfied that Rule 144(k) is available for the resale by the then-current holders of such Common Stock, but in no event later than three years following effective date of such registration statement. The Company has also granted registration rights to the holder of the Representatives' Warrant, which provide such holder with certain rights to register such warrant and the shares of Common Stock underlying such warrant. See "Certain Transactions -- H.J. Meyers, Inc." and "Description of Capital Stock -- Warrants and Convertible Notes." In addition, the Company has agreed to use its best efforts to register for resale under the Securities Act the shares of Common Stock that are issuable upon conversion of the Convertible Notes before March 1, 1997 and to maintain the effectiveness of such registration for a minimum of two years. The Company is filing a registration statement covering such shares substantially concurrently herewith. Moreover, the Company has agreed that, if it files a registration statement covering its equity securities, the Placement Agent shall have the right, during the five-year period beginning on the date of issuance of the Placement Agent's Warrant, to include in such registration statement the shares issuable upon exercise of the Placement Agent's Warrant. The Company has agreed to maintain the effectiveness of such registration as long as such shares remain outstanding. 16,538 shares of Common Stock will be issuable upon exercise of the Placement Agent's Warrant issued in the Debt Financing and up to 29,615 shares of Common Stock would be issuable upon exercise of a Placement 45 Agent's Warrant that would be issued if additional Convertible Notes are issued in the Debt Financing. At an assumed conversion price of $6.50 per share, 330,769 shares of Common Stock are issuable upon conversion of Convertible Notes issued, and up to 592,307 shares of Common Stock would be issuable upon conversion of additional Convertible Notes that may be issued, in the Debt Financing. Holders of Common Stock issuable upon conversion of the Series A Preferred Stock to be issued in the Series A financing would have registration rights substantially equivalent to those that apply to holders of shares of Common Stock issuable upon conversion of the Convertible Notes. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is U.S. Stock Transfer Corporation. SHARES ELIGIBLE FOR FUTURE SALE Sale of substantial amounts of the Company's Common Stock in the public market or the prospect of such sales could materially adversely affect the market price of the Common Stock. See "Risk Factors -- Shares Eligible for Future Sale" and "Description of Capital Stock -- Registration Rights." PLAN OF DISTRIBUTION The Company has been advised by the Selling Shareholders that they may sell all or a portion of the shares from time to time on the Nasdaq SmallCap Market or the Pacific Stock Exchange, to the extent such shares may be traded on such markets, in negotiated transactions or otherwise, and on terms and at prices then obtainable. The Company was notified by Nasdaq on January 29, 1997 that, because, in Nasdaq's opinion, the Company failed to meet the Nasdaq listing standards, its Common Stock would no longer be listed on the Nasdaq SmallCap Market effective on February 6, 1997. The Company has filed with Nasdaq a notice of appeal of Nasdaq's decision. The Company's Common Stock will continue to be listed on the Nasdaq SmallCap Market pending the outcome of the appeal. There can be no assurance that the appeal will be successful. The shares may be sold by one or more of the following methods: (a) a block trade in which the broker or dealer so engaged will attempt to sell the shares as an agent, but may position and resell a portion of the block as principal to facilitate the transaction; (b) purchases by a broker or dealer as principal and resale by such broker or dealer for its own account pursuant to this Prospectus; (c) an over the counter distribution in accordance with the rules of the Nasdaq SmallCap Market or the Pacific Stock Exchange; and (d) ordinary brokerage transactions and transactions in which the broker solicits purchasers. There is no assurance that any of the Selling Shareholders will sell any or all of the shares offered by them. In effecting sales, brokers or dealers engaged by the Selling Shareholders may arrange for other brokers or dealers to participate. Brokers or dealers may receive commissions or discounts from the Selling Shareholders in amounts to be negotiated prior to the sale. Participating brokers or dealers may be deemed to be "underwriters" within the meaning of the Securities Act, in connection with such sales. The Company will not receive any proceeds from the sale of the shares by the Selling Shareholders. The Company may at its discretion withdraw the Registration Statement of which this Prospectus constitutes a part at any time. LEGAL MATTERS The validity of the shares offered hereby has been passed upon for the Company by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park, California. 46 EXPERTS The financial statements as of December 31, 1995 and 1996 and for each of the two years in the period ended December 31, 1996 included in this Prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. 47 DELTAPOINT, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ------ Report of Independent Accountants........................... F-2 Balance Sheet as of December 31, 1995 and 1996.............. F-3 Statement of Operations for the Years Ended December 31, 1995 and 1996.............................................. F-4 Statement of Shareholders' Equity (Deficit) for the Years Ended December 31, 1995 and 1996........................... F-5 Statement of Cash Flows for the Years Ended December 31, 1995 and 1996.............................................. F-6 Notes to Financial Statements............................... F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of DeltaPoint, Inc. In our opinion, the accompanying balance sheet and the related statements of operations, of shareholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of DeltaPoint, Inc. at December 31, 1995 and 1996, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP San Jose, California January 27, 1997, except for Note 11, which is as of February 26, 1997 F-2 DELTAPOINT, INC. BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31 ------------------- 1995 1996 -------- --------- ASSETS Current assets: Cash and cash equivalents................................. $ 4,629 $ 3,142 Accounts receivable, net of allowance for doubtful accounts of $259 and $118................................ 1,225 1,904 Inventories............................................... 182 133 Prepaid expenses and other current assets................. 194 557 -------- --------- Total current assets.................................... 6,230 5,736 Property and equipment, net................................. 49 277 Purchased software, net..................................... 438 299 Deposits and other assets................................... 47 34 -------- --------- $ 6,764 $ 6,346 -------- --------- -------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 665 $ 1,238 Accrued liabilities....................................... 1,337 1,146 Reserve for returns....................................... 398 771 Notes payable............................................. 865 2,150 Current portion of capital lease obligations.............. 50 -- -------- --------- Total current liabilities............................... 3,315 5,305 Commitments and contingencies (Note 6) Shareholders' 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, 2,025,243 and 2,485,540 shares were issued and outstanding.............................................. 12,267 14,707 Accumulated deficit....................................... (8,818) (13,666) -------- --------- Total shareholders' equity.............................. 3,449 1,041 -------- --------- $ 6,764 $ 6,346 -------- --------- -------- ---------
The accompanying notes are an integral part of these financial statements. F-3 DELTAPOINT, INC. STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31 -------------------- 1995 1996 --------- --------- Net revenues................................................................................ $ 4,043 $ 4,950 Cost of revenues............................................................................ 1,337 1,181 --------- --------- Gross profit.............................................................................. 2,706 3,769 --------- --------- Operating expenses: Sales and marketing....................................................................... 1,922 4,685 Research and development.................................................................. 2,036 2,618 General and administrative................................................................ 1,234 1,388 --------- --------- 5,192 8,691 --------- --------- Loss from operations........................................................................ (2,486) (4,922) Interest income (expense)................................................................... (146) 74 --------- --------- Net loss.................................................................................... $ (2,632) $ (4,848) --------- --------- --------- --------- Net loss per share.......................................................................... $ (2.42) $ (2.17) --------- --------- --------- --------- Shares and share equivalents used in per share calculations................................. 1,086 2,231 --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements. F-4 DELTAPOINT, INC. STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ---------------------- ACCUMULATED SHARES AMOUNT DEFICIT TOTAL ----------- --------- ------------ --------- Balance at December 31, 1994................................... 182,717 $ 145 $ (6,186) $ (6,041) Exercise of stock options.................................... 382 1 -- 1 Issuance of warrants......................................... -- 6 -- 6 Sale of common stock......................................... 1,100,000 5,143 -- 5,143 Issuance of common stock for acquisition of purchased technology.................................................. 100,000 600 -- 600 Conversion of mandatorily redeemable convertible preferred stock....................................................... 578,810 5,992 -- 5,992 Conversion of notes payable and accrued interest............. 63,334 380 -- 380 Net loss..................................................... -- -- (2,632) (2,632) ----------- --------- ------------ --------- Balance at December 31, 1995................................... 2,025,243 12,267 (8,818) 3,449 Issuance of common stock..................................... 379,297 1,797 -- 1,797 Exercise of stock options.................................... 81,000 643 -- 643 Net loss..................................................... -- -- (4,848) (4,848) ----------- --------- ------------ --------- Balance at December 31, 1996................................... 2,485,540 $ 14,707 $ (13,666) $ 1,041 ----------- --------- ------------ --------- ----------- --------- ------------ ---------
The accompanying notes are an integral part of these financial statements. F-5 DELTAPOINT, INC. STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------- 1995 1996 --------- --------- Cash flows from operating activities: Net loss.................................................................................. $ (2,632) $ (4,848) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................................................... 163 254 In process research and development..................................................... 1,240 -- Other................................................................................... 40 -- Change in assets and liabilities: Accounts receivable................................................................... (642) (679) Inventories........................................................................... 44 49 Prepaid expenses and other current assets............................................. (113) (162) Accounts payable...................................................................... (751) 573 Accrued liabilities................................................................... 670 (191) Reserve for returns................................................................... 326 373 Deposits and other assets............................................................. 9 13 --------- --------- Net cash used in operating activities............................................... (1,646) (4,618) --------- --------- Cash flows used in investing activities: Acquisition of property and equipment..................................................... (29) (340) Acquisition of purchased software......................................................... (225) (3) --------- --------- Net cash used in investing activities............................................... (254) (343) --------- --------- Cash flows from financing activities: Proceeds from issuance of preferred stock, net............................................ 1,815 -- Proceeds from issuance of common stock and warrants, net.................................. 5,150 2,440 Proceeds from issuance of notes payable, net.............................................. -- 1,949 Repayment of notes payable................................................................ (289) (865) Repayment of capitalized lease obligations................................................ (177) (50) --------- --------- Net cash provided by financing activities........................................... 6,499 3,474 --------- --------- Increase (decrease) in cash and cash equivalents............................................ 4,599 (1,487) Cash and cash equivalents at beginning of year.............................................. 30 4,629 --------- --------- Cash and cash equivalents at end of year.................................................... $ 4,629 $ 3,142 --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements. F-6 DELTAPOINT, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: Founded in 1989, DeltaPoint, Inc. (the Company), has headquarters in Monterey, California, and distribution partners in the United States, Europe, Japan, and Asia-Pacific. 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 following is a summary of the Company's significant accounting policies: USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. REVENUE RECOGNITION The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants' Statement of Position 91-1 (SOP 91-1) on Software Revenue Recognition. Software product sales are recognized upon shipment of the product, net of appropriate allowances for estimated returns. Revenues from software royalty and packaging agreements are recognized upon shipment of a master copy of the software product and packaging if no significant vendor obligations remain under the terms of the agreements, any amounts paid are nonrefundable and collection is probable. 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, credits for price protection and stock rotation rights are accrued upon shipment based upon historical experience. The Company provides a limited amount of free telephone technical support to customers. These activities are generally considered insignificant post contract customer support obligations. Estimated costs of these activities are accrued at the time of product shipment. Revenue from international customers, primarily in Japan accounted for 40% and 26% of net revenues in 1995 and 1996, respectively. Sales to customers in excess of 10% of net revenues is presented below:
