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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[X]15, ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ]15, TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-27328
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SITE TECHNOLOGIES, INC.
(FORMERLY DELTAPOINT, INC.)
(Exact Name of Registrant as specified in its charter)
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CALIFORNIA 7372 77-0216760
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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380 EL PUEBLO RD., STE. 100
(Address of principal executive offices)
408-461-3017
(Registrant's telephone number, including area code)
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
None
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
Common Stock, no par value
(Title of each class).
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes _X_ No
____
Check if there is no disclosure of delinquent filers in the response to Item
405 of Regulation S-B is not contained in this Form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this for 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $1,827,000
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 23, 1998 was approximately $4,248,000. Shares of Common
Stock held by each officer and director have been excluded in that such persons
may be deemed to be affiliates. This determination of an affiliate status is not
necessarily a conclusive determination for other purposes. The number of shares
outstanding of the registrant's Common Stock as of March 23, 1998 was 8,516,380.
Transitional Small Business Disclosure Format (check one) Yes ____ No _X_
DOCUMENTS INCORPORATED BY REFERENCE
PART III--Portions of the registrant's definitive Proxy Statement are to be used
in conjunction with the registrant's Annual Meeting of Shareholders to be held
on June 12, 1998.
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SITE TECHNOLOGIES, INC.
FORM 10-KSB ANNUAL REPORT
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997
TABLE OF CONTENTS
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PART I
Item 1. Description of Business...................................................... 3
Item 2. Property..................................................................... 23
Item 3. Legal Proceedings............................................................ 23
Item 4. Submission of Matters to a Vote of Security Holders.......................... 23
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........ 24
Item 6. Management's Discussion and Analysis of Financial Condition and Plan
of Operations.............................................................. 24
Item 7. Consolidated Financial Statements............................................ 30
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................. 30
PART III
Item 9. Directors and Executive Officers, Promoters, and Control Persons; Compliance
with Section 16 (a) of the Exchange Act.................................... 46
Item 10. Executive Compensation....................................................... 46
Item 11. Security Ownership of Certain Beneficial Owners and Management............... 46
Item 12. Certain Relationships and Related Transactions............................... 46
Item 13. Exhibits and Reports on Form 8-K............................................. 46
SIGNATURES.............................................................................. 49
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
THIS REPORT ON FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY
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 PLAN OF OPERATIONS" AND "RISK FACTORS."
Site Technologies, Inc. (the "Company") was incorporated in California in
1989. The Company develops and markets Web site development, management and
maintenance software solutions for Web-based business environments. The Company
is committed to providing modular, extensible client and server Web site
management tools through a multi-tier family of software products that scale
from small business to enterprise departmental solutions. The Company's
objective is to become a leading provider of professional Web tools for the Web
professional.
INDUSTRY BACKGROUND
The worldwide, cost-effective communication benefits of the Web are leading
many individuals and business organizations to actively "publish" information on
the Web by creating a Web "site", a collection of Web pages, each handcrafted
using a relatively new and quickly evolving tagging language called hypertext
markup language ("HTML").
For many individuals and small business 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 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. A generational
evolution in Web sites, based on additional functions and benefits, is also
underway.
First generation Web sites are generally characterized by small volumes of
information or "content", static pages that are infrequently updated with
limited links to other Web pages. Generally, these sites are created and managed
by a single author (the Webmaster) and published to a single Web server. To
assist in the creation of first generation Web sites, a large number of first
generation Web authoring or "page creation" tools have emerged. These
limited-function tools focus on the creation of a single page at a time and
require that content within pages and between pages be manually linked and
manually maintained. Further, the content of such sites has no inherent
structural intelligence, making global changes, consistency of design,
reorganization of sections and managing the integrity of the Web site difficult
and time-consuming.
Next generation Web sites are richer in multi-media content, consist of both
static and dynamically created pages, are continuously updated and must
integrate with existing business data. The use of these Web sites is emerging as
businesses of all sizes adopt the use of Intranets for internal communications
and begin conducting business over the Internet. Within these sites multiple
authors of varying skill levels create a variety of Web pages that are combined
into sophisticated Web-based applications, which are published to multiple Web
servers and managed by multiple Webmasters. Although some second-generation Web
page creation tools have been introduced, the Company believes that these
products are based on architectures that primarily emphasize the layout and
design aspects of individual pages and, as a result, are not suited to handle
these dynamic Web site environments.
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The evolving market for Web site development and management software
products is segmented as follows:
INDIVIDUALS AND SOHO PROFESSIONALS (1 TO 20 EMPLOYEES). According to IDC
Link, a leading research firm, in 1996 there were approximately 11 million
individual and SOHO business users in the United States. The Internet provides
these business users with a cost-effective way of increasing their exposure and
market reach by creating and publishing a Web site. Increasingly, Internet
shopping malls are attracting these small businesses to build catalogs and
publish product and service offerings on the Internet.
The Web site has recently evolved into a critical business application
environment that provides greater sales and marketing reach and is allowing
these businesses to grow faster and more cost effectively than ever before. The
need for easy to use robust Web site development and management software
solutions that support a wide range of Web application environments is expanding
rapidly.
SMALL TO MEDIUM BUSINESS (SMB) (1 TO 499 EMPLOYEES). Small to medium
businesses ("SMB's"), primarily through value added resellers ("VARs"), are
developing robust Web sites to reach broader target audiences in a more
cost-effective manner. These Web sites are extending both internally to
Intranets that enable internal company communications, and externally to
Extranets that enable business-to-business and business-to-consumer transactions
such as "electronic commerce."
Today, the SMB's and the Web professionals that support them have very few
tools to support the multi-authoring environment that is required to easily
develop an interdepartmental Web site. The wide variety of content (including
text, graphics, multi-media, video and audio) and applications (including Java
and ActiveX) that can be incorporated into a robust Web site requires varying
levels of users or "content creators" (including content contributors, graphic
artist, developers, web administrators, application managers and Webmasters).
As SMB's leverage Web technology to implement Intranet applications and
Internet Web sites, they are facing a new set of management challenges such as
integrating the efforts of many diverse contributors, managing a large number of
varied application components and keeping applications up to date with ever-
changing content. These markets need an integrated Web site development and
management solution that supports a broad set of Web based business
requirements.
WEB PROFESSIONALS. In response to customer demands, many value-added
resellers ("VARs") who have historically serviced the SMB market are moving
their business focus to Web consulting and Web application development. In
addition, Internet Service Providers ("ISPs") are offering Web site hosting and
consulting services to help small and medium businesses quickly gain a presence
on the Web and reduce the up front cost of setting up a Web server. These Web
professionals require powerful software tools and solutions to aid them in their
Web site development and management businesses.
ENTERPRISE DEPARTMENT USERS. Many large corporations or enterprises, having
already established sophisticated Web sites for external communications, are now
encouraging smaller internal groups and departments to build private "Intranet"
Web sites. These departmental environments in many respects operate as small
businesses and face many of the same problems identified above (including the
need for multi-authoring capabilities and managing a large number of varied
application components). There is considerable demand for Web site development
and management software solutions that support the existing enterprise
standards, as well as the interoperability with legacy data environments.
COMPANY APPROACH
The Company believes that effective Web site development and management
software solutions must not only simplify initial content creation, but enable
content contributors, developers and Webmasters to easily update diverse
content, maintain site integrity, deploy pages in a controlled methodology and
manage the variety of Web site components on an ongoing basis. Further, the
Company believes that an open architecture that supports existing components is
important to maintaining maximum flexibility as
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Internet standards emerge and evolve rapidly and as Web based applications
become more tightly integrated into legacy business environments.
The Company has developed and is continuing to develop a family of products
designed to enable Web site developers to easily and cost-effectively develop,
manage, integrate, deploy and maintain robust Web-based applications using a
structured approach. The Company's scalable Web site development and management
products have been designed to utilize an advanced product design featuring a
database architecture and incorporate a series of "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 is intended to enable the automatic generation
and maintenance of links between Web pages, eliminating or reducing the need for
programmer or technical intervention. Additionally, this approach is intended to
enable 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 development and management
provides fundamental advantages over existing page creation methodologies as the
volume and complexity of content contained in the Web sites increases and the
propagation of pages are expanded through multiple tiers of servers in larger
organizations.
The Company's scalable Web site development and management tools are
designed to work either with full client-side functionality, to free the site
designer from costly server connection time during the site creation and testing
process, or as a client/server environment supporting multi-authoring
capabilities in a group development environment. Further, these products are
designed to utilize an open architecture that provides Web browser and Web
server independence.
STRATEGY
The Company's objective is to be a leading provider of professional Web
tools for the Web professional. The Company's strategy for achieving this
objective includes the following elements:
BROADEN PRODUCT OFFERINGS. The Company continues to identify and develop,
license and acquire technologies or products to extend product functionality and
market position in Web site management and interoperability.
In the area of Web site management and interoperability, the Company expects
to continue to update and enhance the development, interoperability and
management features of its products to support a broader level of functionality.
Towards that end, and to capitalize on the emerging opportunities in the SMB and
enterprise department user markets for scalable Web tools for Web professionals,
in November 1997 the Company has acquired from Inlet Divestiture Corp. ("Inlet")
certain proprietary core technology which will serve as the basis for the
Company's client/server, multi-authoring site, dynamic development and
management products, the first being SiteMaster which was released in a preview
format in February 1998. In July 1997, pursuant to the Site/technologies/inc.
acquisition ("Site Tech Acquisition"), the Company acquired technology that
serves as the basis for the Company's SiteSweeper 2.0 product, which is designed
to enable Web development and management professionals to maintain the quality
and integrity of mission critical Web based business environments.
EXPAND TARGET MARKETS. To date, the Company's Internet software products
have been targeted at individuals and SOHO professionals. However, the scalable
design of the Company's current and planned family of Web site development and
management products should enable such products to be used by the individual or
SOHO professional in a desktop environment that publishes the finished Web site
on a remote Web server or outside hosting site, and by the SMB or enterprise
department user that develops Intranet applications in a client/server,
multi-authoring environment.
EXPAND CHANNELS OF DISTRIBUTION. The Company has historically marketed its
Internet software products primarily through the retail distribution channel.
The Company believes that in order to
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effectively market its new family of Web site development and management
products to the SMB and enterprise department users, the Company must continue
to implement a sales and marketing program focused on the development of VAR's
Web professionals, Original Equipment Manufacturers ("OEMs") (such as key PC
manufacturers) and ISP's.
DEVELOP PRODUCTS THAT SUPPORT OPEN ARCHITECTURE. The Company plans continue
to introduce Web site development and management software products based on an
open architecture. This open architecture is designed to support industry
standard architectures, which support widely used Web browsers (including
Netscape Navigator and Microsoft Internet Explorer), major Web server software
environments (including Windows NT, Netscape and Unix) and industry standard
database environments (including Oracle, Informix and Microsoft SQL).
Additionally, the Company plans to design additional products that will
incorporate evolving technologies such as: Java, Active X and OLE components
that will support a wide variety of Web based client/server environments.
INCREASE DEMAND AND AWARENESS. The Company intends to increase its brand
and product awareness by emphasizing the product's ability to develop, manage,
deploy and maintain next-generation Web sites and database architecture, and by
demonstrating its broad acceptance through strategic relationships with industry
leaders. Since March 1996, the Company has entered into agreements with
companies such as Sony, Earthlink, Anawave, Inc., Compaq, Macmillan Press,
McAfee Mall, Internet Mall and StarBase Corp. To build brand identity, the
Company is also planning to increase and expand its print and online
advertising.
COMPANY PRODUCTS
SITESWEEPER
In September 1997, the Company introduced SiteSweeper 2.0 a Web site quality
control tool available for Web professionals (including those who support the
SMB and enterprise department user markets) that automates time-consuming
quality assurance tasks, allowing the Webmaster to identify potential problems
quickly and easily. SiteSweeper 2.0 is designed to (i) "sweep" Web sites using
standard Internet protocols, allowing a sweep of both static and dynamic pages;
(ii) secure Web pages that require a user name and password; and (iii) permit
the Webmaster to include or exclude specific pages, or entire folders, on any
number of Web servers.
SiteSweeper 2.0 is designed to incorporate the following functions:
QUALITY REQUIREMENT EXAMINATION. SiteSweeper 2.0 is designed to examine a
Web site searching for problems that impact the quality and integrity of the
Site. SiteSweeper 2.0 is designed to check for broken links, slow pages, missing
"Alt" attributes, missing "Width" or "Height" attributes, distorted images,
missing or duplicate titles, and missing meta-tags. These functions are designed
to allow the Webmaster to identify specific quality requirements for each
problem area. For example, it is expected that the Webmaster may designate the
desired connection speed of typical users (for example, 28.8K bps or ISDN) and
the longest acceptable page download time at the speed, with SiteSweeper 2.0
then reporting to the Webmaster how well that site meets the specified quality
requirements.
COMPREHENSIVE REPORTS. SiteSweeper 2.0 is designed to generate reports that
identify potential quality problems. Additionally, a summary showing how well
the site meets each quality requirement be displayed graphically, using a series
of easy to understand charts. A detailed listing of specific problems is also
provided for every page in the site. In addition, SiteSweeper 2.0 provides the
Webmaster with information necessary for site management and maintenance. This
includes a detailed listing of all of the components that make up a given page,
as well as a complete list of links to and from each page, usage of various
resource types, link status codes, external links, and images. SiteSweeper's
reports are designed to be HTML-based and compatible with widely used Web
browsers. The reports are designed to use Java-based charting and visual
navigation technology, based on JavaScript.
