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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
/ / 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)
CALIFORNIA 77-0216760
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
380 EL PUEBLO RD., SCOTTS VALLEY, CA 95066
(Address of principal executive offices)
408-461-3017
(Registrant's telephone number, including area code)
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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
/ /
State the number of shares outstanding of each of the issuer's classes of
common equity, as of April 30, 1998: 8,516,380
Transitional Small Business Disclosure Format (check one) Yes / / No /X/
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SITE TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
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Part 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets March 31, 1998 (unaudited) and December 31,
1997................................................................................ 3
Condensed Consolidated Statements of Operations (unaudited) Three months ended March
31, 1998 and 1997................................................................... 4
Condensed Consolidated Statements of Cash Flows (unaudited) Three months ended March
31, 1998 and 1997................................................................... 5
Notes to Condensed Consolidated Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Plan of Operations.... 7
Part II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................... 20
Item 6. Exhibits and Reports on Form 8-K...................................................... 20
Signature................................................................................................... 21
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM I. CONSOLIDATED FINANCIAL STATEMENTS
SITE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 2,076 $ 3,856
Accounts receivable, net of allowance for doubtful accounts of $176 and $176........ 103 96
Inventories......................................................................... 32 34
Prepaid expenses and other current assets........................................... 170 259
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Total current assets.............................................................. 2,381 4,245
Property and equipment, net........................................................... 278 309
Purchased software, net............................................................... 258 262
Deposits and other assets............................................................. 74 100
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$ 2,991 $ 4,916
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 640 $ 788
Accrued liabilities................................................................. 751 958
Reserve for returns................................................................. 43 55
Notes payable....................................................................... -- 350
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Total current liabilities......................................................... 1,434 2,151
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Commitments and contingencies
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 8,516,380 and 8,491,380
shares were issued and outstanding................................................ 24,636 24,602
Accumulated deficit................................................................. (23,079) (21,837)
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Total shareholders' equity........................................................ 1,557 2,765
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$ 2,991 $ 4,916
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</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
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SITE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA, UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
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1998 1997
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<S> <C> <C>
Net revenues................................................................................. $ 170 $ 1,023
Cost of revenues............................................................................. 40 320
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Gross profit............................................................................... 130 703
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Operating expenses:
Sales and marketing........................................................................ 754 1,459
Research and development................................................................... 452 731
General and administrative................................................................. 192 238
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1,398 2,428
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Loss from operations......................................................................... (1,268) (1,725)
Interest income (expense), net............................................................... 26 (796)
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Net loss..................................................................................... $ (1,242) $ (2,521)
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Basic and diluted net loss per share......................................................... $ (0.15) $ (1.01)
--------- ---------
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Shares and share equivalents used in per share calculations.................................. 8,516 2,489
--------- ---------
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</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
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SITE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
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1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................................................... $ (1,242) $ (2,521)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................................... 51 70
Amortization of discounted conversion feature of notes payable.......................... -- 537
Change in assets and liabilities:
Accounts receivable....................................................................... (7) 327
Inventories............................................................................... 2 33
Prepaid expenses and other current assets................................................. 89 231
Accounts payable.......................................................................... (148) 151
Accrued liabilities....................................................................... (207) (153)
Reserve for returns....................................................................... (12) (288)
Deposits and other assets................................................................. 26 5
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Net cash used in operating activities................................................... (1,448) (1,608)
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Cash flows from investing activities:
Acquisition of property and equipment..................................................... (16) (7)
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Net cash used in investing activities................................................... (16) (7)
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Cash flows from (used in) financing activities:
Proceeds from issuance of common stock, net............................................... 34 21
Repayment of notes payable................................................................ (350) --
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Net cash provided by financing activities............................................... (316) 21
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Decrease in cash and cash equivalents....................................................... (1,780) (1,594)
Cash and cash equivalents at beginning of period............................................ 3,856 3,142
--------- ---------
Cash and cash equivalents at end of period.................................................. $ 2,076 $ 1,548
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
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SITE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--THE COMPANY AND BASIS OF PRESENTATION:
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.
The condensed consolidated financial statements should be read in
conjunction with the audited financial statements contained in the Company's
Annual Report on Form 10-KSB. In the opinion of management, all adjustments,
including normal recurring accruals, necessary for a fair presentation of the
Company's financial position, results of operations and cash flows for the
interim periods presented have been made. The interim results are not
necessarily indicative of the results to be expected for the entire year.
NOTE 2--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 antidilutive, as was the case for the
three month periods ended March 31, 1998 and 1997.