YEAR ENDED DECEMBER 31, -------------------- 1995 1996 --------- --------- Customer A.................................................................. 35% 21% Customer B.................................................................. 13% 30%
F-7 DELTAPOINT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Included in the cash equivalent balance at December 31, 1996, were $1,000,000 in certificates of deposit. The Company did not have any short-term investments outstanding at December 31, 1995 and 1996. STOCK BASED COMPENSATION The Company applies Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock-based compensation plans, as permitted by the Financial Accounting Standards Board's Statement No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation." FAS 123 defines a "fair value" based method of accounting for an employee stock option or similar equity instrument and encourages, but does not require, entities to adopt that method of accounting for their employee stock compensation plans. The pro forma disclosures of the difference between compensation cost included in net loss and the related cost measured by the fair value method are presented in Note 9. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is provided using the straight-line method based upon the estimated useful life of the assets ranging from three to five years. Leasehold improvements are amortized over the shorter of the remaining term of the lease or the estimated useful life of the asset. PURCHASED SOFTWARE Purchased software is recorded at cost and amortized using the straight line method over the three-year estimated life of the asset. SOFTWARE DEVELOPMENT COSTS Research and development costs are expensed as incurred. Statement of Financial Accounting Standards No. 86 (FAS 86) requires the capitalization of certain software development costs once technological feasibility is established. The capitalized costs are then amortized on a straight-line basis over the estimated product life, or on the ratio of current revenues to total projected product revenues, whichever is greater. Based upon the Company's product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release have been insignificant and accordingly have not been capitalized. CONCENTRATION OF CREDIT RISKS Financial instruments that potentially subject the Company to significant concentrations of credit risks consist principally of cash and accounts receivable. The Company places its cash in interest bearing accounts and certificates of deposit in high quality financial institutions. The Company sells its products primarily to end-users, distributors and resellers in a variety of industries located primarily in the United States and Japan. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral from its customers. The Company maintains an allowance for uncollectible accounts receivable based upon the expected collectibility of all accounts receivable. To date, the Company has not experienced any material credit losses. F-8 DELTAPOINT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) At December 31, 1995, five customers accounted for 86% of accounts receivable. At December 31, 1996, three customers accounted for 83% of accounts receivable. NET LOSS PER SHARE Net loss per share is based upon the weighted average number of common shares outstanding during the period. Common equivalent shares (consisting of warrants and stock options) are excluded from the computation if their effect is anti-dilutive except that, pursuant to the Securities and Exchange Commission Staff Accounting Bulletins, common and common equivalent shares issued during the period from November 1994 to November 1995 have been included in the calculation as if they were outstanding for all periods through November 1995 (using the treasury stock method for the options and warrants at the initial public offering price). FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of the Company's financial instruments, including accounts receivable and notes payable, approximates fair values. INCOME TAXES The Company utilizes the liability method of accounting for income taxes and accordingly, deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of the Company's assets and liabilities. RECLASSIFICATIONS Certain reclassifications have been made to the financial statements in order to conform to the 1996 presentation. F-9 DELTAPOINT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- BALANCE SHEET DETAILS (IN THOUSANDS):
DECEMBER 31 -------------------- 1995 1996 --------- --------- Inventories: Raw materials.................................................. $ 119 $ 84 Finished goods................................................. 63 49 --------- --------- $ 182 $ 133 --------- --------- --------- --------- Purchased software: Purchased software............................................. $ 450 $ 453 Less: accumulated amortization................................. (12) (154) --------- --------- $ 438 $ 299 --------- --------- --------- --------- Property and equipment: Computer equipment and software................................ $ 936 $ 1,160 Furniture and fixtures......................................... 139 139 Leasehold improvements......................................... -- 31 --------- --------- 1,075 1,330 Less: accumulated depreciation................................. (1,026) (1,053) --------- --------- $ 49 $ 277 --------- --------- --------- --------- Accrued liabilities: Accrued royalties.............................................. $ 351 $ 315 Accrued compensation........................................... 303 369 Other.......................................................... 683 462 --------- --------- $ 1,337 $ 1,146 --------- --------- --------- ---------
Included in the December 31, 1995 and 1996 balances of computer equipment and software are $531,000 of assets acquired under capital leases. Accumulated depreciation associated with these leases approximates $481,000 and $531,000 at December 31, 1995 and December 31, 1996, respectively. In 1995, the Company acquired certain Internet technologies, including the source code and related documentation. The aggregate purchase price of these technologies was $1,690,000, which was comprised of (i) $1,090,000 in cash, payable in installments through August 1996 and (ii) the issuance of 100,000 shares of the Company's common stock. The Company is also required to pay royalties on sales of the products developed from these technologies. The Company made installment payments for the technology of $225,000 and $865,000 for the years ended December 31, 1995 and 1996, respectively. Cash paid for royalties on sales of the product totaled $0 in 1995 and $33,000 in 1996. Amounts due to these suppliers for royalties are included in accrued liabilities at December 31, 1996 and totaled $205,000. Approximately $1,240,000 of the purchase price was allocated to in-process technology. In connection with these acquisitions, the Company determined that the majority of the purchase price represented in-process technology and because such technology had not reached the stage of technological feasibility and had no alternative future use, the amount was immediately charged to operations. F-10 DELTAPOINT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 3 -- SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION In December 1995, upon the closing of the Company's initial public offering, all outstanding shares of Mandatorily Redeemable Convertible Preferred Stock were converted into common stock. In addition, the Company converted notes payable to preferred shareholders totaling $300,000 and accrued interest on the notes totaling $80,000 into 63,334 shares of common stock. In November and December 1995, the Company acquired intellectual property for a total purchase price of $1,690,000 which was comprised of the (i) issuance of 100,000 shares of common stock at $6.00 per share, (ii) a cash payment of $225,000 and (iii) $865,000 which was paid in installments through August 1996. Cash paid during the year for interest totaled $146,000 and $28,000 for 1995 and 1996, respectively. NOTE 4 -- RELATED PARTY TRANSACTIONS: The Company purchases goods and services from a supplier who is a shareholder of the Company. Purchases from this supplier totaled $354,000 and $271,000 for the years ended December 31, 1995 and 1996, respectively. Amounts due to this supplier are included in accounts payable at December 31, 1995 and 1996 and totaled $55,000 and $72,000, respectively. NOTE 5 -- NOTES PAYABLE: On December 31, 1996, the Company issued $2,150,000 of convertible promissory notes payable. The notes bear interest at 6% payable semi-annually over their two year term. The notes are convertible into common stock at the option of the holder with a total of 33%, 67%, and 100% of the principal value of the notes convertible on March 1, March 31, and April 30, 1997, respectively. The notes automatically convert upon a change in control of the Company or on December 31, 1998. The conversion price of the notes is calculated as the lower of (a) 80% of the average closing bid price of the Company's common stock, as reported by the Nasdaq Small Cap Market, for the five business days prior to a written notice of conversion by the holder or (b) the average closing offer price of the Company's common stock, as reported by the Nasdaq Small Cap Market, for the five business days prior to the notes' issuance. The notes are convertible into a total of 105,392, 210,784 and 316,176 shares of common stock on March 1, March 31, and April 30, 1997, respectively based upon the average closing price of the Company's common stock for the five business days prior to the notes' issuance date. The Company may call all or part of the outstanding notes within a ten day period if the average closing offer price of the Company's common stock, as determined by the Nasdaq Small Cap Market, is less than $4.00 for any five day period. The call price is equal to 120% of the principal called. The Company has deferred and included in other current assets $230,000 of debt issuance costs related to the notes which will be amortized over the two year term using the interest method. In connection with the issuance of the notes, the Company granted the underwriters 16,538 common stock warrants at an exercise price of $6.50 per share and exercisable through December 2001. Included in the deferred debt issuance costs is $29,000 representing the estimated value of the warrants on the date of grant. The Company has reserved 316,176 shares of common stock for issuance upon the conversion of the notes. NOTE 6 -- COMMITMENTS AND CONTINGENCIES: COMMITMENTS The Company leases its facilities under noncancellable operating leases. Rent expense was $262,000 and $194,000 for the years ended December 31, 1995 and 1996, respectively. F-11 DELTAPOINT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 6 -- COMMITMENTS AND CONTINGENCIES: (CONTINUED) Future minimum lease payments are as follows (in thousands):
OPERATING YEAR ENDING DECEMBER 31, LEASES - --------------------------------------------------------------------------------------------- ----------- 1997 $ 206 1998......................................................................................... 155 ----- Total minimum lease payments................................................................. $ 361 ----- -----
CONTINGENCIES In the normal course of business, the Company from time to time receives inquiries with regards to possible patent infringement. Management believes that it is unlikely that the outcome of these inquiries will have a material adverse effect on the Company's financial position or results of operations or liquidity. NOTE 7 -- INCOME TAXES: No provision for income taxes has been recorded for any periods presented due to net operating losses. At December 31, 1996, the Company had approximately $7,000,000 of federal net operating loss carryforwards which expire in varying amounts through 2011. Due to certain changes in the ownership of the Company, approximately $1,700,000 and $1,200,000 of these losses are subject to annual limitations of approximately $142,000 and $301,000, respectively. A reconciliation of the Company's effective tax rate to the U.S. federal statutory rate follows:
YEAR ENDED DECEMBER 31, ------------------------ 1995 1996 ----------- ----------- U.S. federal statutory rate................................. (34.0)% (34.0 )% State and local taxes, net of U.S. federal benefit.......... (9.1 ) (8.8 ) Reserved net deferred tax assets and others................. 43.1 42.8 ----- ----- --% --% ----- ----- ----- -----
The components of the net deferred tax assets consist of the following (in thousands):
DECEMBER 31, -------------------- 1995 1996 --------- --------- Deferred tax assets: Net operating losses...................................... $ 940 $ 2,788 Reserves, accruals and depreciation....................... 885 767 Tax credit carryforwards.................................. 10 -- --------- --------- 1,835 3,555 Deferred tax valuation allowance........................ (1,835) (3,555) --------- --------- Net deferred tax asset...................................... $ -- $ -- --------- --------- --------- ---------
The Company has determined that, under FAS 109, it is more likely than not that the deferred tax assets at December 31, 1995 and 1996 would not be realized and, accordingly, a full valuation reserve has been established. Management's assessment is based on the Company's history of net operating losses. F-12 DELTAPOINT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- COMMON STOCK AND WARRANTS: COMMON STOCK: In December 1995, the Company completed its initial public offering of 1,100,000 shares of its common stock at a per share price of $6.00 and realized net proceeds of $5,143,000. In addition, common stock as of December 31, 1996 reflects the January 1996 sale of 165,000 shares of common stock issued in the overallotment of the Company's initial public offering. Net proceeds to the Company resulting from the overallotment were $831,000. Common stock also reflects net proceeds resulting from the exercise of warrants totaling $966,000 and the exercise of stock options from the 1995 Stock Option Plan of $643,000. WARRANTS: The following warrants were outstanding and exercisable at December 31, 1996:
ISSUED IN WARRANTS OUTSTANDING CONNECTION WITH ISSUANCE DATE EXPIRATION DATE WARRANT EXERCISE PRICE - -------------------- --------------- ------------- --------------- ----------------------- 71,875 Equity Nov. 1995 Nov. 2000 $ 7.20 110,000 Equity Dec. 1995 Dec. 2000 $ 7.20 Convertible 16,538 Notes Dec. 1996 Dec. 2002 $ 6.50 -------- 198,413 -------- --------
The 71,875 outstanding warrants issued in November 1995 have an exercise price of $7.20 per share for the first thirty (30) months of the warrant term and $8.40 per share for the remaining warrant term. The Company has reserved 198,413 shares of common stock for issuance upon the exercise of the outstanding warrants. NOTE 9 -- STOCK OPTION PLANS: The Company has three Stock Option Plans (the Plans) which provide for the issuance of stock options to employees of the Company. The Company has reserved an aggregate of 885,462 shares of Common Stock for issuance upon the exercise of options granted under these plans, including 200,000 shares approved by the Company's shareholders at the annual meeting in June 1996. Options to purchase 41,588 and 171,804 shares were vested and exercisable at December 31, 1995 and 1996 respectively. Options granted under the Plans are for periods not to exceed 10 years. Non-employee members of the Board of Directors are eligible for automatic option grants under the 1995 Stock Option Plan (the 1995 Plan). All options granted under the Plans must be at prices not less than fair market value at the date of grant, except for the 1995 Plan for which options can be granted at prices not less than 85% of the fair market value at the date of grant. The Board of Directors may amend, modify or terminate the Plans at their discretion. F-13 DELTAPOINT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- STOCK OPTION PLANS: (CONTINUED) The following table summarizes activity under the Company's Stock Option Plans:
OPTIONS OUTSTANDING SHARES --------------------------------- AVAILABLE WEIGHTED AVERAGE FOR GRANT SHARES EXERCISE PRICE ---------- ---------- --------------------- Balance at December 31, 1994............................ 27,230 38,127 6.63 Additional shares reserved.............................. 620,000 -- -- Options granted......................................... (525,000) 525,000 4.08 Options exercised....................................... -- (382) 6.63 Options canceled........................................ 3,321 (3,321) 6.63 ---------- ---------- Balance at December 31, 1995............................ 125,551 559,424 3.89 Additional shares reserved.............................. 200,000 -- -- Options granted......................................... (433,677) 433,677 8.54 Options exercised....................................... -- (81,000) 3.64 Options canceled........................................ 171,593 (171,593) 4.85 ---------- ---------- Balance at December 31, 1996............................ 63,467 740,508 6.68 ---------- ---------- ---------- ----------
The following table summarizes information about employee stock options outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------------- -------------------------------------- NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED AVERAGE OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT EXERCISE PRICE AT RANGE OF EXERCISE PRICES DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1996 DECEMBER 31, 1996 - ------------------------ ----------------- ----------------- --------------- ----------------- ------------------- $3.50................... 236,611 8.9 3.50 92,998 3.50 $4.80-6.63.............. 75,759 9.0 5.95 37,834 5.89 $7.50................... 140,000 9.9 7.50 2,222 7.50 $7.75-7.83.............. 99,788 9.3 7.82 -- -- $9.50-11.50............. 188,350 9.4 9.78 38,750 9.50 -------- -------- Total................. 740,508 9.3 6.68 171,804 5.43 -------- -------- -------- --------
FAIR VALUE DISCLOSURES Had compensation cost for the Plans been determined based on the fair value of each stock option grant on its grant date, as prescribed in FAS 123, the Company's net loss and net loss per share would have been as follows:
YEAR ENDED DECEMBER 31, -------------------- 1995 1996 --------- --------- Net loss: As reported............................................... $ (2,632) $ (4,848) Pro forma................................................. $ (2,704) $ (5,450) Net loss per share: As reported............................................... $ (2.42) $ (2.17) Pro forma................................................. $ (2.49) $ (2.44)
The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants during the applicable F-14 DELTAPOINT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- STOCK OPTION PLANS: (CONTINUED) period: dividend yields of 0% for both periods; expected volatility of 80.6%; risk-free interest rate of 5.57% for 1995 and 6.07% for 1996 for options granted; and a weighted average expected option term of 4.3 years for 1995 and 3.9 years for 1996. The above pro forma amounts include compensation expense based on the fair value of options granted and vesting during the years ended December 31, 1995 and 1996 and exclude the effects of options granted prior to January 1, 1995. Accordingly, the above pro forma net loss and net loss per share are not representative of the effects of computing stock option compensation expense using the fair value method for future periods. NOTE 10 -- 401(K) PLAN: During 1992, the Company established a deferred compensation plan (the 401(k) Plan) pursuant to Section 401(k) of the Internal Revenue Code (the "Code"), whereby substantially all employees are eligible to contribute up to 20% of their pre-tax earnings, not to exceed amounts allowed under the Code. The Company may make contributions to the 401(k) Plan at the discretion of the Board of Directors. No employer contributions have been made to the 401(k) Plan by the Company. NOTE 11 -- SUBSEQUENT EVENT: On February 26, 1997, the Company reached an agreement with Berckeley Investment Group Ltd. ("Berckeley") to issue and sell to Berckeley an aggregate of 1,000 shares of Series A Preferred Stock to be designated, at a purchase price of $1,000 per share, for cash in the aggregate amount of $1,000,000 (the "Series A Financing"). Each share of Series A Preferred Stock would be convertible at any time, at the option of the holder, into such number of shares of Common Stock as may be determined by dividing the original purchase price of a share of Series A Preferred Stock by 80% of the market price of Common Stock on the conversion date, subject to certain adjustments; provided, however, that no holder may convert Series A Preferred Stock, without the Company's prior written consent, if such conversion would cause such holder's aggregate ownership of the Company's capital stock to exceed 4.9% of the Company's then issued and outstanding capital stock. Such shares would also be convertible automatically two years from their issue date or, if earlier, upon the occurrence of certain other events. The holder of Series A Preferred Stock would be entitled to cumulative cash dividends at an annual rate of $85.72 per share. 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 (a "Liquidation Event"), holders of shares of Series A Preferred Stock would be entitled to receive from the proceeds from such Liquidation Event the aggregate purchase price of any shares of Series A Preferred Stock held by such holders plus any accrued but unpaid dividends, subject to certain adjustments. F-15 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ------- Available Information............................. 2 Summary........................................... 3 Risk Factors...................................... 6 Price Range of Common Stock....................... 14 Dividend Policy................................... 14 Capitalization.................................... 15 Selected Financial Data........................... 16 Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 17 Business.......................................... 21 Management........................................ 31 Certain Transactions.............................. 39 Principal and Selling Shareholders................ 41 Description of Capital Stock...................... 43 Shares Eligible for Future Sale................... 46 Plan of Distribution.............................. 46 Legal Matters..................................... 46 Experts........................................... 47 Financial Statements.............................. F-1
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS As permitted by Section 204(a) of the California General Corporation Law, the Registrant's Articles of Incorporation eliminate a director's personal liability for monetary damages to the Registrants and its shareholders arising from a breach or alleged breach of the director's fiduciary duty, except for liability arising under Sections 310 and 316 of the California General Corporation Law or liability for (i) acts or omissions that involve intentional misconduct or knowing and culpable violation of law, (ii) acts or omissions that a director believes to be contrary to the best interests of the Registrant or its shareholders or that involve the absence of good faith on the part of the director, (iii) any transaction from which a director derived an improper personal benefit, (iv) acts or omissions that show a reckless disregard for the director's duty to the Registrant or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the Registrant or its shareholders and (v) acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Registrants or its shareholders. This provision does not eliminate the directors' duty of care, and in appropriate circumstances equitable remedies such as an injunction or other forms of non-monetary relief would remain available under California law. Sections 204(a) and 317 of the California General Corporation Law authorize a corporation to indemnify its directors, officers, employees and other agents in terms sufficiently broad to permit indemnification (including reimbursement for expense) under certain circumstances for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"). The Registrant's Articles of Incorporation and Bylaws contain provisions covering indemnification of corporate directors, officers and other agents against certain liabilities and expenses incurred as a result of proceedings involving such persons in their capacities as directors, officers, employees or agents, including proceedings under the Securities Act or the Securities Exchange Act of 1934, as amended. The Company has entered into Indemnification Agreements with its directors and executive officers. At present, there is no pending litigation or proceeding involving a director, officer, employee or other agent of the Registrant in which indemnification is being sought, nor is the Registrant aware of any threatened litigation that may result in a claim for indemnification by any director, officer, employee or other agent of the Registrant. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee. SEC Registration fee...................................................... $ 719 Printing and engraving expenses........................................... 5,000 Legal fees and expenses................................................... 7,500 Accounting fees and expenses.............................................. 2,000 Blue sky fees and expenses................................................ 10,000 Transfer agent fees....................................................... 2,500 Miscellaneous fees and expenses........................................... 2,281 --------- Total................................................................. $ 30,000 --------- ---------