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EXTENSIBLE ARCHITECTURE. SiteSweeper 2.0 is developed upon a robust modular
software architecture, using components that are both re-usable and extensible.
SiteSweeper 2.0 is designed to use a true multi-threaded web crawler capable of
visiting many pages simultaneously. Swept data is stored in an industry-standard
database format, and can be manipulated using the Open Database Connectivity
("ODBC") programming interfaces. This architecture facilitates the expansion of
the SiteSweeper feature set, and is expected to result in the development of new
products based on the same underlying core technologies.
SITEMASTER 4.0
In November 1997, the Company acquired certain proprietary core technology
from Inlet. This technology served as the basis for the Company's client/server,
multi-authoring, dynamic site development and management product, SiteMaster
4.0, which was released in a preview state in February 1998. The product
includes design client tools and server side/backend processing, along with
powerful site management and business application development tools. The product
is designed to allow non-programmers as well as developers to rapidly create
dynamic Web sites. The development environment is designed to include many
pre-built components, which are designed to extend traditional client/server
systems to the Web site.
SiteMaster 4.0 is designed to incorporate a powerful document management
system that stores the definition of a page in a database and generates the
actual HTML pages from that definition. Through this powerful feature, users of
SiteMaster 4.0 will be able to track every link between pages on the site. If
the user changes the location of a page, SiteMaster identifies which pages need
to be updated and regenerates them at the touch of a button. Instead of creating
a link by inserting an HTML link to the other page's filename, a SiteMaster link
command to the other page's definition is inserted. When the page is generated,
the SiteMaster link can be converted into the proper HTML command.
In addition, the SiteMaster 4.0 product provides and incorporates the
following functions:
USE OF MACROS FOR DYNAMIC CREATION. A macro is a portion or fragment of
code that needs to be used in multiple places. SiteMaster 4.0 is designed to
track which pages use a particular macro so that it knows the pages that need to
be regenerated when that macro is changed. Additionally, Web site developers or
Webmasters may pass parameters to macros, allowing a header or footer to be
tailored for each page. Using macros within SiteMaster 4.0 assures the developer
of consistency throughout the site while allowing changes to a single page, or
across the entire site, to be completed quickly.
SEPARATION OF DATA FROM THE DESIGN. SiteMaster 4.0 is designed to have the
ability to query any ODBC database and insert information from the database into
a page. This feature allows Web site developers and Webmasters to create,
maintain and modify the data associated with a Web site without additional
revision of the Web pages. This separation of the site's content (which is
stored in the database) from the site's design (which is stored in scripts and
macros) is designed to enable individuals of different skill levels to work on
common projects. This separation is also designed to permit the Web designer to
focus more closely on the layout and organization of the site and allow
individuals skilled in the creation of content to better manage such content by
putting content portions into a database and using macros to pull content into
an HTML page. By combining the macro feature with database content extraction, a
designer can create a standard macro for retrieving and laying out a page. When
the page layout needs to be changed, the macro can be modified and each page
regenerated with the new page format.
DYNAMIC CUSTOM PAGES AND ACTIONS. SiteMaster 4.0 is designed to create Web
pages and e-mail responses based upon user input. Instead of requiring
programmers to develop proprietary Web applications in C or Perl, SiteMaster 4.0
is designed to include a powerful set of standard actions that may be
automatically performed when a Web based form is processed by the Web server. In
the case of a feedback form, this set of standard actions could enable data to
be saved to a database, a formatted e-mail message with the data sent to the
customer service representative, and a "Thank You" page displayed to the
visitor.
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CUSTOM COMPONENTS. SiteMaster 4.0 is designed to include a library of
custom components. These pre-built interactive components are designed to
quickly integrate into a Web site. The library includes components for:
- Threaded Discussion: This component is designed to allow site developers
to input ideas and questions and receive feedback from other users.
- Feedback Form: This component is designed to help site developers to
immediately receive, catalog, and reply to feedback from site visitors.
- Press Releases: this component is designed to assist the Web site
developer in establishing and managing a library of press releases on a
Web site. The integrated search mechanism allows a site visitor to search
for releases by date. The online management feature is designed to allow
for posting, editing and publishing of press releases at the editor's
discretion.
- Company Directory: This component is designed to allow a site developer to
organize and display a company's personnel information. The data can be
organized and search by department, division or location.
- Site Traffic Analyzer: this component is designed to include a log
processor to analyze traffic on the site, a system for tracking advertiser
impressions and "click-through" links and a system for tracking
subscribers and their profiles. Such tools are designed to be scalable
from single to multi-sites. Instead of hits SiteMaster 4.0 tracks pages
viewed so management and sponsors get accurate reports about the number of
people who visit the site.
REMOTE FUNCTIONS. SiteMaster 4.0 is designed to provide remote publishing
functions for both dynamic and static pages. Developers are expected to be able
to maintain local control of the dynamic and interactive functions of a site,
while maintaining the content database at a remote location. This feature is
designed to provide a remotely hosted Web site with the same dynamic and
interactive functionality as locally hosted Web sites.
ADDITIONAL FEATURES. SiteMaster 4.0 is designed to include the following
additional features: (i) Site creation wizards to guide users through Web site
creation and other difficult tasks; (ii) the ability to import existing Web
sites or pages into SiteMaster 4.0; (iii) custom E-mail list processing (based
on user profiles); (iv) set and get "cookies" for maintaining information
Management of ActiveX and Java applets; and (v) remote, publishing via local
area networking or File Transfer Protocol ("FTP") Interfaces to Netscape,
Microsoft and other popular Web servers.
QUICKSITE
QuickSite, the Company's first Web site creation and management tool, which
began shipping to retail distributors in March 1996, is designed to enable
non-technical individuals and organizational users to rapidly create and
efficiently manage a Web site. QuickSite incorporates the following key
attributes, most of which are also incorporated into the Company's other
products as part of the Company's design approach:
EASE OF SITE CREATION. The Company has designed a collection of site
creation wizards aimed at eliminating the initial stumbling blocks encountered
by novice and other 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. In the QuickSite 2.5 and 3.0
versions, the Company has designed a Catalog Builder module to speed the process
of establishing an electric commerce presence on the Web and also added a
WYSIWYG (What You See Is What You Get) Layout Editor. Wizards also enable users
to select and modify the stylistic elements of a site such as the colors and
textures of backgrounds, graphics, headers and footers. By masking the
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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 UPDATEABLE CONTENT. The Company's product architecture passively
enforces a Web structure so that as the author populates the site, content
components are captured as data objects that are automatically indexed and
stored within the products database engine. As a result, content can be 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, saving users time as they
build additional sites or add to existing sites.
BROWSER AND SERVER INDEPENDENCE. QuickSite supports most Web browsers,
including Netscape Navigator and Microsoft Internet Explorer, which together
account for a substantial majority 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
approach provides several key advantages including: (i) elimination of
dependencies on any single third party Internet or network-server technology;
(ii) lower overall cost 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.
WEBANIMATOR
WebAnimator is a multi-media authoring tool that enables a broad range of
Web users to easily add multi-media and interactive animation to a Web site.
WebAnimator offers the following key attributes: (i) extensive use of predefined
templates that enable users to combine text, graphics and sound to produce
multi-media rich content components; (ii) content components created in
WebAnimator's native format are vector based and can be compressed to small
files that 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 enable users to easily and accurately add sound and
motion to an animated content component. The market for Web-enabled multi-media
authoring tools has emerged more slowly than originally expected and, as a
result, until such market more meaningfully develops the Company does not expect
to expend significant resources on this market.
WEBTOOLS
WebTools allows database developers to add Web-enabling features to existing
database applications. The Company licenses 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.
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 capabilities in the areas of Web tools
for Web Professionals.
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
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and significant price erosion over the life of a product. The Company
anticipates increased competition in these markets from both existing vendors
and new market entrants.
In the market for Internet software tools targeted at individual and SOHO
professional users, the Company has encountered competition primarily from
Microsoft, Adobe Systems Incorporated, SoftQuad, Inc. and NetObjects,
Incorporated (majority owned by IBM). In the market for Internet software
solutions targeted at the SMB and enterprise department user markets, in
addition to these competitors, the Company has encountered competition from HAHT
Software Incorporated, Wallop Software Incorporated, Aziza, a division of
Objectivity Incorporated, Eventus Software Incorporated, Interwoven Corporation
and Vignette Corporation. In addition, some existing vendors in the enterprise
wide Internet software solution market (such as IBM/Lotus, Oracle Corporation,
Informix Software, Inc. and Sybase Incorporated, Inc.) may enter into the
Company's existing and planned markets. The Company expects that existing
vendors and new market entrants will develop products that will compete directly
with the Company's products and that competition will increase significantly to
the extent that markets for the Company's products grow. Increased competition
is likely to result in price reductions, reduced gross margins and loss of
market share, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. Most of the Company's
current and potential competitors have substantially greater financial,
technical, marketing, sales and customer support resources, greater name
recognition and larger installed customer bases than the Company. Because there
are minimal barriers to entry into the software market, the Company believes
sources of competition will continue to proliferate. The market for the
Company's products is characterized by significant price competition, and the
Company expects it will face increasing pricing pressures. There can be no
assurance the Company will be able to maintain its historic pricing structure
and will be able to obtain its desired pricing structure for newly released and
planned products. Any inability to do so or if the Company is unable to compete
effectively against current and future competitors, the Company's business,
financial condition and results of operations will be materially adversely
affected.
In the future, vendors of operating system software or other software (such
as office or back office software suites) may continue to enhance their products
(including separate products that are bundled together) to include functionality
that is provided by the Company's current and planned products. This enhancement
could be achieved through the addition of functionality to operating system
software or other software or the bundling of Internet software tools with
operating system software or other products. For example, Microsoft incorporates
into its BackOffice product its Web page creation software product, FrontPage.
The inclusion of the functionality of Internet software tool products, as
standard features of operating system software or other software could render
the Company's products obsolete and unmarketable, particularly if the quality of
such functionality were comparable, or perceived to be comparable, to that of
the Company's products. Furthermore, even if the internet software tool
functionality provided as standard features by operating systems or other
software is more limited than that of the Company's products, there can be no
assurance that a significant number of customers would not elect to accept such
functionality in lieu of purchasing additional software. If the Company were
unable to develop new Internet software tools products to further enhance
operating systems or other software and to replace successfully any obsolete
products, the Company's business, financial condition and results of operations
would be materially adversely affected. See "Risk Factors--Competition and--Risk
of Inclusion of Internet Software Tools Functionality in Other Software."
SALES AND MARKETING
The Company markets and sells its products through the coordinated efforts
of its corporate marketing department and its direct sales organization. The
Company historically has marketed its products through the retail channel. The
Company's current sales and marketing efforts are targeted at the individual and
SOHO professional users through the Company's direct sales and marketing effort
and at the SMB and enterprise department user markets through partner channels
which the Company is actively developing in order to sell the Company's Web site
development, management and maintenance products.
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PRODUCTS TARGETED AT THE INDIVIDUAL AND SOHO PROFESSIONAL USER. The Company
markets and sells its products targeted at the individual and SOHO professional
user through the coordinated efforts of its corporate marketing department and
its direct sales organization.
The Company's direct sales efforts are accomplished through a variety of
telesales, telemarketing, catalog sales and Internet activities. The Company
promotes catalog sales through Programmer's Paradise Incorporated, TigerDirect
Incorporated, Programmer's Super Shop and Dartek Computer Supply Corp. The
Company also allows fully functional versions of many of its products to be
downloaded from its secure Web site server (SiteTech.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 7-day grace period after
which encrypted technology within the downloadable versions automatically
disables the product. The Company plans to expand the availability of its
downloadable products. To that end, the Company has entered into agreements with
C/Net, Software.Net, BuyDirect.Com and others in order to electronically promote
and distribute the Company's products to the general public via their secure
credit card ordering systems.
Internationally, the Company's strategy is to work with established
distributors who can invest in an array of local services including marketing
and localization support as well as provide access to distribution. Long term
the Company intends to take measures, including hiring of additional sales and
marketing persons, to increase its level of international sales. However, in
light of the disposition of the DeltaGraph product line in June 1997, the
Company expects that international Internet revenues will be minimal until
international distribution channels can be reestablished. See "Risk
Factors--Risks Associated with International Operations."
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 Earthlink,
Anawave, Inc., Internet Mall, McAfee Mall and more than half a dozen regional
ISP's. In addition, the Company announced relationships with MacMillan Press,
which has included QuickSite 2.5 into a Web publishing bundle to be sold through
book stores. The Company also has announced relationships with technology
partners such as Virtus, a leading developer of Virtual Reality Modeling
language technology for creating 3D Web sites and StarBase Corp, a provider of a
family of advanced team development and software configuration management tools.
Many of these relationships are still being developed and have not yet resulted
in material revenues to the Company. See "Strategic Alliances."
PRODUCTS TARGETED AT SMB AND CORPORATE DEPARTMENT USERS. To effectively
market its family of scalable Web site development and management products to
the SMB and enterprise department users, the Company intends to continue to
implement a sales and marketing program focused at the development of VAR's, Web
professionals, OEM's (such as PC manufacturers) and ISP's.
The Company intends to continue to seek strategic partnerships with Web
professionals and OEM's that focus on enterprise department users through
complete sales, support and service offerings.
In support of its sales organization, the Company conducts a number of
marketing campaigns, programs, and activities. The Company has three objectives:
(i) increase demand for its current products through its current channels; (ii)
recruit new channel members (such as VARs, Web professionals, OEMs and ISPs) to
carry its new products into new markets; and (iii) expand awareness and
positioning of the corporate and product brand to support the first two
objectives. These efforts include product advertising, public relations and
press tours, trade show participation, direct mail and telemarketing campaigns,
product launches, preparation of marketing collateral and participation in
industry programs, special product promotions and involvement in user groups and
forums. Many of these activities are conducted jointly with strategic partners.
This allows the Company to leverage larger firms and extend the reach and
frequency of its messages to its target customers. The Company also maintains an
extensive Web site that
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provides users and channel members with complete information on the Company, its
products, distribution channels, awards, personnel and other information.
There can be no assurance that the Company will be able to develop the sales
and marketing team needed to develop satisfactory VAR, OEM and ISP relationships
on a timely basis or at all. Furthermore, if developed, there can be no
assurance as to the amount of support that the Company's products will receive
from these VAR's, OEM' or ISP's, who may offer products that compete with the
Company's products.
As of December 31, 1997, the Company had 12 employees in sales and
marketing. For the year ended December 31, 1997, the Company spent $4.0 million
or 219.8% of revenue for sales and marketing expenses compared to $4.7 million
and 94.6% of revenue in the year ended December 31, 1996.
CORPORATE DEVELOPMENTS
DELTAGRAPH DISPOSITION. On June 27, 1997, Site Technologies, Inc.
consummated the DeltaGraph Disposition pursuant to which the Company sold those
assets related to its DeltaGraph software product line to SPSS for $910,000 in
cash. The DeltaGraph product line consisted of an advanced multi-platform
charting and graphics software product for desktop applications. The effective
date for the disposition was May 1, 1997 and as part of the DeltaGraph
Disposition, Site Technologies, Inc. also agreed to assist in the transition of
DeltaGraph to SPSS through July 31, 1997. In return, SPSS made an additional
$400,000 cash payment to Site Technologies, Inc. on August 11, 1997.
The DeltaGraph Disposition was part of the Company's continuing strategy to
realize a significant and growing percentage of its revenues from the sale of
Internet software products. This strategy commenced with the Company's
acquisition of the technology required to develop WebAnimator in November 1995.
Prior to 1996, the Company derived substantially all of its product revenues
from licenses of DeltaGraph. For the period from January 1, 1996 to June 30,
1997, DeltaGraph products accounted for approximately 58% of the Company's net
revenues. Without the related contribution of the DeltaGraph business, the
Company's operating losses for these periods would have been significantly
greater. The DeltaGraph Disposition also provided the Company with much needed
liquidity. See Management's Discussion and Analysis of financial Position and
Plan of Operations" and "Notes to Consolidated Financial Statements."
As a result of its cash constraints, and in connection with its reduced
level of operations and its focus on Internet software products, the Company has
over time significantly rationalized its workforce, including administrative and
engineering resources. This rationalization could have a material adverse effect
on, among other things, the Company's ability to identify and develop, license
or acquire technologies or products to extend product functionality and market
position in the areas of Web site development and management. See "Factors That
May Affect Future Results--Dependence on Limited Number of Key Personnel; Key
Management Openings; Personnel Limitations; Ability to Manage Growth."
SITE TECH ACQUISITION. On July 11, 1997 the Company consummated the Site
Tech Acquisition pursuant to which the Company acquired, among other things,
SiteSweeper 1.0, a Web site quality control and maintenance product. The Company
has since developed SiteSweeper 2.0, which is designed to enable Web development
and management professionals to maintain quality and integrity of mission
critical Web based business environments. In connection with the Site Tech
Acquisition, the Company issued a total of 550,029 shares of Common Stock with
an aggregate fair value of $638,000 on the acquisition date to the former
stockholders of Site in exchange for all outstanding shares of Site. In
addition, the Company also agreed to pay the specified royalties on sales of
certain products developed from the technologies acquired from Site.
As part of the Site Tech Acquisition, Stephen Mendel, a member of the board
of directors of Site, was appointed as a member of the Company's Board of
Directors. In addition, the Company has granted certain registration rights with
respect to the 550,029 shares of Common Stock paid to the former Site
stockholders.
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INLET TECHNOLOGY ACQUISITION. On November 19, 1997, the Company entered
into an agreement for the "Inlet Technology Acquisition" with, among others,
Inlet pursuant to which the Company agreed to acquire from Inlet certain
Internet technologies. As consideration for the Inlet Technology Acquisition,
the Company agreed to pay Inlet an aggregate of $825,000 in cash payable as
provided below and 360,000 shares of the Company's Common Stock payable at
closing. The aggregate cash consideration of $825,000 was payable as follows:
$350,000 payable at the closing of the acquisition; $350,000 is payable with
interest, at the Company's option, on the first anniversary of the closing of
the acquisition or in four quarterly installments commencing on the first
anniversary of the closing of the acquisition and the aggregate payments of
$125,000 made pursuant to the Letter of Intent executed April 16, 1997, where
credited against the cash consideration payable by the Company. The agreement
provides for future royalty payments by the Company to Inlet in an amount equal
to 5% of the net revenues from all sales of the products developed from these
technologies, subject to certain limitations.
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 leveraged marketing alliances
that will endorse and promote the Company's products to a larger potential
customer base than can be reached through the Company's direct marketing
efforts. To date, the Company has entered into strategic alliances with the
following companies:
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. The Company
receives a referral fee for customers that sign up with Earthlink's service.
SONY. In December 1996, an addendum to a previous agreement was completed
that allows Sony to pre-install and ship an unencrypted version of QuickSite 1.0
on the Sony, Vaio personal computers. The Company receives a royalty for each
unit sold.
MACMILLAN PRESS, INC. In May 1997, the Company entered into an agreement
with the Sam's Publishing division of MacMillan Press, Inc. to create a limited
function version of QuickSite 2.5 for inclusion in a Web developers bundled
product. MacMillan Press will distribute this bundle under its own brand and
packaging to its targeted book stores. The Company receives a royalty for each
distributed license and is working together with MacMillan Press to promote an
upgrade offer to a full function version of the product. The Company is also
currently in negotiations to include QuickSite 2.5 on other MacMillan Press
promotions.
ANAWAVE, INC. The Company entered into an agreement with Anawave, Inc. in
June 1997 under which Anawave will offer an encrypted, 30 day, trial version of
QuickSite 2.5 to its customers. The Company will receive a royalty for each
license distributed and an additional royalty for upgrades to fully functional
versions of QuickSite 2.0. The Company in turn includes promotional literature
inside the QuickSite 2.5 retail packaging offering its retail customers a
discounted rate on Anawave's Web site hosting service. The Company receives a
referral fee for each customer who takes advantage of this special offer. The
Company has since entered into another agreement with Anawave in which they are
promoting and selling the QuickSite 2.5 product via their online services. The
companies intend to continue to develop additional future co-marketing programs.
INTERNET MALL, INC. In July 1997, the Company entered into an agreement
with Internet Mall, Inc., a leading electronic shopping mall service provider.
Under the agreement, the Company added a direct link to Internet Mall's "Order
Easy", secure electronic credit card shopping mall service, through the addition
of a "Buy Now" button in the QuickSite 2.5 distributed by Internet Mall service.
The companies are jointly marketing the program, including marketing material in
the QuickSite 2.5 retail packaging.
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STARBASE CORPORATION. In February 1998, the Company signed a letter of
intent to form a technology alliance with StarBase Corporation. Under the letter
of intent the Company and StarBase intend to jointly develop a set of standard
application program interfaces to integrate their complementary technologies and
open architectures. The resulting product is expected to be a revolutionary,
automated Web-based quality control solution.
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 assurances 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
The Company's research and development efforts are focused on the
development of a family of Web tools for the Web professional. To date, the
Company has made substantial investments in research and development through
both internal development and technology acquisitions. The Company believes its
future performance will depend substantially on its ability to maintain and
enhance its current product line (including through technology acquisitions,
partnerships and licenses), to develop new products, maintain technological
competitiveness and to meet an expanding range of customer requirements. There
can be no assurance that the Company will be successful in these efforts, and
there are a significant number of other related risks any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
As part of the Site Tech Acquisition and the Inlet Technology Acquisition,
the Company has acquired certain core Internet technologies. The failure to
continue to successfully develop and integrate the acquired technologies into
the Company's Web site development and management technology or to successfully
market the products based upon the acquired technologies would adversely impact
the Company's strategy of marketing to the SMB and enterprise department user
markets (in addition to individuals and SOHO professionals) and would have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, these technology acquisitions and any other
similar acquisitions are subject to a number of risks.
As a result of cash constraints during most of 1997, and in connection with
its reduced level of operations and its focus on Internet software products, the
Company has significantly rationalized its workforce, including engineering
resources. The Company's research and development capabilities could be limited
by, among other things, existing engineering resources needed to timely respond
to customer needs or market conditions or to develop products to address
targeted markets would have a material adverse effect on the Company's business,
financial condition and Plan of Operations.
As of December 31, 1997, the Company had 15 employees in its research and
development organization. The Company's research and development expenses for
the year ended December 31, 1997 were $4.6 million, which includes a technology
write-off of $1.6 million for the portion of the Site Tech Acquisition and the
Inlet Technology Acquisition determined to be in-process research and For the
year ended December 31, 1996, the Company's research and development expenses
were $2.6 million. The Company plans to continue to make significant investments
in research and development. See "Management's Discussion and Analysis of
Financial Condition and Plan 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 either
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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.
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.
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 regarding this matter or any
other similar matters, 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.
In November 1997, the Company consummated the Inlet Technology Acquisition.
As part of that acquisition, the Company agreed to pay royalties of
approximately 5% of sales of all products developed from the technologies
acquired, subject to certain limitations.
In July 1997, the Company consummated the Site Tech Acquisition. As part of
that acquisition, the Company agreed to pay royalties of approximately 5% on
sales of certain products developed from the technologies acquired from Site for
a 12 month period commencing on the date of the first commercial shipment of
such products.
In March 1997, the Company entered into an agreement with Unisys Corporation
("Unisys") pursuant to which the Company has licensed a patent which will
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 license agreement,
subject to a minimum license fee of ten cents ($0.10) for each such product. The
products subject to this agreement are QuickSite version 2.5, WebAnimator and
Graphic Tools.
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.
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The purchase price for the technology was (i) $800,000 in cash, payable in
installments, and (ii) the issuance of 100,000 shares of the Company's Common
Stock. The Company has royalty obligations during the first two years of
commercial shipments of QuickSite.
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 also pays a royalty based on net revenues from sales
of WebAnimator.
EMPLOYEES
As of December 31, 1997, the Company had 37 full-time employees located
throughout the United States. This number includes 15 persons in Research and
Development and Technical Support, 12 persons in Marketing, Sales and Sales
Support and 10 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
RECENT AND EXPECTED LOSSES; ACCUMULATED DEFICIT; GOING CONCERN ASSUMPTIONS;
FUTURE CAPITAL NEEDS; NO ASSURANCE OF FUTURE FINANCING
The Company incurred a net loss of $8,159,000 for the year ended December
31, 1997 and had an accumulated deficit of $21,837,000 as of December 31, 1997.
The Company expects to incur losses for at least the next 12 months, and perhaps
longer. There can be no assurance that the Company will not incur significant
additional losses, will generate positive cash flow from its operations, or that
the Company will attain or thereafter sustain profitability in any future
period. 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 will require the Company to obtain additional sources of
financing in the future or to reduce operating expenses.
The Company's independent accountants' report on its financial statements as
of and for the years ended December 31, 1996 and 1997 contains an explanatory
paragraph indicating that the Company's accumulated deficit and historical
operating losses raise substantial doubts about its ability to continue as a
going concern. The Company may require substantial additional funds in the
future, and there can be no assurance that any independent accountant's report
on the Company's future financial statements will not include a similar
explanatory paragraph if the Company is unable to raise sufficient funds or
generate sufficient cash from operations to cover the cost of its operations.
The existence of the explanatory paragraph may have a material adverse effect
on, among other things, the Company's relationships with prospective customers
and suppliers, and therefore could have a material adverse effect on the
Company's business, financial condition and Results of operations. See Note 1 to
the consolidated Financial Statements.
DEPENDENCE ON INTERNET SOFTWARE PRODUCTS AND RELATED STRATEGY; DEPENDENCE ON
CONTINUED EMERGENCE OF INTERNET SOFTWARE MARKET
Prior to 1996, DeltaPoint derived substantially all of its product revenues
from licenses of DeltaGraph charting and graphics software products. With the
DeltaGraph Disposition, the Company's future operating results will depend on
the successful development, introduction and commercial acceptance of the
Company's Internet software products. The Company's current Internet software
products consist of: QuickSite 1.0, its Web page creation and site management
product introduced in February 1996; WebTools, its Web publishing capability
tool introduced in March 1996; WebAnimator, its multimedia authoring tool for
the Web introduced in July 1996; and QuickSite Developer's Edition, its enhanced
version of QuickSite for Web site developers and corporate Intranet developers
introduced in September 1996; QuickSite 2.5, its updated version of QuickSite
1.0, introduced in May 1997; SiteSweeper 2.0, its
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quality control product for the Web professional; and SiteMaster 4.0 its
client/server, multi-authoring, dynamic site development and management product.