II-1 ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES Since January 1, 1994, the Registrant has issued and sold the following securities (after giving effect to the one-for-5.3 reverse split of the Common Stock effected on the closing of the Company's Initial Public Offering in December 1995): 1. The Registrant has granted options to purchase 7,165 shares of Common Stock and issued and sold 2,143 shares of its Common Stock upon exercise of such options to a number of employees pursuant to direct issuances and to exercises of options under its 1990 Stock Option Plan. 2. The Registrant has granted options to purchase 8,063 shares of Common Stock and issued and sold no shares of its Common Stock upon exercise of such options to employees and a third party pursuant to direct issuances and to exercises of options under its 1992 Stock Option Plan, including options granted to Raymond R. Kingman, Jr., William G. Pryor to purchase 4,283 and 1,894 shares of Common Stock, respectively. 3. The Registrant has granted options to purchase 499,844 shares of Common Stock and issued and sold no shares of its Common Stock upon exercise of such options to a number of employees and directors pursuant to direct issuances and to exercises of options under its 1995 Stock Option Plan. 4. On April 6, 1994, Registrant sold and issued an aggregate of 77,894 shares of its Series C Preferred Stock for cash in the aggregate amount of $450,000 to entities affiliated with Hummer Winblad Venture Partners and entities affiliated with Oak V Affiliates Fund, L.P. pursuant to a Series C Preferred Stock Purchase Agreement. See "Certain Transactions." 5. On May 24, 1995 Registrant sold and issued an aggregate of 112,564 shares of its Series D Preferred Stock for cash in the aggregate amount of $1,050,000 to entities affiliated with Hummer Winblad Venture Partners, entities affiliated with Oak V Affiliates Fund, L.P. and Pinnacle Manufacturing Professionals pursuant to a Series D Preferred Stock Purchase Agreement. See "Certain Transactions" and "Capital Stock -- Convertible Notes and Warrants." 6. On May 24, 1995, Registrant issued to Hummer Winblad Venture Partners and entities affiliated with Oak V. Affiliates Fund, L.P., Warrants to purchase 69,272 shares of Common Stock at an exercise price of $9.33 per share, or in the event Registrant consummates the sale of its Common Stock pursuant to a registration statement filed on Form S-1 filed under the Securities Act for an aggregate offering price of $5 million. See "Certain Transactions." 7. On November 6, 1995, Registrant sold and issued 125,000 units, each unit consisting of two shares of Series E Preferred Stock, and one Warrant at a purchase price of $8.00 per unit, for cash of $765,000, net of issuance costs, to the following investors in the following amount of units: Hummer Winblad Ventures (3,125 units), Oak V Affiliates Fund, L.P. (6,250 units), American High Growth Equities Retirement Trust (50,000 units), Jack Balter (3,125 units), Dr. Mannie Magid (3,125 units), George L. Black Trust (6,250 units), Leon Feldan (3,125 units), Ronald Mickwee (3,125 units), Joan Plastiras Myers (3,125 units), Nicholas W. and Geraldine Perilli (3,125 units), James R. Ratliff (6,250 units), David Rosenberg (3,125 units), Alan J. Rubin (6,250 units), The Salzman Group, Ltd. (6,250 units), Donald L. & Lucy A. Stoner Trust (6,250 units), Lawrence S. Weisman (6,250 units), Donald B. Witmer (6,250 units). See "Certain Transactions." 8. On November 10, 1995, Registrant granted options to purchase an aggregate of 335,000 shares of Common Stock under its 1995 Stock Option Plan, at an exercise price of $3.50 per share to Raymond R. Kingman, Jr., William G. Pryor and Donald B. Witmer to purchase 100,000, 100,000 and 135,000 shares of Common Stock, respectively. II-2 9. On November 8, 1995 issued to each of Hummer Winblad Ventures and Oak Affiliates a warrant to purchase 31,667 of Common Stock exercisable at a price of $7.20 per share for a period of 30 months following December 26, 1995 and a price of $8.40 per share from such time until November 6, 2000. 10. On April 22, 1996, Registrant granted options to purchase an aggregate of 155,000 shares of Common Stock under its 1995 Stock Option Plan, at an exercise price of $9.50 per share to John J. Ambrose and Donald B. Witmer to purchase 145,000 and 10,000 shares of Common Stock, respectively. 11. On August 13, 1996, Registrant granted options to purchase 20,000 shares of Common Stock under its 1995 Stock Option Plan, at an exercise price of $7.50 per share to Patrick Grady. 12. On November 4, 1996, Registrant granted options to purchase 40,000 shares of Common Stock under its 1995 Stock Option Plan, at an exercise price of $7.50 per share to Donald Witmer. 13. In December 1996, holders of warrants exercised warrants to purchase an aggregate of 189,297 shares of Common Stock at a purchase price of $5.00 per share, including warrants to purchase an aggregate of 145,547 shares of Common Stock exercised by Oak Investment Partners V, L.P. and Oak V Affiliates Fund, L.P. The shares issued are covered by Post-Effective Amendment No. 2 to Registration Statement on Form SB-2 (Registration No. 333-3784). 14. On December 31, 1996, Registrant issued $2,000,000 principal amount of 6% Convertible Subordinated Debentures to High Risk Opportunities Hub Fund Ltd. and $150,000 principal amount thereof to American High Growth Equities Retirement Trust. 15. In November 1996, Registrant issued 30,970 shares of Common Stock to Oak Investment Partners V, L.P., 697 shares of Common Stock to Oak V Affiliates Fund, L.P., 30,084 shares of Common Stock to Hummer Winblad Venture Partners and 1,583 shares of Common Stock to Hummer Winblad Technology Fund, all pursuant to the conversion of the notes described in the chart and footnote 7 in "Certain Transactions." Such shares are covered by this Registration Statement. The issuance described in Items 1 through 15 were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) under the Securities Act as transactions by an issuer not involving a public offering or on Rule 701 promulgated under the Securities Act. In addition, the recipients of securities in each such transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates issued in such transactions. All recipients had adequate access, through their relationships with the Registrant, to information about the Registrant. ITEM 27. EXHIBITS
EXHIBIT NO. DESCRIPTION - --------------- ------------------------------------------------------------------------------------------------- 3.1(1) Registrant's Amended and Restated Articles of Incorporation 3.2(1) Registrant's Bylaws 4.1(1) Specimen Certificate of Registrant's Common Stock 4.2(1) Form of Warrant 4.3(1) Form of H.J. Meyers & Co.'s' Warrant 4.4(1) Loan and Warrant Agreement between Registrant and certain investors dated as of March 29, 1993 4.5(1) Amended and Restated Investor Rights Agreement between Registrant and the investors specified therein dated as of November 6, 1995 5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
II-3
EXHIBIT NO. DESCRIPTION - --------------- ------------------------------------------------------------------------------------------------- 10.1(1) Real Property Lease between Registrant and Owens Mortgage Investment Fund dated as of August 18, 1995 10.2(1) 1990 Stock Option Plan 10.3(1) 1992 Stock Option Plan 10.4(1)(3) 1995 Stock Option Plan 10.5(1) Form of Indemnification Agreement 10.6(1)(2) License Agreement between Registrant and Smart Draw Software, Inc. dated as of April 19, 1995 10.7(1) License Agreement between Registrant and Halcyon Software, Inc. dated as of June 30, 1992 10.8.1(1)(2) Distribution Agreement between Registrant and Nippon Polaroid Kabushiki Kaishi dated as of November 12, 1991 10.8.2(1)(2) Distributor Software License Agreement between Registrant and Nippon Polaroid K.K. Supplements dated as of December 24, 1993, June 6, 1994 and two supplements dated as of June 28, 1995 10.9(1) Series C Preferred Stock Purchase Agreement dated April 6, 1994 among the Registrant and the investors named therein 10.10(1) Series D Preferred Stock and Warrant Purchase Agreement dated May 24, 1995 among Registrant and the investors named therein 10.11(1) Series E Preferred Stock and Warrant Purchase Agreement dated November 6, 1995 among Registrant and the investors named therein 10.12(1) Employment Agreement dated as of November 1, 1995 between Registrant and Donald B. Witmer 10.13.1(1) Business Loan Agreement between Registrant and Silicon Valley Bank dated as of August 24, 1994 10.13.2(1) Promissory Note between Registrant and Silicon Valley Bank dated as of August 24, 1994 10.14(1) Conversion of Promissory Notes and Exchange of Warrants Agreement dated as of November 8, 1995 among Registrant, Hummer Winblad Venture Partners, Hummer Winblad Technology Fund, Oak Investment Partners V, Limited Partnership and Oak V Affiliates Fund, Limited Partnership. 10.15(1) License Agreement between Registrant and Altura Software, Inc. dated June 7, 1994 10.16(1) Employment Agreement dated November 8, 1995 between Registrant and Raymond R. Kingman, Jr. 10.17(1) Employment Agreement dated November 8, 1995 between Registrant and William G. Pryor 10.18(1) Offer letter dated December 5, 1995 between the Registrant and Spencer A. Leyton 10.19(1)(2) Letter of Intent dated November 21, 1995 between DeltaPoint and Richard Blum 10.20(1)(2) Agreement dated December 15, 1995 among Registrant, Global Technologies Corporation and William French 10.21(1) Termination Agreement dated as of November 8, 1995 among the Company and certain shareholders of the Company named therein 10.22(1) Amendment Agreement dated as of December , 1995 among the Company and certain shareholders of the Company named therein
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EXHIBIT NO. DESCRIPTION - --------------- ------------------------------------------------------------------------------------------------- 10.23(3) Employment Agreement dated December 26, 1995 between Registrant and William A. French 10.24(4) Separation Agreement and Release between Registrant and Raymond R. Kingman, Jr. dated April 5, 1996 10.25(4) Offer letter dated March 29, 1996 between Registrant and John J. Ambrose 10.26* Form of 6% Convertible Subordinated Debentures issued by Registrant on December 31, 1996 to High Risk Opportunities Hub Fund Ltd. and American High Growth Equities Retirement Trust 10.27* Form of Subscription Agreement governing issuance of 6% Convertible Subordinated Debentures 23.1* Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP (included in Exhibit 5.1) 23.2* Consent of Price Waterhouse LLP 24.1* Power of Attorney (see page II-7)
- ------------------------ (1) Incorporated by reference to Registrant's Registration Statement on Form SB-2, filed December 19, 1995 (File No. 33-99300). (2) Confidential treatment requested as to certain portions of this exhibit. (3) Incorporated by reference to Registrant's Registration Statement on Form S-8 filed March 6, 1996 (File No. 333-2192). (4) Incorporated by reference to Registrant's Registration Statement on Form SB-2, filed April 17, 1996 (File No. 333-3784). * Filed herewith. ITEM 28. UNDERTAKINGS Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes: That for purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; II-5 (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The Registrant further undertakes to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the Offering. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Monterey, State of California, on February 28, 1997. DELTAPOINT, INC. By: /s/ JOHN J. AMBROSE ----------------------------------- John J. Ambrose CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints John J. Ambrose and Donald B. Witmer as his attorney-in-fact, with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments) and any and all Registration Statements related to this Registration Statement filed with the Securities and Exchange Commission pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO REGISTRATION STATEMENT HAS BEEN SIGNED ON THE 28TH DAY OF FEBRUARY, 1997 BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED:
SIGNATURE TITLE - ------------------------------------------------------ -------------------------------------- /s/ JOHN J. AMBROSE ------------------------------------------- Chief Executive Officer and Director John J. Ambrose (Principal Executive Officer) Chief Financial Officer, Chief /s/ DONALD B. WITMER Operating Officer and Director ------------------------------------------- (Principal Financial and Accounting Donald B. Witmer Officer) /s/ WILLIAM G. PRYOR ------------------------------------------- Director William G. Pryor /s/ JOHN HUMMER* ------------------------------------------- Director John Hummer /s/ PATRICK GRADY ------------------------------------------- Director Patrick Grady *By: /s/ DONALD B. WITMER -------------------------------------- Donald B. Witmer Director ATTORNEY-IN-FACT
II-7 INDEX TO EXHIBITS
EXHIBIT SEQUENTIALLY NUMBER EXHIBITS NUMBERED PAGE - ---------- ------------------------------------------------------------------------------------------- --------------- 5.1 Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP................... 10.26 Form of 6% Convertible Subordinated Debentures issued by Registrant on December 31, 1996 to High Risk Opportunities Hub Fund Ltd. and American High Growth Equities Retirement Trust..................................................................................... 10.27 Form of Subscription Agreement governing issuance of 6% Convertible Subordinated Debentures................................................................................ 23.2 Consent of Price Waterhouse, LLP...........................................................