The Company's future operating results are dependent on the commercial
acceptance of the products targeted at the SMB and enterprise department user
markets and the size of these markets. There can be no assurance that the
Company's strategy of targeting SMB and enterprise department user markets will
be successful and that the Company can successfully manage the introduction and
distribution of new versions of its existing Internet software products or any
other potential products will achieve significant market acceptance. Failure of
any of the Company's existing or potential products (particularly those targeted
at the SMB and enterprise department user markets) to achieve significant market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operation. See "--Risks Associated with Site
Tech Acquisition and Inlet Technology Acquisition; General Acquisition Risks"
and "--Distribution Risk; Substantial Reseller Customer Concentration."
RISKS ASSOCIATED WITH SITE TECH ACQUISITION AND INLET TECHNOLOGY ACQUISITION;
GENERAL ACQUISITION RISKS
In an effort to capitalize on the emerging opportunities in the SMB and
enterprise department user markets for scalable Web site development and
management solutions, the Company consummated the Site Tech Acquisition in July
1997 and the Inlet Technology Acquisition in November 1997. The Company has
introduced SiteSweeper 2.0, an updated version of the SiteSweeper 1.0 product
acquired in the Site Tech Acquisition and has announced and introduced in a
preview state SiteMaster 4.0, a client/server, multi-authoring site, dynamic
development and management based on the technology acquired in the Inlet
Technology Acquisition. There can be no assurance that any technology acquired
in the Site Tech Acquisition and the Inlet Technology Acquisition can be
successfully developed or integrated into the Company's current technology on a
timely basis or at all, or that any products based on this technology will
receive market acceptance. In order to market products to the SMB and enterprise
departmental user markets, the Company must significantly increase its
non-retail distribution channels. The failure to successfully develop and
integrate the acquired technologies into the Company's web site development and
management technology or to successfully market products based upon the acquired
technologies would adversely impact the Company's strategy of marketing to the
SMB and enterprise department user markets (in addition to individuals and SOHO
professionals) and would have a material adverse effect on the Company's
business, operating results and financial condition.
The Company frequently evaluates potential acquisitions of complementary
businesses, products and technologies. As part of the Company's expansion plans,
the Company may acquire companies that have an installed base of products not
yet offered by the Company, have strategic distribution channels or customer
relationships, or otherwise present opportunities which management believes may
enhance the Company's competitive position. The success of any acquisition could
depend not only upon the ability of the Company to acquire such businesses,
products and technologies on a cost-effective basis, but also upon the ability
of the Company to integrate the acquired operations or technologies effectively
into its organization, to retain and motivate key personnel of the acquired
businesses, and to retain the significant customers of the acquired businesses.
Any acquisition, depending upon its size, could result in use of a significant
portion of the Company's cash, or if such acquisition is made utilizing the
Company's securities, could result in significant dilution to the Company's
shareholders. Moreover, such transactions involve the diversion of substantial
management resources and evaluation of such opportunities requires substantial
diversion of administrative, marketing and sales and engineering and
technological resources. In addition, such transactions could result in large
one-time write-offs or the creation of goodwill or other intangible assets that
would result in amortization expense. For example, in the quarter ended
September 30, 1997 and the quarter ended December 31, 1997, the Company expensed
a significant portion of the Site Tech purchase price and the Inlet purchase
price, respectively, because the acquired technology had not reached
technological feasibility and has no alternative future use. The failure to
successfully evaluate, negotiate, effect and integrate acquisition transactions
could have a material adverse effect on the Company's business, operating
results and financial condition.
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DEPENDENCE ON LIMITED NUMBER OF KEY PERSONNEL; PERSONNEL LIMITATIONS; ABILITY TO
MANAGE GROWTH
The Company's success depends substantially 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 effect
on the Company's business, financial condition and Results of operations.
As a result of its cash constraints during most of 1997, and in connection
with its reduced level of operations and its focus on Internet software
products, the Company has significantly rationalized its workforce, including
administrative and engineering resources. While the Company endeavors to
identify and develop, license or acquire technologies or products to extend
product functionality and market position in the areas of Web site development
and management, its ability to successfully undertake these activities could be
limited by, among other things, existing administrative, engineering and other
resource limitations. The failure to attract and retain adequate levels of
engineering, sales and marketing and other resources needed to timely respond to
customer needs or market conditions or to develop products to address targeted
markets would have a material adverse effect on the Company's business,
financial condition and result of operations. See "--Distribution Risks;
Substantial Reseller Customer Concentration" and "Rapid Technological Change;
Risk of Product Delays; Risk of Product Defects."
The Company's rationalization of its workforce has challenged, and is
expected to continue to challenge, the Company's management and operations,
including its sales and marketing, customer support, research and development
and finance and administrative operations. The Company's future performance will
depend in part on its ability to manage growth, should it occur, both in its
domestic and international operations and to adapt its operational and financial
control systems, if necessary, to respond to changes resulting from such growth.
The Company intends to continue to invest in improving its financial systems and
controls in connection with anticipated increases in the level of its
operations. The Company anticipates that it may need to add additional personnel
beyond its present needs and expand and upgrade its financial systems to manage
any future growth. The failure of the Company's management to respond to and
manage growth effectively could have a material adverse effect on the Company's
business, financial condition and Results of operations. See "Management's
Discussion and Analysis of Financial Condition and Plan of Operations."
DISTRIBUTION RISKS; SUBSTANTIAL RESELLER CUSTOMER CONCENTRATION
The Company currently sells its software products targeted at the individual
and SOHO professional market to distributors for resale to certain retailers,
including computer superstores and mass merchandisers. The Company plans to
de-emphasize the distribution of its Internet software products in this retail
distribution channel because the Company has found that the retail distribution
channel is highly competitive and requires significant sales and marketing
spending in order to maintain a presence in this market.
The Company has introduced and intends to continue introducing products
targeted at the SMB and enterprise department user markets. Successful
development of products targeted at the SMB and enterprise department user
markets will depend in part on the Company's ability to successfully integrate
the technology acquired in the Site Tech Acquisition and the Inlet Technology
Acquisition. See "--Risks Associated with Inlet Technology Acquisition and Site
Tech Acquisition; General Acquisition Risks." In addition, the Company has not
historically sold products targeted at these markets and, in order to do so,
must develop a sales and marketing department with specialized expertise in the
development of value added reseller ("VAR"s), original equipment manufacturer
("OEM") and Internet Service Provider ("ISP") relationships to provide SMB and
enterprise department users Internet software solutions. There can be no
assurance that the Company will be able to develop such a sales and marketing
team on a timely basis or at all. In addition, this market is competitive and
there can be no assurance that the Company will be successful in establishing
significant relationships with VARs, OEMs or ISPs or, if developed, there can be
no assurance as to amount of support that the Company's products will receive
from these VARs,
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OEMs or ISPs who may offer products that compete with the Company's products.
See "--Competition." To the extent that the Company succeeds in its strategy to
target the SMB and enterprise department user markets, among other things, the
Company's Results of operations may be subject to greater or different
fluctuations as a result of potentially larger individual product sales, a
longer sales cycle and longer payment terms.
Sales to a limited number of distributors and retailers in the retail
distribution channel have constituted, and are anticipated to continue to
constitute in the near term, a significant portion of the Company's retail
software sales. Sales to Ingram Micro Inc. constituted approximately 19% of the
Company's revenues from the sale of Internet products for the year ended
December 31, 1997. Any termination or significant disruption of the Company's
relationship with any major distributor or retailer, or any significant
reduction in sales volume attributable to any of such entities, would, unless or
until replaced, materially adversely affect the Company's business, financial
condition and Results of operations. A deterioration in financial condition or
other business difficulties of a distributor or retailer could render the
Company's accounts receivable from such entity uncollectible, which could have a
material adverse effect on the Company's business, financial condition and
Results of operations. There can be no assurance that the Company's existing
distributors and retailers will continue to provide the Company's products with
adequate levels of shelf space or promotional support.
RAPID TECHNOLOGICAL CHANGE; RISK OF PRODUCT DELAYS; RISK OF PRODUCT DEFECTS
The markets in which the Company competes are characterized by ongoing
technological developments, frequent new product announcements and
introductions, evolving industry standards and changing customer requirements.
The introduction of products embodying new technologies and the emergence of new
industry standards and practices can render existing products obsolete and
unmarketable. The Company's future success depends upon its ability on a timely
basis to enhance its existing products, introduce new products that address the
changing requirements of its customers and anticipate or respond to
technological advances, emerging industry standards and practices in a timely,
cost-effective manner. There can be no assurance that the Company will be
successful in developing, introducing and marketing new products or enhancements
to existing products or will not experience difficulties that could delay or
prevent the successful development, introduction or marketing of these products,
or that its new products and product enhancements will adequately meet the
requirements of the marketplace and achieve any significant degree of commercial
acceptance. Software products such as those offered by the Company often contain
errors or "bugs" that can adversely affect the performance of the product or
damage a user's data. The Company has in the past discovered software defects in
its products that have adversely affected its business and operating results. If
the Company is unable, for technological or other reasons, to develop and
introduce new products or enhancements of existing products in a timely manner
or if new versions of existing products contain unacceptable levels of product
defects or do not achieve a significant degree of market acceptance, or any of
the above situations occur there could be a material adverse effect on the
Company's business, financial condition and Results of operations. 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 market 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.
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<PAGE>
In the market for Internet software tools targeted at individual and SOHO
professional users, the Company has encountered competition primarily from
Microsoft, Adobe Systems Incorporated, SoftQuad, Inc. Systems and NetObjects,
Incorporated (majority owned by IBM). In the market for Internet software
solutions targeted at the SMB and corporate departmental user markets, in
addition to these competitors, the Company expects competition from HAHT
Software Incorporated, Wallop Software Incorporated, Aziza, a division of
Objectivity Incorporated, Eventus Software Incorporated, Interwoven Corporation
and Vignette Corporation. In addition, some existing vendors in the enterprise
wide Internet software solution market (such as IBM/Lotus, Oracle Corporation,
Informix Software Inc. and Sybase Incorporated, Inc.) may enter into the
Company's existing and planned markets. The Company expects that existing
vendors and new market entrants will develop products that will compete directly
with the Company's products and that competition will increase significantly to
the extent that markets for the Company's products grow. Increased competition
is likely to result in price reductions, reduced gross margins and loss of
market share, any of which could have a material adverse effect on the Company's
business, financial condition and Results of operations. Most of the Company's
current and potential competitors have substantially greater financial,
technical, marketing, sales and customer support resources, greater name
recognition and larger installed customer bases than the Company. Because there
are minimal barriers to entry into the software market, the Company believes
sources of competition will continue to proliferate. The market for the
Company's products is characterized by significant price competition, and the
Company expects that it will face increasing pricing pressures. There can be no
assurance the Company will be able to maintain its historic pricing structure
for its existing products or will be able to obtain its desired pricing
structure for planned products. If the Company is unable to do so or if the
Company is unable to compete effectively against current and future competitors,
the Company's business, financial condition and Results of operations will be
materially adversely affected.
In the future, vendors of operating system software or other software (such
as office or back office software suites) may continue to enhance their products
(including separate products that are bundled together) to include functionality
that is provided by the Company's current and planned products. This enhancement
could be achieved through the addition of functionality to operating system
software or other software or the bundling of Internet software tools with
operating system software or other products. For example, Microsoft incorporates
into its BackOffice product its Web page creation software product, FrontPage.
The inclusion of the functionality of Internet software tool products as
standard features of operating system software or other software could render
the Company's products obsolete and unmarketable, particularly if the quality of
such functionality were comparable, or perceived to be comparable, to that of
the Company's products. Furthermore, even if the Internet software tool
functionality provided as standard features by operating systems or other
software is more limited than that of the Company's products, there can be no
assurance that a significant number of customers would not elect to accept such
functionality in lieu of purchasing additional software. If the Company were
unable to develop new Internet software tool products to further enhance
operating systems or other software and to replace successfully any obsolete
products, the Company's business, financial condition and Results of operations
would be materially adversely affected.
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, the Company'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
20
<PAGE>
price protection obligations, and believes its existing policies have resulted
in the establishment of allowances that are adequate and have been adequate in
the past, there can be no assurance that such product returns and price
protection obligations will not exceed such allowances in the future and as a
result will not have a material adverse effect on future operating results,
particularly since the Company seeks to continually introduce new and enhanced
products and is likely to face increasing price competition. See "Management's
Discussion and Analysis of Financial Condition and Plan of Operations."