EX-5.1 2 EXHIBIT 5.1 February 27, 1997 DeltaPoint, Inc. 22 Lower Ragsdale Drive Monterey, CA 93940 Re: Post Effective Amendment No. 1 to Registration Statement on Form SB-2 (File No. 333-17733) Ladies and Gentlemen: We have examined Post-Effective Amendment No. 1 to Registration Statement on Form SB-2 (File No. 333-17733) filed by DeltaPoint, Inc. (the "Company") with the Securities and Exchange Commission (the "Commission") on or about the date hereof (the "Registration Statement Amendment"), in connection with the registration under the Securities Act of 1933, as amended, of 300,896 shares of the Company's Common Stock (the "Shares") to be offered and sold by certain shareholders of the Company (the "Selling Shareholders") as described in the Registration Statement Amendment. As your counsel in connection with this transaction, we have examined the proceedings taken by you in connection with the original issuance of the Shares and are familiar with the proceedings proposed to be taken by you in connection with the sale of the Shares by the Selling Shareholders. It is our opinion that, upon conclusion of the proceedings being taken or contemplated by us, as your counsel, to be taken prior to the sale of the Shares by the Selling Shareholders and upon completion of the proceedings being taken in order to permit such transactions to be carried out in accordance with the securities laws of the various states where required, the Shares, when sold in the manner described in the Registration Statement Amendment and the applicable agreements and documents referred to in the exhibits thereto, will be legally and validly issued, fully paid and non-assessable. DeltaPoint, Inc. February 27, 1997 Page 2 We consent to the use of this opinion as an exhibit to said Registration Statement Amendment, and further consent to the use of our name under the caption "Legal Matters" in the Registration Statement Amendment, including the prospectus constituting a part thereof, and in any amendment or supplement thereto. Very truly yours, /s/ GUNDERSON DETTMER STOUGH VILLENEUVE FRANKLIN & HACHIGIAN, LLP ------------------------------------------------- GUNDERSON DETTMER STOUGH VILLENEUVE FRANKLIN & HACHIGIAN, LLP HLC:mzt EX-10.26 3 EXHIBIT 10.26 EXHIBIT 10.26 EXHIBIT A FORM OF NOTE THIS NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. 6% SUBORDINATED CONVERTIBLE NOTE $ December __, 1996 Monterey, California FOR VALUE RECEIVED DELTAPOINT, INC., a California corporation ("Company"), promises to pay to __________ ("Holder"), or its registered assigns, the principal sum of ______ Dollars ($_______), or such lesser amount as shall equal the outstanding principal amount hereof, together with interest from the date of this Note on the unpaid principal balance at a rate equal to six percent (6.00%) per annum, computed on the basis of the actual number of days elapsed and a year of 365 days. This Note is one of the "Notes" issued by the Company in the private offering (the "Private Offering") described in the Confidential Private Offering Memorandum dated October 15, 1996, as supplemented by a supplement dated December 23, 1996 (collectively, the "Memorandum") distributed by the Company to the Holder, and pursuant to the Subscription Agreement completed by the Holder (the "Subscription Agreement"). The following is a statement of the rights of Holder and the conditions to which this Note is subject, and to which Holder, by the acceptance of this Note, agrees: 1. DEFINITIONS. As used in this Note, the following capitalized terms have the following meanings: (a) "Certificate" shall mean the Articles of Incorporation of Company as amended and/or restated. (b) "Closing" shall mean the date of this Note. (c) "Company" includes the corporation initially executing this Note and any Person which shall succeed to or assume the obligations of Company under this Note. (d) "Event of Default" has the meaning given in Section 3 hereof. (e) "Holder" shall mean the Person specified in the introductory paragraph of this Note or any Person who shall at the time be the registered holder of this Note. (f) "Indebtedness" shall mean and include the aggregate amount of, without duplication (a) all obligations for borrowed money, (b) all obligations evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations to pay the deferred purchase price of property or services (other than accounts payable incurred in the ordinary course of business determined in accordance with generally accepted accounting principals), (d) all obligations with respect to capital leases, (e) all guaranty obligations, (f) all obligations created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person, and (g) all reimbursement and other payment obligations, contingent or otherwise, in respect of letters of credit. (g) "Lien" shall mean, with respect to any property, any security interest, mortgage, pledge, lien, claim, charge or other encumbrance in, of, or on such property or the income therefrom, including, without limitation, the interest of a vendor or lessor under a conditional sale agreement, capital lease or other title retention agreement, or any agreement to provide any of the foregoing, and the filing of any financing statement or similar instrument under the Uniform Commercial Code or comparable law of any jurisdiction. (h) "Majority in Interest" shall mean more than 50% of the aggregate outstanding principal amount of the Notes issued in the Private Offering and then outstanding. (i) "Obligations" shall mean and include all loans, advances, debts, liabilities and obligations, howsoever arising, owed by Company to Holder of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), now existing or hereafter arising under or pursuant to the terms of this Note and the other Transaction Documents, including all interest, fees, charges, expenses, attorneys' fees and costs and accountants' fees and costs chargeable to and payable by Company hereunder and thereunder, in each case, whether direct or indirect, absolute or contingent, due or to become due, and whether or not arising after the commencement of a proceeding under Title 11 of the United States Code (11 U.S.C. Section 101 et seq.), as amended from time to time (including post-petition interest) and whether or not allowed or allowable as a claim in any such proceeding. (j) "Person" shall mean and include an individual, a partnership, a corporation (including a business trust), a joint stock company, a limited liability company, an unincorporated association, a joint venture or other entity or a governmental authority. (k) "Senior Indebtedness" shall mean, unless expressly subordinated to or made on a parity with the amounts due under this Note, the principal of (and premium, if any), unpaid interest on and amounts reimbursable, fees, expenses, costs of enforcement and other amounts due in connection with, (i) indebtedness of Company to banks, commercial finance lenders, insurance companies, leasing or equipment financing institutions (including the vendor of such equipment) or other lending institutions regularly engaged in the business of lending money (including venture capital, investment banking or similar institutions which sometimes engage in lending activities but which are primarily engaged in investments in equity securities), which is for money borrowed, or purchase or leasing of equipment in the case of lease or other equipment financing, whether or not secured, and (ii) any such indebtedness or any debentures, notes or other evidence of indebtedness issued in exchange for such Senior Indebtedness, or any indebtedness arising from the satisfaction of such Senior Indebtedness by a guarantor. 2 (l) "Transaction Documents" shall mean this Note, each of the other Notes issued in the Private Offering, the Memorandum and the Subscription Agreement. 2. INTEREST. Accrued interest on the unpaid principal balance of this Note shall be payable on each of the dates six months, one year, eighteen months and two years after the Closing. 3. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an "Event of Default" under this Note and the other Transaction Documents: (b) Failure to Pay. Company shall fail to pay any interest or other payment required under the terms of this Note or any other Transaction Document on the date due and such payment shall not have been made within five (5) days of Company's receipt of Holder's written notice to Company of such failure to pay; or (b) Voluntary Bankruptcy or Insolvency Proceedings. Company shall (i) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property, (ii) be unable, or admit in writing its inability, to pay its debts generally as they mature, (iii) make a general assignment for the benefit of its or any of its creditors, (iv) be dissolved or liquidated, (v) become insolvent (as such term may be defined or interpreted under any applicable statute), (vi) commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consent to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it, or (vii) take any action for the purpose of effecting any of the foregoing; or (c) Involuntary Bankruptcy or Insolvency Proceedings. Proceedings for the appointment of a receiver, trustee, liquidator or custodian of Company or of all or a substantial part of the property thereof or an involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to Company or the debts thereof under any bankruptcy, insolvency or other similar law now or hereafter in effect shall be commenced and an order for relief entered or such proceeding shall not be dismissed or discharged within thirty (30) days of commencement. 4. RIGHTS OF HOLDER UPON DEFAULT. Upon the occurrence or existence of any Event of Default (other than an Event of Default referred to in Section 3(b) or 3(c)) and at any time thereafter during the continuance of such Event of Default Holder may, with the written consent of a Majority in Interest of the holders of the Notes issued in the Private Offering, by written notice to Company, declare 3 all outstanding Obligations payable by Company hereunder to be immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the other Transaction Documents to the contrary notwithstanding. Upon the occurrence or existence of any Event of Default described in Section 3(b) or 3(c), immediately and without notice, all Obligations payable by Company hereunder shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the other Transaction Documents to the contrary notwithstanding. In addition to the foregoing remedies, upon the occurrence or existence of any Event of Default, Holder may exercise any other right power or remedy granted to it by the Transaction Documents or otherwise permitted to it by law, either by suit in equity or by action at law, or both. 5. SUBORDINATION. The indebtedness evidenced by this Note is hereby expressly subordinated, to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full of all of Company's Senior Indebtedness. (a) Insolvency Proceedings. If there shall occur any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization, or arrangements with creditors (whether or not pursuant to bankruptcy or other insolvency laws), sale of all or substantially all of the assets, dissolution, liquidation, or any other marshaling of the assets and liabilities of Company, (i) no amount shall be paid by Company in respect of the principal of, interest on or other amounts due with respect to this Note at the time outstanding, unless and until the principal of and interest on the Senior Indebtedness then outstanding shall be paid in full, and (ii) no claim or proof of claim shall be filed with Company by or on behalf of Holder of this Note which shall assert any right to receive any payments in respect of the principal of and interest on this Note except subject to the payment in full of the principal of and interest on all of the Senior Indebtedness then outstanding. (b) Default on Senior Indebtedness, If there shall occur an event of default which has been declared in writing with respect to any Senior Indebtedness, as defined therein, or in the instrument under which it is outstanding, permitting the holder to accelerate the maturity thereof and Holder shall have received written notice thereof from the holder of such Senior Indebtedness, then, unless and until such event of default shall have been cured or waived or shall have ceased to exist, or all such Senior Indebtedness shall have been paid in full, no payment shall be made in respect of the principal of or interest on this Note, unless within 180 days after the happening of such event of default, the maturity of such Senior Indebtedness shall not have been accelerated. Not more than one notice may be given to Holder pursuant to the terms of this Section 5(b) during any 360-day period with respect to such Senior Indebtedness. (c) Further Assurances. By acceptance of this Note, Holder agrees to execute and deliver customary forms of subordination agreement requested from time to time by holders of Senior Indebtedness, and as a condition to Holder's rights hereunder, Company may require that Holder execute such forms of subordination agreement; provided that such forms shall not impose on Holder terms less favorable than those provided herein. 4 (d) Other Indebtedness. No Indebtedness which does not constitute Senior Indebtedness shall be senior in any respect to the indebtedness represented by this Note. (e) Subrogation. Subject to the payment in full of all Senior Indebtedness, Holder shall be subrogated to the rights of the holder(s) of such Senior Indebtedness (to the extent of the payments or distributions made to the holder(s) of such Senior Indebtedness pursuant to the provisions of this Section 5) to receive payments and distributions of assets of Company applicable to the Senior Indebtedness. No such payments or distributions applicable to the Senior Indebtedness shall, as between Company and its creditors, other than the holders of Senior Indebtedness and Holder, be deemed to be a payment by Company to or on account of this Note; and for purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness to which Holder would be entitled except for the provisions of this Section 5 shall, as between Company and its creditors, other than the holders of Senior Indebtedness and Holder, be deemed to be a payment by Company to or on account of the Senior Indebtedness. (f) No Impairment. Subject to the rights, if any, of the holders of Senior Indebtedness under this Section 5 to receive cash, securities or other properties otherwise payable or deliverable to Holder, nothing contained in this Section 5 shall impair, as between Company and Holder, the obligation of Company, subject to the terms and conditions hereof, to pay to Holder the principal hereof and interest hereon as and when the same become due and payable or shall prevent Holder, upon default hereunder, from exercising all rights, powers and remedies otherwise provided herein or by applicable law. (g) Lien Subordination. Any Lien of Holder, whether now or hereafter existing in connection with the amounts due under this Note, on any assets or property of Company or any proceeds or revenues therefrom which Holder may have at any time as security for any amounts due and obligations under this Note shall be subordinate to all Liens now or hereafter granted to a holder of Senior Indebtedness by Company or by law, notwithstanding the date, order or method of attachment or perfection of any such Lien or the provisions of any applicable law. (h) Reliance of Holders of Senior Indebtedness. Holder, by its acceptance hereof, shall be deemed to acknowledge and agree that the foregoing subordination provisions are, and are intended to be, an inducement to and a consideration of each holder of Senior Indebtedness, whether such Senior Indebtedness was created or acquired before or after the creation of the indebtedness evidenced by this Note, and each such holder of Senior Indebtedness shall be deemed conclusively to have relied on such subordination provisions in acquiring and holding, or in continuing to hold, such Senior Indebtedness. 