QUARTERLY FLUCTUATIONS IN PERFORMANCE
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, if the Company
obtains additional financing, the Company intends to continue to make
significant expenditures to enhance its sales and marketing activities and to
continue to make significant expenditures for research and development
activities. As such expenditures occur, the Company may be unable to reduce 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 s indications of future performance. In addition, to
the extent that the Company succeeds in its strategy to target the SMB and
corporate department user markets, among other things, the Company's Results of
operations and financial condition may be subject to greater or different
fluctuations as a result of potentially larger individual product sales,
seasonality, a longer sales cycle and longer payment terms. There can be no
assurance the Company will be profitable on a quarter to quarter or any other
basis in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of operations" and Financial Statements.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company's revenues from international operations accounted for
approximately 11% and 8% of the Company's revenues from the sale of Internet
products in 1996 and 1997, respectively, all of which were derived from sales in
Japan to Nippon Polaroid Kabushiki Kaisha, the Company" Japanese distributor. In
light of the recent DeltaGraph Disposition, the Company expects that
international Internet revenues may decline until the relationship with its
Japanese distributor (principally sold DeltaGraph products) is clarified or
other international distribution channels can be established. In the longer
term, the Company intends to take measures, including the hiring of additional
sales and marketing persons, to increase its level of international sales. In
light of, among other things, the Company's need to develop additional
international sales capabilities and to timely introduce and gain broader market
acceptance for its existing and planned Internet software products, there can be
no assurance that the Company will be successful in such efforts. International
revenues are subject to a number of risks, including greater
21
<PAGE>
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 privacy
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 Plan of Operations," "Sales
and Marketing."
LIMITED INTELLECTUAL PROPERTY PROTECTION
The Company's ability to compete effectively depends in large part on its
ability to develop and maintain proprietary aspects of its technology. Despite
precautions taken by the Company, it may be possible for unauthorized third
parties to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Moreover, the laws of some
foreign countries do not protect the Company's proprietary rights in its
products to the same extent, as do the laws of the United States. The Company
licenses its products primarily under "shrink wrap" license agreements that are
included in products shipped by the Company and are not signed by licensees,
therefore they may be unenforceable under the laws of certain jurisdictions. In
addition, some aspects of the Company's products are not subject to intellectual
property protection.
The Company cannot be certain that others will not independently develop
substantially equivalent or superseding proprietary technology, or that an
equivalent product will not be marketed in competition with the Company's
products, thereby substantially reducing the value of the Company's proprietary
rights. There can be no assurance that any confidentiality agreements between
the Company and its employees will provide adequate protection for the Company's
proprietary information in the event of any unauthorized use or disclosure of
such proprietary information.
Although the Company is not currently engaged in any intellectual property
litigation or proceedings, there can be no assurance that the Company will not
become involved in such proceedings. An adverse outcome in litigation or similar
adversarial proceedings could subject the Company to significant liabilities to
third parties, require disputed rights to be licensed from others or require the
Company to cease the marketing or use of certain products, any of which could
have a material adverse effect on the Company's business, financial condition
and Results of operations. The Company may be required to obtain licenses to
patents or proprietary rights of others, and there can be no assurance that any
licenses required under any patents or proprietary rights would be made
available on terms acceptable to the Company, if at all.
VOLATILITY OF STOCK PRICE
The Company's stock price has exhibited substantial volatility since the
Company's initial public offering in December 1995. The trading price of the
Company's Common Stock could be subject to significant fluctuations in response
to variations in quarterly operating results, changes in analysts' estimates,
announcements of technological innovations by the Company or its competitors,
general conditions in the Internet tools and visualization software industry and
other factors. In addition, the stock market is subject to price and volume
fluctuations that affect the market prices for companies in general, and small
capitalization, high technology companies in particular, and are often unrelated
to operating performance.
DE-LISTING FROM NASDAQ SMALLCAP MARKET; POTENTIAL DELISTING FROM PACIFIC
EXCHANGE; POSSIBLE INABILITY OF PRINCIPAL MARKET MAKER TO MAKE A MARKET IN THE
COMPANY'S COMMON STOCK
The Company's Common Stock was quoted on the Nasdaq SmallCap Market from
December 1995 until March 18, 1997 and is traded on the Pacific Exchange
(formerly the Pacific Stock Exchange) and quoted on the OTC Bulletin Board and
the "pink sheets." The Common Stock was delisted from the Nasdaq SmallCap Market
effective March 19, 1997 because of Nasdaq's determination that the Company
22
<PAGE>
failed to maintain certain requirements for continued listing. The shares of
Common Stock are currently quoted on the Pacific Exchange. The Company has been
notified by the Pacific Exchange that it may take action to delist the shares of
Common Stock as a result of, among other things, the Company's failure to
maintain a minimal level stock price. As a result of the foregoing, it is more
difficult to dispose of, or to obtain accurate quotations as to the price of,
the Company's Common Stock. In addition, because the Company's Common Stock was
removed from the Nasdaq SmallCap Market and its market price is less than $5.00
per share, it is subject to so-called "penny stock" rules that impose additional
sales practice and market making requirements on broker-dealers who sell and/or
make a market in such securities. Consequently, removal from the Nasdaq SmallCap
Market and the applicability of such "penny stock" rules could adversely affect
the ability or willingness of broker-dealers to sell and/or make a market in the
Company's Common Stock and the ability of purchasers of the Company's Common
Stock to sell their securities in the secondary market. While the Company
intends to apply for relisting on the Nasdaq SmallCap Market should it ever
satisfy the conditions of listing and intends to take actions to prevent
delisting from the Pacific Exchange, there can be no assurance that relisting
will occur or that delisting will not occur in the future. Even if the Company
achieves relisting for the Common Stock on the Nasdaq SmallCap Market, the
liquidity of the Common Stock will remain limited as the Nasdaq SmallCap Market
and the Pacific Exchange are a significantly less liquid markets then the Nasdaq
National Market. If the Company should continue to experience losses from
operations, it may be unable to maintain the standards for continued quotation
on the Nasdaq SmallCap Market (if relisted) and the Pacific Exchange, and the
shares of Common Stock could be subject to removal from the Nasdaq SmallCap
Market and the Pacific Exchange.
Any limitation on the ability of any principal market maker in the Company's
Common Stock to make a market in the Company's Common Stock could adversely
impact the liquidity or trading price of the Company's Common Stock, which could
have a material adverse impact on the market price of the Company's Common
Stock. For example, the Chicago office of the Securities and Exchange Commission
conducted a private, nonpublic investigation of H.J. Meyers & Co. Inc. ("H.J.
Meyers") pursuant to a Formal Order of Investigation issued by the Commission.
The investigation focused on whether H.J. Meyers may have violated applicable
securities laws and the rules and regulations thereunder, with respect to sales
of certain securities. The Company is unable to assess the potential impact of
the outcome of such investigation by the staff on the ability of any market
maker to make a market in the Company's Common Stock or trading in the Company's
securities.
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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases an approximately 18,000 square foot office
suite located at 380 El Pueblo Drive, Scotts Valley, California under a lease
that expires in April 2001 with a monthly rental of approximately $18,000. 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.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock was quoted on the Nasdaq SmallCap Market from
December 20, 1995 through March 18, 1997 under the symbol "DTPT" and has been
traded on the Pacific Stock Exchange since December 1995 through January 16,
1998, under the symbol "DTP.P" and from January 17, 1998 through the present,
under the symbol "SYT.P." The Common Stock is traded over-the-counter and is
quoted on the OTC Bulletin Board under the symbol "SITE" and on the "pink
sheets" and remains on the Pacific Stock Exchange.
The table below sets forth the high and low closing sale price of the Common
Stock for the periods indicated, as reported by the Nasdaq SmallCap Market
through March 18, 1997 and the OTC Bulletin Board thereafter. Prior to the
offering in December 1995, no established public trading market for the
Company's Common Stock existed.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
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 ENDED DECEMBER 31, 1997
First quarter............................................................. $ 8.25 $ 2.25
Second quarter............................................................ $ 3.00 $ 1.38
Third quarter............................................................. $ 3.06 $ 1.13
Fourth quarter............................................................ $ 2.84 $ 0.63
YEAR ENDED DECEMBER 31, 1998
First quarter (through March 23, 1998).................................... $ 0.94 $ 0.47
</TABLE>
The Company's Common Stock was delisted from the Nasdaq SmallCap Market
effective March 19, 1997 because of Nasdaq's determination that the Company
failed to maintain certain requirements for continued listing. On March 23,
1998, the closing bid price for a share of the Company's Common Stock, as
reported by the OTC Bulletin Board, was $0.50.
The number of record holders of the Company's common stock as of March 23,
1998 was 45.
The Company has not declared or paid a dividend with respect to its common
stock nor does the Company anticipate paying dividends in the foreseeable
future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THIS REPORT ON FORM 10-KSB CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE
ACT, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY, SUCH AS
"MAY," "WILL," "EXPECT," "ANTICIPATE," "ESTIMATE," OR "CONTINUE" OR THE NEGATIVE
THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THE MATTERS SET
FORTH UNDER THE CAPTION "FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS" IN
THIS REPORT ON FORM 10-KSB CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING
IMPORTANT FACTORS WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS, INCLUDING
RISK AND UNCERTAINTIES, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS.
24
<PAGE>
OVERVIEW
CORPORATE EVENTS. The Company was incorporated on February 1, 1989 to
design, develop and market visualization software products for personal
computers. The Company commenced shipments of its initial product, DeltaGraph,
at the end of 1989. The Company conducted its initial public offering in
December 1995 and completed a follow-on offering in October 1997. Commencing
with its acquisition of the technology required to develop WebAnimator (a
multimedia authoring tool for the Web) in November 1995, the Company's strategy
has been to realize a significant and growing percentage of its revenues from
the sale of Internet software products. Towards that end, the Company acquired
technology to develop QuickSite (a Web site creation and management tool) in
December 1995 (released version 1.0 in February 1996) and introduced WebTools in
March 1996, WebAnimator in July 1996, QuickSite Developer's Edition in September
1996 and QuickSite 2.5 in May 1997. In July 1997 the Company acquired technology
to develop SiteSweeper 2.0 which was released in September 1997 and in November
1997 the Company acquired technology to develop SiteMaster 4.0 which was
released in a preview mode in February 1998.
DELTAGRAPH DISPOSITION. On June 27, 1997, as part of the Company's
continuing strategy to focus its development, sales and marketing efforts on
Internet software products, the Company consummated the "DeltaGraph Disposition"
pursuant to which the Company sold those assets related to its DeltaGraph
software product for $910,000 in cash. The DeltaGraph product line consisted of
an advanced multi-platform charting and graphics software product for desktop
applications. The effective date for the disposition was May 1, 1997 and as part
of the DeltaGraph Disposition, DeltaPoint also agreed to assist in the
transition of DeltaGraph to SPSS through July 31, 1997. In return, SPSS agreed
to make an additional $400,000 cash payment to DeltaPoint on August 10, 1997.
See Note 4 to the Notes to Consolidated Financial Statements.
In addition to further focusing the Company on Internet software products,
the DeltaGraph disposition provided the Company with much needed liquidity.
RECENT ACQUISITIONS. On July 11, 1997, the Company consummated the "Site
Tech Acquisition" pursuant to which the Company issued a total of 550,029 shares
of Common Stock, made a cash payment of $60,000 and assumed liabilities of
$73,000 for a total purchase price of $638,000 in exchange for all outstanding
shares of Site. The Company recognized a charge to operations of $500,000 for
the portion of the purchase price determined to be in-process research and
development.
On November 19, 1997, the Company consummated the "Inlet Technology
Acquisition" pursuant to which the Company acquired from Inlet certain Internet
technologies. As consideration for the Inlet Technology Acquisition, the Company
issued Notes payable of $825,000 in cash and 360,000 shares of the Company's
Common Stock. The Company recognized a charge to operations of approximately
$1.1 million for the portion of the purchase price determined to be in-process
research and development
See Note 6 of Notes to Consolidated Financial Statements for further
discussion of the Site Tech and Inlet Acquisitions.
REVENUES. The Company's revenues consist of license revenues from sales of
software products to distributors, resellers and end users. In addition, the
Company derives license revenues from royalty agreements with certain customers.
Under these agreements, the Company typically receives a large percentage of the
aggregate revenues in the form of a nonrefundable royalty paid upon shipment of
the master copy of software, which allows the customer to license a specified
number of copies of the Company's software. In addition, the Company recently
introduced products targeted at the small to medium size businesses ("SMBs") and
corporate department user markets for scalable Web site development and
management solutions. In connection with the introduction of these products, the
Company plans to significantly increase its use of non-retail distribution
channels including VARs, OEMs and Internet Service Providers ("ISPs").
25
<PAGE>
Software product sales are recognized upon shipment of the product, net of
appropriate allowances for estimated returns. Revenues from software royalty
agreements are recognized upon shipment of a master copy of the software product
if no significant vendor obligations remain under the term of the license
agreements and any amounts to be paid are nonrefundable. Payments received in
advance of revenue recognition are recorded as deferred revenue. The Company
grants distributors and resellers certain rights of return, price protection and
stock rotation rights on unsold merchandise. Accordingly, reserves for estimated
future returns and credits for price protection and stock rotation rights are
accrued at the time of shipment.
IMPACT OF DELTAGRAPH DISPOSITION AND THE SITE TECH ACQUISITION. As a result
of the DeltaGraph Disposition and the Site Tech Acquisition, the Company's
future operating results will not be comparable to its historical operating
results and should not be relied upon as an indication of future operating
results. Moreover, the Company's future profitability will be entirely dependent
on the success of its Internet software products. Set forth below on an actual
and pro forma basis giving effect to the DeltaGraph Disposition and the Site
Tech Acquisition are the Company's net revenues, operating losses and gross
profit for the years ended December 31, 1997 and 1996, respectively. The sale of
DeltaGraph is not expected to result in a significant reduction in operating
expenses as the Company plans to continue its investment in developing new and
updated versions of its Internet software products.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------- ----------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Net Revenues.................................. $ 1,827 $ 1,197 $ 4,950 $ 1,911
Loss from Operations.......................... $ (8,551) $ (9,819) $ (4,922) $ (7,647)
Gross Profit Percentage....................... 57.0% 50.0% 76.1% 72.5%
</TABLE>
HISTORIC AND ANTICIPATED LOSSES. The Company incurred net losses of
$4,848,000 for the year ended December 31, 1996 and $8,159,000 for the year
ended December 31, 1997, and had an accumulated deficit of $21,837,000 as of
December 31, 1997. The net loss for the year ended December 31, 1997 included
aggregate in-process research and development write-offs of $1,591,000 and a
$703,000 interest expense charge relating to the value of the discounted
conversion feature and deferred debt issuance costs relating to the Company's 6%
Convertible Subordinated Debentures ("Convertible Notes"). These charges were
offset by a one-time gain of approximately $1,171,000 relating to the
disposition of the DeltaGraph product line. The Company expects to incur losses
for at least the next 12 months, and possibly longer. The Company's future
operating results will depend on many factors, including the successful
development, introduction and commercial acceptance of the Company's Internet
software products (including Internet software products targeted by the Company
at the SMB and corporate department user markets); continued emergence of the
evolving Internet software product market; the Company's success in expanding
its use of non-retail distribution channels for SMB and corporate department
user Internet software solutions including VARs, OEMs and ISPs; the mix of
revenues derived from product sales and royalty fees and the level of product
and price competition. In particular, there can be no assurance that the Company
will be successful in its efforts to introduce additional products targeted at
the SMB or the corporate department user market or to expand its distribution
channels in order to service these markets.
FLUCTUATIONS. The Company's Results of operations have historically varied
substantially from quarter to quarter and the Company expects they will continue
to do so. In the past, the Company's operating results have varied significantly
as a result of a number of factors, including the size and timing of customer
orders or license agreements, product mix, the revenues derived from product
sales and license fees, the existence and terms of royalty and packaging
arrangements, seasonality, the timing of the introduction and customer
acceptance of new products or product enhancements by the Company's competitors,
new product or version releases by the Company, changes in pricing policies by
the Company or its competitors, marketing and promotional expenditures, research
and development expenditures and changes in general
26
<PAGE>
economic conditions. Furthermore, the Company has often recognized a substantial
portion of its revenues in the last month of the quarter, with such revenues
frequently concentrated in the last week or weeks of the quarter.
The Company's operating and other expenses are relatively fixed in the short
term. As a result, variations in timing of revenues can cause significant
variations in quarterly results of operations. The Company generally does not
operate with a significant order backlog and a substantial portion of its
revenue in any quarter is derived from orders booked in that quarter, which are
difficult to forecast and are typically concentrated at the end of the quarter.
Accordingly, the Company's sales expectations are based almost entirely on its
internal estimates of future demand and not on firm customer orders. Due to the
foregoing factors, the Company believes that quarter to quarter comparisons of
its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. In addition, to the extent
that the Company succeeds in its strategy to target the SMB and corporate
departmental user markets, among other things, the Company's results of
operations and financial condition may be subject to greater or different
fluctuations as a result of potentially larger individual product sales,
seasonality, a longer sales cycle and longer payment terms. There can be no
assurance the Company will be profitable on a quarter to quarter or any other
basis in the future.
SERIES A PREFERRED STOCK; CONVERTIBLE NOTES. In December 1996, the Company
issued $2,150,000 in principal amount of its 6% Convertible Subordinated
Debentures ("Convertible Notes"). In April through June 1997, $582,000 in
principal amount of Convertible Notes was converted into shares of Common Stock,
and on June 30, 1997 all but $37,500 of the remaining principal value of the
Convertible Notes was converted into shares of the Company's Series A Preferred
Stock ("Series A Preferred Stock"). In July and August 1997 the remaining
balance on the Convertible Notes of $37,500 and the Series A Preferred Stock
were converted into shares of Common Stock. The Series A Preferred Stock and
Convertible Notes were converted into shares of Common Stock generally at a
price equal to 80% of the five day average closing price on the OTC Bulletin
Board for the five business days prior to conversion. During the quarter ended
March 31, 1997, the Company recognized the value of the discounted conversion
feature and deferred debt issuance costs of aggregating $703,000 as additional
interest expense. The Company does not expect to record any similar charges
related to these securities in future quarters.
GOING CONCERN ASSUMPTION. Due to the Company's accumulated losses, the
report of the Company's independent accountants, Price Waterhouse LLP, with
respect to the Company's consolidated financial statements for 1997 and 1996
contains an explanatory paragraph concerning the Company's ability to continue
as a going concern.
27
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain statement
of operations data as a percentage of net revenues.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1997 1996
ACTUAL ACTUAL
--------- ---------
<S> <C> <C>
Net revenues............................................................... 100.0% 100.0%
Cost of revenues........................................................... 43.0 23.9
--------- ---------
Gross Profit............................................................. 57.0 76.1
Operating expenses:
Sales and marketing...................................................... 219.8 94.6
Research and development................................................. 249.5 52.9
General and administrative............................................... 55.7 28.0
--------- ---------
Total operating expenses................................................. 525.0 175.5
Loss from operations....................................................... (468.0) (99.4)
Interest income (expense), net............................................. (42.6) 1.5
Other income............................................................... 64.1 --
--------- ---------
Net loss................................................................. (446.5)% (97.9)%
--------- ---------
--------- ---------
</TABLE>
YEARS ENDED DECEMBER 31, 1997 AND 1996
NET REVENUES. Net revenues decreased by 63.1% from $4,950,000 for 1996 to
$1,827,000 for 1997. The decrease in revenue was primarily attributable to the
sale of the DeltaGraph product line which accounted for $3,067,000 of net
revenues in the year ended December 31, 1996 as compared to $658,000 for the
year ended December 31, 1997. In addition, sales of the Company's Internet
products were adversely affected by the Company's limited promotional activities
due to cash constraints during a majority of the year ended December 31, 1997
and the introduction of new products by a competitor.
International revenues decreased to 21.7% of net revenues for 1997 compared
to 26.3% for 1996. In light of the DeltaGraph disposition, the Company expects
that in the near-term international revenues attributable to Internet products
will decline until the relationship with its Japanese distributor (who
principally sold DeltaGraph products) is reestablished or other international
distribution channels can be established.
GROSS PROFIT. Cost of revenues consists of direct materials, labor,
overhead, freight, post customer support and contract manufacturing costs
associated with the manufacturing of the Company's products. Gross profit
decreased from 76.1% of net revenues in 1996 to 57.0% of net revenues in 1997,
primarily as a result of higher inventory write-offs relating to the Company's
name change and rebranding strategy. The Company's gross profit on an actual
basis and as a percentage of net revenue has varied from quarter to quarter as a
result of a number of factors including changes in customer and product mix,
inventory write-offs due to new product releases and third party royalty
obligations for the Company's Internet products. Historically, the Company's
gross profit on the sale of DeltaGraph products was consistent with the
Company's overall gross profit. However, the Company anticipates gross profit as
a percentage of revenue will decline in future periods as Internet product sales
increase due to the third-party royalty obligations associated with such sales.
SALES AND MARKETING. Sales and marketing expenses include sales
commissions, compensation of sales and marketing personnel and cost of
promotional activities. Sales and marketing expenses decreased in absolute
dollars to $4,016,000 (or 219.8% of net revenues) for 1997 compared to
$4,685,000 (or 94.6% of
28
<PAGE>
net revenues) in 1996. The decrease in sales and marketing expenses, in absolute
dollars, was primarily due to the decrease in overall marketing activities due
to cash flow constraints. The Company expects that sales and marketing expenses
will increase in absolute dollars in future periods because the Company plans 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 $4,558,000 (or 249.5% of net revenues) for
1997 compared to $2,618,000 (or 52.9% of net revenues) in 1996. The increase in
research and development expenses was primarily due to the write-offs for the
Site Tech Acquisition and Inlet Acquisition aggregating approximately $1.6
million. The Company expects that research and development costs would increase
in future periods due to further development of the Company's new products and
updated versions of the Company's existing products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
in absolute dollars to $1,018,000 (or 55.7% of net revenues) for 1997 compared
to $1,388,000 (or 28.0% of net revenues) in 1996. The decrease in general and
administrative expenses was primarily attributable to a severance charge in the
first quarter of 1996 of $505,000 offset by an increase in bad debt expenses of
$150,000 in 1997 relating to the Company's refocus of distribution channels. 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 1997 or
1996 due to net operating losses.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31 1997, the Company had a working capital balance of
$2,094,000 and shareholders' equity of $2,765,000. The Company has financed its
operations primarily through private and public sales of equity securities,
borrowings under a term loan (no longer in place), the private sale of debt
securities and, recently, the sale of the DeltaGraph product line. Since
inception, the Company has received approximately $23 million in proceeds from
private sales of preferred stock, convertible debt and from the Company's two
public offerings of Common Stock.
During 1997 and 1996, the Company used cash in operations totaling
approximately $6.1 million and $4.6 million, respectively. Cash used in
operations during 1997 consisted of the Company's net loss of $8.2 million
offset by non-cash charges and changes in working capital resulting from the
Company's change in strategy. Cash used in operations during 1996 primarily
consisted of the Company's net loss of $4.8 million.
Net cash provided by financing activities totaled $3,474,000 in 1996 and
$6,268,000 in 1997. Net cash from financing activities in 1996 consisted
primarily of $831,000 in net proceeds from the exercise of the overallotment
option from the Company's initial public offering 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. Net cash from financing
transactions in 1997 consisted primarily of $6,260,000 in net proceeds from the
Company's October 1997 follow-on public offering of common stock.
Net cash provided by investing activities during 1997 totaled approximately
$514,000 and primarily resulted from the DeltaGraph Disposition offset by the
Inlet Technology Acquisition and other property and equipment purchases. During
1997 the Company's capital expenditures totaled approximately $108,000 and were
attributable to acquisitions of personal computer and computer workstation
equipment used to support the Company's development efforts in addition to some
leasehold improvements relating to move of the Company's headquarters to Scotts
Valley, Ca.
29
<PAGE>
As of December 31, 1997, the Company's cash and cash equivalents totaled
$3,856,000 including approximately $6,260,000 in net proceeds from the follow-on
offering in October 1997. 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 will require the Company to obtain
additional sources of financing in the future or to reduce operating expenses.