6. CONVERSION. (a) Voluntary Conversion. Beginning on the date 60 days after the Closing, Holder has the right, at Holder's option, at any time, to 5 convert up to one third of the outstanding principal amount of this Note, in accordance with the provisions of Section 6(c) hereof, into fully paid and nonassessable shares of Common Stock of Company (the "Common Stock"). Beginning on the date 90 days after the Closing, Holder has the right, at Holder's option, at any time, to convert up to two thirds of the original principal amount of this Note (but not in excess of the outstanding principal amount of this Note), in accordance with the provisions of Section 6(c) hereof, into fully paid and nonassessable shares of Common Stock. Beginning on the date 120 days after the Closing, Holder has the right, at Holder's option, at any time, to convert up to the original principal amount of this Note, (but not in excess of the outstanding principal amount of this Note), in accordance with the provisions of Section 6(c) hereof, into fully paid and nonassessible shares of Common Stock. Notwithstanding the foregoing, all principal amounts converted shall be in denominations of $1,000 or integral multiples thereof. The number of shares of Common Stock into which this Note may be converted ("Conversion Shares") shall be determined by dividing the aggregate principal amount to be converted by the Conversion Price (as defined below) in effect at the time of such conversion. The "Conversion Price" shall be equal to the lower of (i) 80% (the "Discount Percentage") of the average closing bid price of the Company's Common Stock, as reported by the Nasdaq SmallCap Market (or, if the Common Stock is traded on the Nasdaq National Market, the closing sale price as reported by such market), for the five business days prior to the business day (x) on which written notice of conversion is transmitted by the Holder pursuant to Section 6(c)(i) below, if the conversion is voluntary pursuant to this Section 6(a), or (y) on which an automatic conversion is deemed effective pursuant to Section 6(b) below; or (ii) the average closing offer price of the Company's Common Stock, as reported by the Nasdaq Small Cap Market, for the five business days prior to the Closing. Notwithstanding the foregoing, if the Company has not filed the Registration Statement (as defined in Section 7 below) with respect to the Conversion Shares to be initially registered pursuant to the Registration Statement on or before the 60th day after the Closing (the "Penalty Date"), the Discount Percentage shall be reduced by 2% for each 30-day period or portion thereof after the Penalty Date until the Company has filed such Registration Statement. For example, if the Company files the Registration Statement after the 60th day after the Closing but before the 91st day after the Closing, the Discount Percentage shall be 78%; if the Company files the Registration Statement after the 90th day after the Closing but before the 121st day after the Closing, the Discount Percentage shall be 76%; and so on. (b) Automatic Conversion. The entire outstanding principal amount of this Note shall be automatically converted into shares of Common Stock at the Conversion Price in effect at the time upon the earlier to occur of: (i) any consolidation or merger of Company with or into any Person, or any other corporate reorganization in which Company shall not be the continuing or surviving entity of such consolidation, merger or reorganization, or any transaction or series of related transactions by Company in which in excess of 50% of Company's voting power is transferred, or a sale of all or substantially all of the assets of Company; or (ii) the second anniversary of the Closing. 6 (c) Conversion Procedure. (i) Conversion Pursuant to Section 6(a). Before Holder shall be entitled to convert this Note into shares of Common Stock, it shall surrender this Note, duly endorsed, at the office of Company and shall give written notice by registered or certified mail, postage prepaid, to Company at its principal corporate office, of the election to convert the same pursuant to Section 6(a), and shall state therein the amount of the unpaid principal amount of this Note to be converted and the name or names in which the certificate or certificates for shares of Common Stock are to be issued. Company shall, within three business days thereafter, issue and deliver at such office to Holder of this Note a certificate or certificates for the number of shares of Common Stock to which Holder shall be entitled upon conversion (bearing such legends as are required by applicable state and federal securities laws in the opinion of counsel to Company), together with a replacement Note (if any principal amount remains outstanding after conversion) and any other securities and property to which Holder is entitled upon such conversion under the terms of this Note, including a check payable to Holder for any cash amounts payable as described in Section 6(d). The conversion shall be deemed to have been made immediately prior to the close of business on the date of the surrender of this Note, and the Person or Persons entitled to receive the shares of Common Stock upon such conversion shall, as of such date, be treated for all purposes as the record holder or holders of such shares of Common Stock and purchasers of such shares of Common Stock under the Transaction Documents and shall be bound by the terms of the Transaction Documents. (ii) Conversion Pursuant to Section 6(b). If this Note is automatically converted, written notice shall be delivered to Holder at the address last shown on the records of Company for Holder or given by Holder to Company for the purpose of notice or, if no such address appears or is given, at the place where the principal executive office of Company is located, notifying Holder of the conversion to be effected, specifying the principal amount of the Note to be converted, the date on which such conversion is expected to occur and calling upon such Holder to surrender to Company, in the manner and at the place designated, the Note. Upon such conversion of this Note, Holder shall surrender this Note, duly endorsed, at the principal office of Company. At its expense, Company shall, within three business days thereafter, issue and deliver to such Holder at such principal office a certificate or certificates for the number of shares to which Holder shall be entitled upon such conversion (bearing such legends as are required by applicable state and federal securities laws in the opinion of counsel to Company), together with any other securities and property to which Holder is entitled upon such conversion under the terms of this Note, including a check payable to Holder for any cash amounts payable as described in Section 6(d). Any conversion of this Note pursuant to Section 6(b) shall be deemed to have been made immediately prior to the closing of the issuance and sale of shares as described in Section 6(b) and on and after such date the Persons entitled to receive the shares issuable upon such conversion shall be treated for all purposes as the record Holders of such shares and purchasers of such shares under the Transaction Documents and shall be bound by the terms of the Transaction Documents. 7 (d) Fractional Shares; Interest; Effect of Conversion. No fractional shares shall be issued upon conversion of this Note. In lieu of Company issuing any fractional shares to Holder upon the conversion of this Note, Company shall pay to Holder an amount equal to the product obtained by multiplying the Conversion Price by the fraction of a share not issued pursuant to the previous sentence. In addition, Company shall pay to Holder any interest accrued on the amount converted and on the amount to be paid to Company pursuant to the previous sentence. Upon conversion of this Note in full and the payment of the amounts specified in this Section 6(d), Company shall be forever released from all its obligations and liabilities under this Note. (e) Reservation of Stock Issuable Upon Conversion. Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of this Note such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of the Note; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of the entire outstanding principal amount of this Note, without limitation of such other remedies as shall be available to the holder of this Note, Company will use its best efforts to take such corporate action as may, in the opinion of counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. (f) Conversion Price Adjustments. (i) Adjustments for Stock Splits and Subdivisions. In the event Company should at any time or from time to time after the date of issuance hereof fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price shall be appropriately decreased so that the number of shares of Common Stock issuable upon conversion of this Note shall be increased in proportion to such increase of outstanding shares. (ii) Adjustments for Reverse Stock Splits. If the number of shares of Common Stock outstanding at any time after the date hereof is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price shall be appropriately increased so that the number of shares of Common Stock issuable on conversion hereof shall be decreased in proportion to such decrease in outstanding shares. 8 (g) Limitation. Notwithstanding anything to the contrary contained in this Note or any other Transaction Document, the Holder shall not, without the prior written consent of the Company, convert any principal amount of this Note where such conversion would cause the Holder's aggregate ownership (including beneficial ownership) within the meaning of the Securities Exchange Act of 1934 of the Company's then issued and outstanding capital stock to exceed 4.9% of the Company's then issued and outstanding capital stock. 6A. OPTIONAL REDEMPTION. Notwithstanding anything to the contrary contained in this Note or any other Transaction Document, if the average for any five day period of the closing offer price for the Company's Common Stock, as reported by the Nasdaq, is below $4.00 (four dollars) per share, the Company may, at its sole election, within ten business days thereafter, redeem all or part of the outstanding principal amount of this Note at the redemption price of 120% of the amount of the principal balance being redeemed, plus accrued interest on the amount of the principal balance being redeemed. 7. REGISTRATION REQUIREMENTS. (a) Registration. (i) Company shall prepare and file a registration statement (the "Registration Statement") with the Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "Securities Act"), to register the issuance and/or resale of the Conversion Shares (the "Registrable Securities") and shall use its best efforts to secure the effectiveness of such registration statement before the date 60 days after the Closing. The number of Conversion Shares to be initially included in the Registration Statement shall be calculated using a Conversion Price of $4.00 per share. The Company shall amend the Registration Statement to include additional Conversion Shares, if any, at such time as the holders of a Majority in Interest of all then outstanding Notes issued in the Private Offering shall direct; provided, however, that the Company shall not be obligated to effect more than one such amendment. (ii) Company shall pay all Registration Expenses (as defined below) in connection with any registration, qualification or compliance hereunder, and Holder shall pay all Selling Expenses (as defined below) and other expenses that are not Registration Expenses relating to the Registrable Securities resold by such Holder. "Registration Expenses" shall mean all expenses, except for Selling Expenses, incurred by Company in complying with the registration provisions herein described, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for Company, blue sky fees and expenses and the expense of any special audits incident to or required by any such registration. "Selling Expenses" shall mean all selling commissions, underwriting fees and stock transfer taxes applicable to the Registrable Securities and all fees and disbursements of counsel for Holder. 9 (iii) In the case of the registration effected by Company pursuant to these registration provisions, Company will use its best efforts to: (i) keep such registration effective until the earlier of (A) the second anniversary of the date hereof, (B) such date as all of the Registrable Securities have been resold or (C) such time as all of the Registrable Securities held by Holder can be sold within a given three-month period without compliance with the registration requirements of the Securities Act pursuant to Rule 144 promulgated thereunder ("Rule 144"); (ii) prepare and file with the SEC such amendments and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by the Registration Statement; (iii) furnish such number of prospectuses and other documents incident thereto, including any amendment of or supplement to the prospectus, as Holder from time to time may reasonably request; (iv) cause the Conversion Shares to be listed on each securities exchange and quoted on each quotation service on which similar securities issued by Company are then listed or quoted; (v) provide a transfer agent and registrar for all securities registered pursuant to the Registration Statement and a CUSIP number for all such securities; (vi) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC; and (vii) file the documents required of Company and otherwise use its best efforts to maintain requisite blue sky clearance in (X) all jurisdictions in which the Notes were originally sold and (Y) all other states specified in writing by Holder, provided, however, that, as to clause (Y), Company shall not be required to qualify to do business or consent to service of process in any state in which it is not now so qualified or has not so consented. (iv) Company shall furnish to Holder upon request a reasonable number of copies of a supplement to or an amendment of the prospectus used in connection with the Registration Statement as may be necessary in order to facilitate the public sale or other disposition of all or any of the Registrable Securities held by the Holder. (v) With a view to making available to Holder the benefits of Rule 144 and any other rule or regulation of the SEC that may at any time permit Holder to sell Registrable Securities to the public without registration or pursuant to a registration statement on Form S-3, Company covenants and agrees to use its best efforts to: (i) make and keep public information available, as those terms are understood and defined in Rule 144, until the earlier of (A) the second anniversary of the date hereof or (B) such date as all of the Registrable Securities shall have been resold; (ii) file with the SEC in a timely manner all reports and other documents required of Company under the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"); and (iii) furnish to Holder upon request, as long as the Holder owns any Registrable Securities, (A) a written statement by Company that it has complied with the reporting requirements of the Securities Act and the Exchange Act, (B) a copy of the most recent annual or quarterly report of Company, and (C) such other information as may be reasonably requested in order to avail Holder of any rule or regulation of the SEC that permits the selling of any such Registrable Securities without registration or pursuant to such registration statement on Form S-3. 