In addition, the Company's actual capital needs will depend upon numerous
factors, including the progress of the Company's software development activities
and the amount of cash generated from operations, none of which can be predicted
with certainty.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
SITE TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.......................................................................... 31
Consolidated Balance Sheet as of December 31, 1997 and 1996................................................ 32
Consolidated Statement of Operations for the Years Ended December 31, 1997 and 1996........................ 33
Consolidated Statement of Shareholders' Equity for the Years ended December 31, 1997 and 1996.............. 34
Consolidated Statement of Cash Flows for the Years Ended December 31, 1997 and 1996........................ 35
Notes to Consolidated Financial Statements................................................................. 36
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Site Technologies, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Site
Technologies, Inc. and its subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has an accumulated deficit of approximately
$21.8 million and has incurred recent significant losses that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
PRICE WATERHOUSE LLP
San Jose, California
January 30, 1998, except
as to Note 12 which is as
of February 27, 1998
31
<PAGE>
SITE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 3,856 $ 3,142
Accounts receivable, net of allowance for doubtful accounts of $176 and $118............ 96 1,904
Inventories............................................................................. 34 133
Prepaid expenses and other current assets............................................... 259 557
---------- ----------
Total current assets.................................................................. 4,245 5,736
---------- ----------
Property and equipment, net............................................................... 309 277
Purchased software, net................................................................... 262 299
Deposits and other assets................................................................. 100 34
---------- ----------
$ 4,916 $ 6,346
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 788 $ 1,238
Accrued liabilities..................................................................... 958 1,146
Reserve for returns..................................................................... 55 771
Notes payable........................................................................... 350 2,150
---------- ----------
Total current liabilities............................................................. 2,151 5,305
Commitments and contingencies (Note 7)
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 8,491,380 and 2,485,540 shares
issued and outstanding................................................................ 24,602 14,707
Accumulated deficit..................................................................... (21,837) (13,666)
---------- ----------
Total shareholders' equity............................................................ 2,765 1,041
---------- ----------
$ 4,916 $ 6,346
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
SITE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Net revenues................................................................................. $ 1,827 $ 4,950
Cost of revenues............................................................................. 786 1,181
--------- ---------
Gross profit............................................................................... 1,041 3,769
Operating expenses:
Sales and marketing........................................................................ 4,016 4,685
Research and development................................................................... 4,558 2,618
General and administrative................................................................. 1,018 1,388
--------- ---------
9,592 8,691
--------- ---------
Loss from operations......................................................................... (8,551) (4,922)
Interest (expense) income, net............................................................... (779) 74
Gain on sale of product line................................................................. 1,171 --
--------- ---------
Net loss..................................................................................... $ (8,159) $ (4,848)
--------- ---------
--------- ---------
Basic and diluted net loss per share......................................................... $ (1.95) $ (2.17)
--------- ---------
Shares and share equivalents used in per share calculations.................................. 4,186 2,231
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
SITE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ACCUMULATED
-------------------- --------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
--------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
Exercise of stock options................... -- -- 4,333 21 -- 21
Discount conversion feature of notes
payable................................... -- -- -- 537 -- 537
Conversion of notes payable to Preferred
Stock..................................... 1,530 $ 1,530 -- -- -- 1,530
Conversion of notes payable to Common
Stock..................................... -- -- 426,643 620 -- 620
Conversion of Preferred Stock to Common
Stock..................................... (1,530) (1,530) 1,214,835 1,530 -- --
Issuance of Common Stock for acquisitions... -- -- 910,029 927 -- 927
Sale of Common Stock........................ -- -- 3,450,000 6,260 -- 6,260
Dividend payable for Preferred Stock........ -- -- -- -- (12) (12)
Net loss.................................... -- -- -- -- (8,159) (8,159)
--------- --------- ---------- --------- ---------- ---------
Balance at December 31, 1997.................. -- -- 8,491,380 $ 24,602 $ (21,837) $ 2,765
--------- --------- ---------- --------- ---------- ---------
--------- --------- ---------- --------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<PAGE>
SITE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................................... $ (8,159) $ (4,848)
Adjustments to reconcile net loss to net cash used in operating Activities:
Depreciation and amortization............................................................ 448 254
In process research and development...................................................... 1,591 --
Amortization of discounted conversion feature of notes payable........................... 537 --
Gain on DeltaGraph disposition........................................................... (1,171) --
Change in assets and liabilities:
Accounts receivable.................................................................... 1,815 (679)
Inventories............................................................................ 99 49
Prepaid expenses and other current assets.............................................. 265 (162)
Accounts payable....................................................................... (488) 573
Accrued liabilities.................................................................... (223) (191)
Reserve for returns.................................................................... (716) 373
Deposits and other assets.............................................................. (66) 13
--------- ---------
Net cash used in operating activities................................................ (6,068) (4,618)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment......................................................... (108) (340)
DeltaGraph disposition..................................................................... 1,171 --
Acquisitions (net of cash acquired)........................................................ (549) --
Other...................................................................................... -- (3)
--------- ---------
Net cash provided by (used in) investing activities...................................... 514 (343)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock, exercise of stock options and warrants, net........ 6,281 2,440
Proceeds from issuance of notes payable, net............................................... -- 1,949
Repayment of note payable.................................................................. -- (865)
Dividend payable........................................................................... (13) --
Repayment of capitalized lease obligations................................................. -- (50)
--------- ---------
Net cash provided by financing activities................................................ 6,268 3,474
--------- ---------
Increase (decrease) in cash and cash equivalents............................................. 714 (1,487)
Cash and cash equivalents at beginning of year............................................... 3,142 4,629
--------- ---------
Cash and cash equivalents at end of year..................................................... $ 3,856 $ 3,142
--------- ---------
--------- ---------
Supplemental cash flow information:
Cash paid for interest..................................................................... $ 7 $ 28
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
SITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
Founded in 1989, Site Technologies, Inc., formerly DeltaPoint, Inc., (the
Company), has headquarters in Scotts Valley, California. Site Technologies, Inc.
develops and markets Web site development, management and maintenance software
solutions for Web-based business environments. The Company is committed to
providing modular, extensible client and server Web site management tools
through a multi-tier family of software products that scale from small business
to enterprise departmental solutions.
At December 31, 1997, the Company has an accumulated deficit of $21.8
million and has incurred significant recent losses from operations. The Company
plans to continue to develop and introduce updated versions of its existing
products and to continue to promote its Web tools software products. There can
be no assurance that the Company will not incur additional losses until its
planned and existing products generate significant revenues. The accompanying
financial statements have been prepared assuming the Company will continue as a
going concern. Additional equity or debt financing may be required to enable the
Company to continue its operations and achieve its plans for 1998 and beyond.
The accompanying financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
The following is a summary of the Company's significant accounting policies:
BASIS OF PRESENTATION
The Consolidated financial statements include the accounts of the company
and its wholly-owned subsidiaries. All material intercompany balances and
transactions have been eliminated.
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
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.
36
<PAGE>
SITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Revenue from international customers, primarily in Japan accounted for 22%
and 26% of net revenues in 1997 and 1996, respectively. Sales to customers in
excess of 10% of net revenues is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Customer A..................................................................... 19% 21%
Customer B..................................................................... 19% 30%
</TABLE>
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
equivalents balance at December 31, 1997, were $3,500,000 in certificates of
deposit.
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 ("FAS") No. 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 no
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 10.
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 requires the capitalization of certain
software development costs once technological
37
<PAGE>
SITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
At December 31, 1997 three customers accounted for 78% of accounts
receivable. At December 31, 1996 three customers accounted for 83% of accounts
receivable.
BASIC AND DILUTED NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of
common shares outstanding during the period. Diluted net loss per share is
computed using the weighted average number of common and potential common shares
outstanding during the period. Potential common shares consist of the
incremental common shares issuable upon the exercise of stock options and
warrants (using the treasury stock method). Potential common shares are excluded
from the computation if their effect is anti-dilutive, as was the case for the
years ended December 31, 1997 and 1996.
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.
RECENT ACCOUNTING PRONOUNCEMENT FOR DISCLOSURE PURPOSE:
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
FAS 130, "Reporting Comprehensive Income." FAS 130 establishes standards for
reporting comprehensive income and its components in a financial statement.
Comprehensive income as defined includes all changes in equity (net assets)
during a period from non-owner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include foreign
currency translation adjustment and
38
<PAGE>
SITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
unrealized gain/loss on available for sale securities. The disclosure prescribed
by FAS 130 must be made beginning with the first quarter of fiscal 1998 and is
not anticipated to have a material impact on the Company's financial position or
results of operations.
In June 1997, the FASB issued FAS 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company
has not yet determined the impact, if any, of adopting this new standard. The
disclosures prescribed by FAS 131 are effective in fiscal 1998 and are not
anticipated to have a material impact on the Company's financial position or
results of operations.
NOTE 2--BALANCE SHEET DETAILS (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Inventories:
Raw materials.......................................................... $ 30 $ 84
Finished goods......................................................... 4 49
--------- ---------
$ 34 $ 133
--------- ---------
--------- ---------
Purchased software:
Purchased software..................................................... $ 720 $ 453
Less: accumulated amortization......................................... (458) (154)
--------- ---------
$ 262 $ 299
--------- ---------
--------- ---------
Property and equipment:
Computer equipment and software........................................ $ 1,249 $ 1,160
Furniture and fixtures................................................. 170 139
Leasehold improvements................................................. 87 31
--------- ---------
1,506 1,330
Less: accumulated depreciation......................................... (1,197) (1,053)
--------- ---------
$ 309 $ 277
--------- ---------
--------- ---------
Accrued liabilities:
Accrued royalties...................................................... $ 40 $ 315
Accrued compensation................................................... 345 369
Other.................................................................. 573 462
--------- ---------
$ 958 $ 1,146
--------- ---------
--------- ---------
</TABLE>
Included in the December 31, 1997 and 1996 balances of computer equipment
and software are $531,000 of fully depreciated assets acquired under capital
leases.
39
<PAGE>
SITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--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 convert into common stock automatically at
the end of the two-year term or earlier at the option of the holder. The
conversion price of the notes was the lower of (a) 80% of the average closing
bid price of the Company's Common Stock for the five days prior to a notice of
conversion and (b) $6.70 per share. The Company recognized the value of the
discounted conversion feature, or $537,000, and deferred debt issuance costs, or
$262,000 as additional interest expense during 1997. The amortization of the
discounted conversion feature resulted in an increase to Common Stock of
$537,000. During 1997, holders of notes payable converted $2,150,000 in
principal value into $1,530,000 of Series A Preferred Stock and 426,643 shares
of Common Stock.
In connection with an acquisition (see Note 6), the Company issued $350,000
in principal amount of installment notes payable. The notes are payable on or
before November 15, 1998, must be pre-paid upon certain conditions and bear
interest at 20% payable on a monthly basis.
NOTE 4--SALE OF DELTAGRAPH PRODUCT LINE:
On June 27, 1997, the Company completed the sale of its DeltaGraph product
line with an effective date of May 1, 1997 for aggregate proceeds of $1,310,000
in cash of which $910,000 was attributable to the sale of the Delta Graph
product line and $400,000 was attributable to services to be rendered by the
Company pursuant to a management agreement through August 1997. The Company
recognized an aggregate gain of $1,171,000, net of expenses incurred in the sale
of $105,000 and the net book value of assets sold totaling $34,000.
NOTE 5--UNAUDITED PRO FORMA INFORMATION:
Following the effective date of the DeltaGraph disposition, the Company will
no longer have revenues related to the DeltaGraph product sales. DeltaGraph
revenues were $659,000 and $3,067,000, or 36.1% and 62.0% of total revenues for
1997 and 1996, respectively. During 1997 and 1996, cost of revenues and
operating expenses directly attributable to DeltaGraph totaled $530,000 and
$1,800,000, respectively.
The unaudited proforma net revenues, related net loss and basic and diluted
net loss per share of the Company for the years ended December 31, 1997 and 1996
after giving effect to the DeltaGraph transaction as if it had been consummated
at January 1, 1996, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
Pro forma net revenues.......................................... $ 1,168,000 $ 1,883,000
Pro forma net loss.............................................. (9,459,000) (6,115,000)
Pro forma basic and diluted net loss per share.................. (2.26) (2.74)
</TABLE>
NOTE 6--ACQUISITIONS:
On July 11, 1997, the Company completed the acquisition of
Site/technologies/inc. ("Site"), a privately held company. In connection with
this acquisition, the Company issued a total of 550,029 shares of its Common
Stock, made a cash payment of $60,000 and assumed liabilities of $73,000 for a
total purchase price of $638,000, in exchange for all outstanding shares of
Site. In connection with the Site acquisition, the Company determined that
$500,000 of the purchase price represented in-process technology and because
40
<PAGE>
SITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--ACQUISITIONS: (CONTINUED)
such technology had not reached technological feasibility and therefore had no
alternative future use, recorded a corresponding charge to research and
development expenses. The Company will also pay specified royalties on sale of
certain products developed from the technology acquired from Site.
On November 19, 1997, the Company completed the acquisition of Inlet
Divestiture Corp. ("Inlet") to purchase certain Internet technologies (including
source code and related documentation). The purchase price was $1,297,000 which
consisted of (i) $350,000 in installment notes payable, (ii) the issuance of
360,000 shares of the Company's Common Stock, and (iii) cash and acquisition
expenses aggregating $525,000. The Company will also pay royalties on sales,
licenses, sublicenses or other transactions pursuant to which units of the
software product are distributed. Half of the amount of royalties will be paid
in the Company's Common Stock. In connection with the Inlet acquisition, the
Company determined that $1,091,000 of the aggregate purchase price represented
in-process technology, and because such technology had not reached technological
feasibility and therefore had no alternative future use, recorded a
corresponding charge to research and development expenses.
NOTE 7--COMMITMENTS AND CONTINGENCIES:
COMMITMENTS
The Company leases its facilities under noncancellable operating leases.
Rent expense was $406,000 and $194,000 for the years ended December 31, 1997 and
1996, respectively.
Future minimum lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING DECEMBER 31, LEASES
- ----------------------------------------------------------------------------------- -----------
<S> <C>
1998............................................................................... $ 202
1999............................................................................... 221
2000............................................................................... 221
2001............................................................................... 55
-----
Total minimum lease payments....................................................... $ 699
-----
-----
</TABLE>
In connection with certain technology acquisitions, the Company entered into
royalty agreements under which it is required to pay royalties on the sales of
related products. Cash paid for royalties during 1997 and 1996 totaled $102,000
and $33,000, respectively. Amounts due under these royalty agreements totaled
$11,000 and $0 at December 31, 1997 and 1996, respectively.
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, results of operations or liquidity.
NOTE 8--INCOME TAXES:
No provision for income taxes has been recorded for any periods presented
due to net operating losses. At December 31, 1997, the Company had approximately
$14 million of federal net operating loss
41
<PAGE>
SITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--INCOME TAXES: (CONTINUED)
carryforwards, which expire, in varying amounts through 2012. Due to certain
changes in the ownership of the Company, certain of these losses are subject to
annual limitations ranging from approximately $142,000 to approximately
$500,000, respectively.
A reconciliation of the Company's effective tax rate to the U.S. federal
statutory rate follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
U.S. federal statutory rate................................................ (34.0)% (34.0)%
State and local taxes, net of U.S. federal benefit......................... (8.8) (8.8)
Reserved net deferred tax assets and others................................ 42.8 42.8
--------- ---------
--% --%
--------- ---------
--------- ---------
</TABLE>
The components of the net deferred tax assets consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating losses................................................... $ 5,575 $ 2,788
Acquired technology.................................................... 853 326
Reserves, accruals and depreciation.................................... 87 441
--------- ---------
6,515 3,555
Deferred tax: valuation allowance.................................... (6,515) (3,555)
--------- ---------
Net deferred tax asset................................................... $ -- $ --
--------- ---------
--------- ---------
</TABLE>
The Company has determined that it is more likely than not that the deferred
tax assets at December 31, 1997 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.