10 (vi) If Holder shall propose to sell any Registrable Securities pursuant to the Registration Statement, it shall notify Company of its intent to do so by 12:00 noon Pacific time on the second business day prior to such proposed sale. Such notice shall be deemed to constitute a representation that any written information previously supplied by Holder is accurate as of the date of such notice. At any time on or before 5:00 p.m. Pacific time on the business day after the business day on which the Company receives such notice, Company may refuse to permit the Holder to resell any Registrable Securities pursuant to the Registration Statement for an initial period not to exceed thirty (30) days; provided, however, that in order to exercise this right, Company must deliver a certificate in writing to the Holder to the effect that a delay in such sale is necessary because a sale pursuant to such Registration Statement in its then-current form would not be in the best interests of Company and its stockholders due to disclosure obligations of Company. For example, if the Company receives such notice from Holder on 11:00 a.m. Pacific time on Tuesday, it must deliver such certificate to Holder on or before 5:00 p.m. Pacific time on Wednesday in order to exercise the foregoing right to delay the sale. If the Company exercises such right, it shall use its best efforts to amend the Registration Statement if necessary and to take all other actions necessary to allow such sale, and shall notify the Holder promptly after it has determined that such sale has become permissible. Notwithstanding the foregoing, Company shall not be entitled to exercise its right to withdraw the registration statement more than three (3) times in any calendar year or for more than two consecutive thirty (30) day periods in any calendar year. Holder hereby covenants and agrees that it will not sell any Registrable Securities pursuant to the Registration Statement during the periods the Registration Statement is withdrawn as set forth in this Section 7(a)(vi). (b) Indemnification and Contribution. (i) Company agrees to indemnify and hold harmless Holder from and against any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) to which Holder may become subject (under the Securities Act or otherwise) insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of, or are based upon, any untrue statement of a material fact or omission to state a material fact in the Registration Statement on the effective date thereof, or arise out of any failure by Company to fulfill any undertaking included in the Registration Statement, and Company will, as incurred, reimburse Holder for any legal or other expenses reasonably incurred in investigating, defending or preparing to defend any such action, proceeding or claim; provided, however, that Company shall not be liable in any such case to the extent that such loss, claim, damage or liability arises out of, or is based upon (i) an untrue statement or omission in such Registration Statement in reliance upon and in conformity with written information furnished to Company by or on behalf of Holder specifically for use in preparation of the Registration Statement, (ii) the failure of Holder to comply with the covenants and agreements contained in Sections 7(a)(vi) hereof, or (iii) an untrue statement or omission in any prospectus that is corrected in any subsequent prospectus, or supplement or amendment thereto, that was delivered to the Holder prior to the pertinent sale or sales by Holder. 11 (ii) Holder agrees to indemnify and hold harmless Company from and against any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) to which Company may become subject (under the Securities Act or otherwise) insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of, or are based upon (i) an untrue statement of a material fact or omission to state a material fact in the Registration Statement in reliance upon and in conformity with written information furnished to Company by or on behalf of Holder specifically for use in preparation of the Registration Statement; provided, however, that Holder shall not be liable in any such case for any untrue statement or omission in any prospectus which statement has been corrected, in writing, by Holder and delivered to Company before the sale from which such loss occurred, (ii) the failure of Holder to comply with the covenants and agreements contained in Section 7(a)(vi) hereof, or (iii) an untrue statement or omission in any prospectus that is corrected in any subsequent prospectus, or supplement or amendment thereto, that was delivered to the Holder prior to the pertinent sale or sales by the Holder, and Holder will, as incurred, reimburse Company for any legal or other expenses reasonably incurred in investigating, defending or preparing to defend any such action, proceeding or claim. (iii) Promptly after receipt by any indemnified person of a notice of a claim or the beginning of any action in respect of which indemnity is to be sought against an indemnifying person pursuant to this Section 7(b)such indemnified person shall notify the indemnifying person in writing of such claim or of the commencement of such action, and, subject to the provisions hereinafter stated, in case any such action shall be brought against an indemnified person and the indemnifying person shall have been notified thereof, the indemnifying person shall be entitled to participate therein, and, to the extent that it shall wish, to assume the defense thereof, with counsel reasonably satisfactory to the indemnified person. After notice from the indemnifying person to such indemnified person of the indemnifying person's election to assume the defense thereof, the indemnifying person shall not be liable to such indemnified person for any legal expenses subsequently incurred by such indemnified person in connection with the defense thereof; provided, however, that if there exists or shall exist a conflict of interest that would make it inappropriate in the reasonable judgment of the indemnified person for the same counsel to represent both the indemnified person and such indemnifying person or any affiliate or associate thereof, the indemnified person shall be entitled to retain its own counsel at the expense of such indemnifying person. (iv) If the indemnification provided for in this Section 7(b) is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of Company on the one hand and Holder on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in 12 respect thereof), as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by Company on the one hand or Holder on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. Company and Holder agree that it would not be just and equitable if contribution pursuant to this subsection (iv) were determined by pro rata allocation (even if Holder and all other Holders of Conversion Shares were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to above in this subsection (iv). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (iv) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (iv), Holder shall not be required to contribute any amount in excess of the amount by which the net amount received by Holder from the sale of the Conversion Shares to which such loss relates exceeds the amount of any damages which Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Holder's obligations in this subsection (iv) to contribute are several in proportion to its respective sales of Conversion Shares to which such loss relates and not joint. (v) The obligations of Company and Holder under this Section 7(b) shall be in addition to any liability which Company and Holder may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls Company or Holder within the meaning of the Securities Act and the Exchange Act. 8. NOTICES OF RECORD DATE, ETC. IN THE EVENT OF: (a) Any taking by Company of a record of the holders of any class of securities of Company for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend payable out of earned surplus at the same rate as that of the last such cash dividend theretofore paid) or other distribution or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right; or (b) Any capital reorganization of Company, any reclassification or recapitalization of the capital stock of Company or any transfer of all or substantially all of the assets of Company to any other Person or any consolidation or merger involving Company; or (c) Any voluntary or involuntary dissolution, liquidation or winding-up of Company, Company will mail to Holder of this Note at least ten (10) days prior to the earliest date specified therein, a notice specifying (A) the date 13 on which any such record is to be taken for the purpose of such dividend, distribution or right and the amount and character of such dividend, distribution or right; and (B) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding-up is expected to become effective and the record date for determining stockholders entitled to vote thereon. 9. SUCCESSORS AND ASSIGNS. Subject to the restrictions on transfer described in Sections 10 and 11 below, the rights and obligations of Company and Holder of this Note shall be binding upon and benefit the successors, assigns, heirs, administrators and transferees of the parties. 10. WAIVER AND AMENDMENT. Any provision of this Note may be amended, waived or modified upon the written consent of Company and holders of a Majority in Interest of all then outstanding Notes issued in the Private Offering. 11. TRANSFER OF THIS NOTE OR SECURITIES ISSUABLE ON CONVERSION HEREOF. With respect to any offer, sale or other disposition of this Note or securities into which such Note may be converted, Holder will give written notice to Company prior thereto, describing briefly the manner thereof, together with a written opinion of Holder's counsel, to the effect that such offer, sale or other distribution may be effected without registration or qualification (under any federal or state law then in effect). Promptly upon receiving such written notice and reasonably satisfactory opinion, if so requested, Company, as promptly as practicable, shall notify Holder that Holder may sell or otherwise dispose of this Note or such securities, all in accordance with the terms of the notice delivered to Company. If a determination has been made pursuant to this Section 11 that the opinion of counsel for Holder is not reasonably satisfactory to Company, Company shall so notify Holder promptly after such determination has been made. Each Note thus transferred and each certificate representing the securities thus transferred shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with the Act, unless in the opinion of counsel for Company such legend is not required in order to ensure compliance with the Act. Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. Subject to the foregoing transfers of this Note shall be registered upon registration books maintained for such purpose by or on behalf of Company. Prior to presentation of this Note for registration of transfer, Company shall treat the registered holder hereof as the owner and holder of this Note for the purpose of receiving all payments of principal and interest hereon and for all other purposes whatsoever, whether or not this Note shall be overdue and Company shall not be affected by notice to the contrary. 12. ASSIGNMENT BY COMPANY. Neither this Note nor any of the rights, interests or obligations hereunder may be assigned, by operation of law or otherwise, in whole or in part, by Company without the prior written consent of Holder except in connection with an assignment in whole to a successor corporation to Company, provided that such successor corporation acquires all or substantially all of Company's property and assets and Holder's rights hereunder are not impaired. 14 13. NOTICES. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duty given if personally delivered or mailed by registered or certified mail, postage prepaid, or by recognized overnight courier or personal delivery at the respective addresses of the parties as set forth on the register maintained by Company. Any party hereto may by notice so given change its address for future notice hereunder. Notice shall conclusively be deemed to have been given when received. 14. PARI PASSU NOTES. Holder acknowledges and agrees that the payment of all or any portion of the outstanding principal amount of this Note and all interest hereon shall be pari passu in right of payment and in all other respects to the other Notes issued in the Private Offering or pursuant to the terms of such Notes. In the event Holder receives payments in excess of its pro rata share of Company's payments to the holders of all of the Notes, then Holder shall hold in trust all such excess payments for the benefit of the holders of the other Notes and shall pay such amounts held in trust to such other holders upon demand by such other holders. 15. PAYMENT. Payment shall be made in lawful tender of the United States. 