NOTE 9--PREFERRED STOCK, COMMON STOCK AND WARRANTS:
PREFERRED STOCK:
The Company has authorized up to 4,000,000 shares of Preferred Stock
available for issuance upon approval of the Board of Directors. On June 30,
1997, the Company issued 1,530 shares of Series A Preferred Stock at a price of
$1,000 per share in exchange for $1,530,000 in principal value of convertible
promissory notes outstanding which were subsequently converted into 1,214,835
shares of the Common Stock.
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 January 1996, the Company issued 165,000 shares
of Common Stock for net proceeds of $831,000 to cover over-allotments in
42
<PAGE>
SITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--PREFERRED STOCK, COMMON STOCK AND WARRANTS: (CONTINUED)
the initial public offering. In October 1997, the Company completed a follow-on
offering of 3,450,000 shares of Common Stock for net proceeds of approximately
$3.2 million.
WARRANTS:
The following warrants were outstanding and exercisable at December 31,
1997:
<TABLE>
<CAPTION>
ISSUED IN WARRANT EXERCISE
WARRANTS OUTSTANDING CONNECTION WITH ISSUANCE DATE EXPIRATION DATE PRICE
- -------------------- -------------------- ------------- --------------- ---------------------
<S> <C> <C> <C> <C>
71,875 Equity Nov. 1995 Nov. 2000 $1.31
110,000 Equity Dec. 1995 Dec. 2000 $7.20
16,538 Convertible Notes Dec 1996 Dec. 2002 $6.50
345,000 Equity Oct 1997 Oct. 2003 $5.00
-------
543,413
-------
-------
</TABLE>
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. Due to a repricing clause,
these warrants were repriced based on the average issue price of the shares
relating to the convertible notes of $1.31. The Company has reserved 543,413
shares of common stock for issuance upon the exercise of the outstanding
warrants.
NOTE 10--STOCK OPTION PLANS:
The Company has three Stock Option Plans (the Plans) which provide for
issuance of stock options to employees of the Company. The Company has reserved
an aggregate of 1,285,462 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 and 400,000 shares
approved by the Company's shareholders at the annual meeting in June 1997.
Options to purchase 414,031 and 171,804 shares were vested and exercisable at
December 31, 1997 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 that
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.
In recognition of the decline in the fair market value of the Company's
Common Stock in 1996 and 1997, the Company repriced options to purchase
approximately 699,696 shares of Common Stock in March 1997 to an exercise price
of $2.25 per share, which was the fair market value of the Company's Common
Stock on that date.
43
<PAGE>
SITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCK OPTION PLANS: (CONTINUED)
The following table summarizes activity under the Company's Stock Option
Plans:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
SHARES -------------------------------
AVAILABLE WEIGHTED AVERAGE
FOR GRANT SHARES EXERCISE PRICE
----------- ---------- -------------------
<S> <C> <C> <C>
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
Additional shares reserved....................... 400,000 -- --
Options granted.................................. (1,225,146) 1,225,146 2.03
Options exercised................................ -- (4,333) 4.80
Options canceled................................. 952,511 (952,511) 5.53
----------- ---------- ---
Balance at December 31, 1997..................... 190,832 1,008,810 2.08
----------- ---------- ---
----------- ---------- ---
</TABLE>
The following table summarized information about employee stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS
--------------------------------------------------------- OUTSTANDING
WEIGHTED -----------------
NUMBER AVERAGE WEIGHTED NUMBER
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT
EXERCISE PRICE DECEMBER 31, 1997 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1997
--------------- ----------------- ------------------- --------------- -----------------
<S> <C> <C> <C> <C>
$1.13-$1.44............................. 269,200 9.6 1.14 3,125
$1.75-$2.50............................. 709,610 6.1 2.24 404,240
$5.50-7.50.............................. 30,000 7.1 6.83 6,666
----------------- ----- --- -------
Total................................. 1,008,810 7.0 2.08 414,031
----------------- ----- --- -------
----------------- ----- --- -------
<CAPTION>
WEIGHTED AVERAGE
RANGE OF EXERCISE PRICE AT
EXERCISE PRICE DECEMBER 31, 1997
--------------- ------------------
<S> <C>
$1.13-$1.44............................. 1.13
$1.75-$2.50............................. 2.25
$5.50-7.50.............................. 7.50
---
Total................................. 2.33
---
---
</TABLE>
44
<PAGE>
SITE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCK OPTION PLANS: (CONTINUED)
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 basic and diluted net loss per share would have been as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Net loss:
As reported............................................................ $ (8,159) $ (4,848)
Pro forma.............................................................. $ (8,793) $ (5,435)
Basic and diluted net loss per share:
As reported............................................................ $ (1.95) $ (2.17)
Pro forma.............................................................. $ (2.10) $ (2.44)
</TABLE>
The weighted average estimated grant date fair value, as defined by FAS123,
granted under the Plans was $2.03 and $5.46 for 1997 and 1996, respectively.
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 period: dividend yields of 0%
for both periods; expected volatility of 91.0% for 1997 and 80.6% for 1996;
risk-free interest rate of 6.42% for 1997 and 6.07% for 1996 for options
granted; and a weighted average expected option term of 3.75 years for 1997 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, 1997
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 11--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 12--SUBSEQUENT EVENT'S:
On January 16, 1998, the Company's shareholders voted to amend the Company's
1995 Stock Option Plan to increase the number of shares in the plan by 1,200,000
to a total of 2,400,000.
On February 27, 1998, the Company paid the outstanding notes payable balance
of $350,000 relating to the Inlet acquisition.
45
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT.
Incorporated by reference to the Company's Proxy Statement for Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1997.
ITEM 10. EXECUTIVE COMPENSATION
Incorporated by reference to the Company's Proxy Statement for Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Company's Proxy Statement for the Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Company's Proxy Statement for Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1997.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- ---------------------------------------------------------------------------------------------------
<S> <C>
1.1(10) Form Underwriting Agreement
3.1(1) Registrant's Amended and Restated Articles of Incorporation
3.2(2) Registrant's Bylaws
3.3(3) Amended and Restated Certificate of Determination of Series A Preferred Stock
4.1(2) Specimen Certificate of Registrant's Common Stock
4.2(2) Form of Warrant
4.3(2) Form of H.J. Meyers & Co.'s Warrant
4.4(2) Loan and Warrant Agreement between Registrant and certain investors dated as of March 29, 1993
4.5(2) Amended and Restated Investor Rights Agreement between Registrant and the investors specified
therein dated as of November 6, 1995
10.1(2) Real Property Lease between Registrant and Owens Mortgage Investment Fund dated as of August 18,
1995
10.2(2) 1990 Stock Option Plan
10.3(2) 1992 Stock Option Plan
10.4(2)(5) 1995 Stock Option Plan
10.5(2) Form of Indemnification Agreement
10.6.1(2)(4) Distribution Agreement between Registrant and Nippon Polaroid Kabushiki Kaisha dated as of November
12, 1991
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- ---------------------------------------------------------------------------------------------------
<S> <C>
10.6.2(2)(4) 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
10.7(2) Series E Preferred Stock and Warrant Purchase Agreement dated November 6, 1995 among Registrant and
the investors named therein
10.8(2) Employment Agreement dated as of November 1, 1995 between Registrant and Donald B. Witmer
10.9(2) Employment Agreement dated November 8, 1995 between Registrant and Raymond R. Kingman, Jr.
10.10(2) Employment Agreement dated November 8, 1995 between Registrant and William G. Pryor
10.11(2)(4) Agreement dated December 15, 1995 among Registrant, Global Technologies Corporation and William
French
10.12(2) Termination Agreement dated as of November 8, 1995 among the Registrant and certain shareholders of
the Company named therein
10.13(2) Amendment Agreement dated as of December , 1995 among the Registrant and certain shareholders of
the Company named therein
10.14(5) Employment Agreement dated December 26, 1995 between Registrant and William A. French
10.15(3) Separation Agreement and Release between Registrant and Raymond R. Kingman, Jr. dated April 5, 1996
10.16(3) Offer letter dated March 29, 1996 between Registrant and John J. Ambrose
10.17(10) Separation Agreement and Release between Registrant and John J. Ambrose dated July 3, 1997
10.18(6) 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
10.19(7) Offer letter dated as of March 24, 1997 between the Registrant and Jeffrey F. Ait
10.20(3) Series A Preferred Stock Purchase Agreement dated as of May 6, 1997 between Registrant and High
Risk Opportunities Hub Fund, Ltd.
10.21(3) Letter of Intent dated April 16, 1997 among Registrant, Inlet Divestiture Corp., Inlet, Inc., Terry
Millard and Todd Millard
10.22.1(8) Asset Purchase Agreement dated June 27, 1997 between Registrant and SPSS, Inc.
10.22.2(8) Interim Management Agreement dated June 27, 1997 between Registrant and SPSS, Inc.
10.23.1(9) Stock Exchange Agreement dated July 11, 1997 among Registrant, Site/technologies/inc. and the
persons and entities party thereto
10.23.2(9) Registration Rights Agreement dated as of July 11, 1997 by and among Registrant and the persons and
entities party thereto
10.24.1(11) Agreement and Plan of Reorganization dated November 19, 1997 between Registrant and Inlet, Inc.,
Inlet Divestiture Corp. and Inlet Acquisition Corp.
10.24.2(11) Registration Rights Agreement dated as of November 19, 1997 among Registrant and Inlet Inc.
23.2** Consent of Price Waterhouse LLP
24.1** Power of Attorney
</TABLE>
- ------------------------
(1) Incorporated by reference to Registrant's Annual Report on Form 10-KSB
filed March 26, 1997.
(2) Incorporated by reference to Registrant's Registration Statement on Form
SB-2, filed December 19, 1995 (File No. 33-99300).
47
<PAGE>
(3) Incorporated by reference to Registrant's Post-Effective Amendment No. 5 to
Registration Statement on Form SB-2 (File No. 333-3784).
(4) Confidential treatment requested as to certain portions of this exhibit.
(5) Incorporated by reference to Registrant's Registration Statement on Form
S-8 filed March 6, 1996 (File No. 333-2192).
(6) Incorporated by reference to Registrant's Post-Effective Amendment No. 1 to
Registration Statement on Form SB-2, filed February 28, 1997 (File No.
333-17733).
(7) Incorporated by reference to Registrant's Amendment No. 1 to Registration
Statement on Form SB-2 filed April 9, 1997 (File No. 333-22565).
(8) Incorporated by reference to Registrant's filing on Form 8-K filed on July
11, 1997.
(9) Incorporated by reference to Registrant's filing on Form 8-K filed on July
31, 1997.
(10) Incorporated by reference to Registrant's Registration Statement on Form
SB-2 filed August 28, 1998 (File No. 333-34825)
(11) Incorporated by reference to Registrant's filing on Form 8-K filed on
December 12, 1997.
** Filed herewith.
(B) REPORTS ON FORM 8-K
On December 3, 1997, the Company filed an 8-K for the acquisition of Inlet
Divestiture, Inc.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SITE TECHNOLOGIES
Dated: March 30, 1998 By: /s/ JEFFREY F. AIT
-----------------------------------------
Jeffrey F. Ait
CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL
OFFICER AND DIRECTOR
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jeffrey F. Ait, his attorney-in-fact with the
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-KSB, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact, or his substitute or substitutes, may do or cause to
be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chief Financial Officer,
/s/ JEFFREY F. AIT and (Principal Financial
- ------------------------------ and Accounting Officer), March 30, 1998
Jeffrey F. Ait Chief Executive Officer
and Director
/s/ STEVE MENDEL
- ------------------------------ Director March 30, 1998
Steve Mendel
/s/ PATRICK GRADY
- ------------------------------ Director March 30, 1998
Patrick Grady
/s/ THOMAS HOLT
- ------------------------------ Director March 30, 1998
Thomas Holt
49
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY NUMBERED
NUMBER EXHIBITS PAGE
- ----------- ---------------------------------------------------------------------------------------- ---------------------
<S> <C> <C>
23.2 Consent of Price Waterhouse L.L.P., Independent Accountants
27.1 Financial Data Schedule Worksheet
</TABLE>
50
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-07461 and No. 333-22243) of Site Technologies,
Inc. (formerly DeltaPoint, Inc.) of our report dated January 30, 1998, except as
to Note 12 which is as of February 27, 1998, which appears on page 31 in this
Annual Report on Form 10-KSB.
PRICE WATERHOUSE LLP
San Jose, California
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 32 AND 33 OF THE COMPANY'S FORM 10KSB FOR THE YEAR ENDED DECEMBER 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,856
<SECURITIES> 0
<RECEIVABLES> 272
<ALLOWANCES> 176
<INVENTORY> 34
<CURRENT-ASSETS> 4,245
<PP&E> 1,506
<DEPRECIATION> 1,197
<TOTAL-ASSETS> 4,916
<CURRENT-LIABILITIES> 2,151
<BONDS> 0
0
0
<COMMON> 24,602
<OTHER-SE> (21,831)
<TOTAL-LIABILITY-AND-EQUITY> 4,916
<SALES> 1,827
<TOTAL-REVENUES> 1,827
<CGS> 786
<TOTAL-COSTS> 786
<OTHER-EXPENSES> 9,592
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (119)
<INCOME-PRETAX> (8,159)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,159)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,159)
<EPS-PRIMARY> (1.95)
<EPS-DILUTED> (1.95)
</TABLE>