16. DEFAULT RATE; USURY. In the event that any payment of principal or interest provided for herein is not paid by Company when due (including the entire unpaid balance of this Note in the event such amount is made immediately due and payable pursuant to the terms hereof), then Company shall pay interest on such amounts not paid when due at a rate per annum equal to the rate otherwise applicable hereunder plus two percent (2%). In the event any interest is paid on this Note which is deemed to be in excess of the then legal maximum rate, then that portion of the interest payment representing an amount in excess of the then legal maximum rate shall be deemed a payment of principal and applied against the principal of this Note. 17. EXPENSES; WAIVERS. If action is instituted to collect this Note, Company promises to pay all costs and expenses, including, without limitation, reasonable attorneys' fees and costs, incurred in connection with such action. Company hereby waives notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor and all other notices or demands relative to this instrument. 18. GOVERNING LAW. This Note and all actions arising out of or in connection with this Note shall be governed by and construed in accordance with the laws of the State of California, without regard to the conflicts of law provisions of the State of California, or of any other state. 15 IN WITNESS WHEREOF, Company has caused this Note to be issued as of the date first written above. DELTAPOINT, INC. By: -------------------------------- Title: -------------------------------- EX-10.27 4 EXHIBIT 10.27 EXHIBIT 10.27 DELTAPOINT, INC. SUBSCRIPTION AGREEMENT The undersigned (the "Purchaser") hereby applies to purchase the amount of Convertible Subordinated Debentures (the "Notes") of DeltaPoint, Inc., a California corporation (the "Company"), stated below (this "Subscription"). This Subscription is made with reference to the provisions, terms and conditions set out in the DeltaPoint, Inc. Confidential Private Offering Memorandum dated October 15, 1996, as supplemented by the Supplement thereto dated December 23, 1996 (as so supplemented, the "Memorandum"). The minimum investment is $50,000 (50 Notes at $1,000 principal amount per Note); however, the Company reserves the right to accept lower minimum investments. Purchaser acknowledges that this Subscription may be accepted or rejected by the Company, in its sole discretion, at any time pursuant hereto. If rejected, the check or funds tendered by Purchaser will be returned without interest but without deduction. 1. Representations. The Purchaser makes the following representations, which may be relied upon by the Company in accepting the Purchaser's application to purchase Notes: a. Purchaser has received and read the Memorandum and is familiar with the terms and conditions and other information set forth therein and herein. b. Purchaser has had the opportunity to ask of the Company, or a person or persons acting on its behalf, any and all relevant questions in connection with any aspect of the Company and has received answers which Purchaser considers to be responsive to such questions. c. Purchaser is able to bear the economic risk of the investment represented by the Notes. d. Purchaser is acquiring the Notes for Purchaser's own account for the purpose of investment and not for or with a view to the resale, distribution, subdivision or fractionalization thereof. e. Purchaser understands that his right to transfer the Notes, and the securities into which the Notes are convertible, will be subject to certain restrictions as described in the Memorandum, including restrictions under applicable state and federal securities laws. f. In considering this investment, Purchaser is not relying on any representation, warranty or statement made by the Company or any of its agents, employees, officers or representatives not contained in the Memorandum or not otherwise specifically referenced herein or in any document attached hereto. 2. Investor Eligibility. Offers and sales of Notes will be made to purchasers whom the Company and Sales Agent believes (i) are "Accredited Investors" pursuant to Section 4(2) of the Securities Act of 1933 and Regulation D thereunder and similar provisions of applicable state law or are otherwise deemed appropriate investors under applicable securities laws and, in addition (ii) meet the other suitability standards, if any, as set forth in the Memorandum. Purchaser represents and warrants that he has accurately completed the related Investor Questionnaire, including the Confidential Supplemental Information Statement. Purchaser understands that the Company reserves the right, in individual cases, to waive certain of the foregoing criteria and accept this Subscription. 3. Miscellaneous. a. This Subscription Agreement is subject to all of the terms and provisions of the Memorandum. b. Purchaser may not assign any of his rights under this Subscription Agreement without the written consent of the Company. c. Purchaser may not cancel, terminate or revoke this Subscription Agreement or any agreement of the Purchaser made herein. d. This Subscription Agreement shall be construed in accordance with and governed by the laws of the State of California. e. This Subscription Agreement shall be binding upon the heirs, executors, administrators, successors and assigns of the Purchaser. f. If the Purchaser is more than one person, the obligations of the Purchaser shall be joint and several and the representations herein contained shall be deemed to be made by and binding upon each such person and their heirs, executors, administrators, successors and assigns. g. Throughout this Subscription Agreement, as the context may require, the masculine gender includes the feminine and neuter genders. The undersigned hereby represents that the undersigned has read this entire Subscription Agreement and the Memorandum, understands them, and wishes to subscribe for the amount of Notes indicated below. 2 Please Complete the Following: Purchaser: Name:_________________________________________________________ Age (if an individual):_______________________________________ Date of Formation (if an entity):_____________________________ Residence/Principal Place of Business:____________________________________________ Telephone Number: (Business Hrs.)____________________________ (Evenings)_________________________________ Subscription:$________________ in principal amount of Notes (must be a multiple of $1,000). Type of Ownership: (select one) _____ Company (Signature of authorized officer required - include certified corporate resolution authorizing signature) _____ Partnership: Limited/General (Signature of all general partners required - include a copy of the Partnership Agreement authorizing signature) _____ Limited Liability Company (Signature of manager required - include a copy of authorizing resolution or provision) _____ Trust (Signature of trustee required - include a copy of the trust agreement) _____ Individual Ownership (One signature required) _____ Community Property (Two signatures required if interest is to be held in both names) _____ Tenants in common (Signature of both or all parties required) _____ Joint Tenants with Right of Survivorship (Signatures of both or all parties required) 3 Documents to be Returned: 1. A check, bank draft or money order payable to the order of "DELTAPOINT PRIVATE OFFERING ESCROW ACCOUNT" for the Subscription amount. 2. One copy of this Subscription Agreement completed, dated and signed with the Purchaser's(s') signature(s). Signatures: Purchaser No. 1 Purchaser No. 2 (If the Notes are to be held as tenants in common, as joint tenants, or as community property in both names) Dated:________________________ Dated:___________________________ By:___________________________ By:______________________________ (Signature) (Signature) Name:_________________________ Name:____________________________ (Print) (Print) ______________________________ _________________________________ Social Security or Tax I.D. No. Social Security or Tax I.D. No. (If none, so state) (If none, so state) 4 Name of Purchaser:________________________________ State of Domicile:________________________________ Amount of Investment:_____________________________ DELTAPOINT, INC. _______________________ INVESTOR QUESTIONNAIRE _______________________ INSTRUCTIONS: IN ORDER TO INVEST IN DELTAPOINT, INC., YOU MUST COMPLETE THIS INVESTOR QUESTIONNAIRE BY FILLING IN THE INFORMATION CALLED FOR, CHECKING THE APPROPRIATE BOXES, AND SIGNING AT PAGE 2. PLEASE RETURN THE COMPLETED QUESTIONNAIRE TO: H.J. MEYERS & CO., INC. 1895 MOUNT HOPE AVENUE ROCHESTER, NY 14620 ATTENTION: DEANNA WOHLSCHLEGEL DELTAPOINT, INC. _______________________ INVESTOR QUESTIONNAIRE _______________________ TO: H.J. Meyers & Co., Inc. 1895 Mount Hope Avenue Rochester, NY 14620 Ladies and Gentlemen: In connection with the proposed purchase of Convertible Subordinated Debentures (the "Notes") of DeltaPoint, Inc. (the "Company"), the undersigned hereby represents as follows: 1. Representations as to Accredited Investor Status. The undersigned has read the definition of "Accredited Investor" from Rule 501 of Regulation D attached hereto as Exhibit A, and certifies that: / / The undersigned is an "Accredited Investor"; and / / The undersigned has completed the statement concerning such investor's knowledge and experience in financial and business matters included in Exhibit B hereto. The foregoing representation is true and accurate as of the date hereof and shall be true and accurate as of the date of Closing. If in any respect such representation shall not be true and accurate at or prior to Closing, the undersigned shall give immediate notice of such fact to the President of the Company by facsimile, telex or telegram. Very truly yours, _______________________________________ Print Name of Purchaser Dated: _____________, 1996 _______________________________________ Signature _______________________________________ Print Title (if applicable) _______________________________________ Print Name of joint purchaser or other person whose signature is required _______________________________________ Signature _______________________________________ Print Title (if applicable) 2 EXHIBIT A Rule 501. Definitions and Terms Used in Regulation D. As used in Regulation D, the following terms have the meaning indicated: 1. Accredited Investor. "Accredited Investor" shall mean any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person: 1. Any bank as defined in section 3(a)(2) of the Act or any savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934; any insurance company as defined in Section 2(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions for the benefit of its employees, if such plan has total assets in excess of $5,000,000; employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000; or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors; 2. Any private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940; 3. Any organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the A-1 specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000; 4. Any director or executive officer of DeltaPoint, Inc.; 5. Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000;(1) 6. Any natural person who had an individual income in excess of $200,000 in each of 1994 and 1995 or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in 1996; 7. Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii); and 8. Any entity in which all of the equity owners are Accredited Investors. _______________ (1) For this purpose, "net worth" includes the fair market equity value of homes, home furnishings and automobiles. A-2 EXHIBIT B CONFIDENTIAL SUPPLEMENTAL INFORMATION STATEMENT In order to assure compliance with applicable federal and state laws, it is necessary to obtain the following information: 1. GENERAL INFORMATION (attach additional sheets if necessary) 1. Name:_____________________________________________________ 2. Address:__________________________________________________ Business:____________________________________________ ____________________________________________ ____________________________________________ Residence:___________________________________________ ___________________________________________ ___________________________________________ 3. Telephone: Business: (_____)____________________________________ Residence:(_____)____________________________________ 2. INVESTMENT REPRESENTATIONS 1. Sufficient Net Worth: The Purchaser's investment in the Notes does not exceed 5% of such Purchaser's net worth, excluding home, home furnishings and automobiles. 2. Sufficient Knowledge & Experience: The Purchaser has sufficient knowledge and experience in investing in companies similar to the Company in terms of the Company's stage of development so as to be able to evaluate the risks and merits of the investment in the Company and the Purchaser is able financially to bear the investment risks. 3. Access to Information: The Purchaser has had an opportunity to discuss the Company's business, management and financial affairs with the Company's management. 4. Investment for Own Account: The Purchaser is acquiring the Notes for its own account for the purpose of investment and not with a view to, or for sale in connection with, any distribution. B-1 5. Restricted Securities: The Purchaser understands that (i) the Notes and the Common Stock of the Company issuable upon conversion of the Notes (the "Conversion Shares") have not been registered under the Securities Act because they are being issued in a transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof or Rule 505 or 506 promulgated under the Securities Act, (ii) the Notes and the Conversion Shares must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or is exempt from such registration (and accordingly, the Purchaser should be prepared to bear the economic risk of an investment in the Notes and the Conversion Shares for an indefinite period), (iii) the Notes and the Conversion Shares will bear a legend to such effect, and (iv) the Company will make a notation on its transfer books to such effect. I confirm that the foregoing statements are complete and accurate to the best of my knowledge and belief, and that I undertake to notify DeltaPoint, Inc. promptly regarding any material change in the information set forth above prior to the closing of the purchase by me of the Notes of the Company. _____________________________ Print Name of Purchaser By:__________________________ ________________________ Signature Date _____________________________ Print Title ______________________________ Print Name of joint purchaser or other person whose signature is required By:___________________________ _________________________ Signature Date ______________________________ Print Title (if applicable) B-2 EX-23.2 5 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Post-Effective Amendment No. 1 to this Registration Statement on Form SB-2 of our report dated January 27, 1997, except for Note 11 which is as of February 26, 1997, relating to the financial statements of DeltaPoint, Inc., which appears in such Prospectus. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ PRICE WATERHOUSE LLP PRICE WATERHOUSE LLP San Jose, California February 26, 1997 -----END PRIVACY-ENHANCED MESSAGE-----