NOTE 3--REVENUE RECOGNITION:
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 97-2 ("SOP 97-2"). "Software Revenue
Recognition", which the Company has adopted for transactions entered into
beginning January 1, 1998. SOP 97-2 provides guidance for recognizing revenue on
software transactions and supersedes SOP 91-1 "Software Revenue Recognition". In
March 1998, the AICPA issued Statement of Position No. 98-4("SOP 98-4")
"Deferral of the Effective Date of a Provision of SOP 97-2. Software Revenue
Recognition". SOP 98-4 defers, for one year, the application of certain passages
in SOP 97-2, which limit what is considered vendor-specific objective evidence
("VSOE") necessary to recognize revenue for software licenses on
multiple-element arrangements when undelivered elements exist. Additional
guidance is expected to be provided prior to adoption of the deferred provision
of SOP 97-2. The Company will determine the impact, if any, the further guidance
will have on current revenue recognition practices when issued. Adoption of the
remaining provisions of SOP 97-2 did not have a material impact on revenue
recognition during the first quarter of 1998.
NOTE 4--COMPREHENSIVE INCOME (LOSS):
The Company has adopted Statement of Financial Accounting Standards No 130,
"Reporting Comprehensive Income". This Statement requires that all items
recognized under accounting standards as components of comprehensive earnings or
"losses" be reported in an annual financial statement that is displayed with the
same prominence as other annual financial statements. This Statement also
requires that an entity classify items of other comprehensive earnings by nature
in an annual financial statement. For example, other comprehensive earnings may
include foreign currency translation adjustments and unrealized gains and losses
on marketable securities classified as available-for-sale. The Company's
comprehensive losses for the three month periods ended March 31, 1998 and 1997
were identical to the net losses reported in the Condensed Consolidated
Statement of Operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATIONS.
THIS REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT
CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN
"FACTORS THAT MAY AFFECT FUTURE RESULTS" BELOW, IN "RISK FACTORS" IN PART I OF
THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB AT AND FOR THE YEAR ENDED DECEMBER
31, 1997. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS REPORT.
OVERVIEW
CORPORATE EVENTS. The Company was incorporated on February 1, 1989 to
design, develop and market visualization software products for personal
computers. The Company commenced shipments of its initial product, DeltaGraph,
at the end of 1989. The Company conducted its initial public offering in
December 1995 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 March 1998. In March 1998, the Company also released QuickSite 3.0
and in April 1998 the Company announced the release of the enterprise edition of
the SiteSweeper product which is anticipated to ship in May 1998. In light of
these product introductions and in order to conserve its existing cash balances,
the Company has shifted its principal strategic focus from the designing and
engineering of products to the sales and marketing of products. As part of the
strategic shift, the Company intends to focus on a direct sales model and an
Internet sales model. Therefore, in May 1998, the Company rationalized its
workforce significantly. These reductions were made primarily in the areas of
engineering, finance and operations.
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 the Company's
Form 10-KSB for the year ended December 31, 1997.
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
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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 in the Company Form
10-KSB for the year ended December 31, 1997 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").
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.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 97-2 ("SOP 97-2"). "Software Revenue
Recognition", which the Company has adopted for transactions entered into during
the fiscal year beginning January 1, 1998. SOP 97-2 provides guidance for
recognizing revenue on software transactions and supersedes SOP 91-1. "Software
Revenue Recognition". In March 1998, the AICPA issued Statement of Position No.
98-4 ("SOP 98-4"). "Deferral of the Effective Date of a Provision on SOP 97-2.
"Software Revenue Recognition". SOP 98-4 defers, for one year, the application
of certain passages in SOP 97-2 which limit what is considered vendor-specific
objective evidence ("VSOE") necessary to recognize revenue for software licenses
in multiple-element arrangements when undelivered elements exist. Additional
guidance is expected to be provided prior to adoption of the deferred provision
of SOP 97-2. The Company will determine the impact, if any, the additional
guidance will have on current revenue recognition practices when issued.
Adoption of the remaining provisions of SOP 97-2 did not have a material impact
on revenue recognition during the three months ended March 31, 1998.
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 year ended December 31, 1997. The sale of DeltaGraph is not
expected to result in a
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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
DECEMBER 31, 1997
----------------------
ACTUAL PRO FORMA
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<S> <C> <C>
Net Revenues........................................................... $ 1,827 $ 1,197
Loss from Operations................................................... (8,551) $ (9,819)
Gross Profit Percentage................................................ 57.0% 50.0%
</TABLE>
HISTORIC AND ANTICIPATED LOSSES. The Company incurred net losses of
$8,159,000 for the year ended December 31, 1997 and $1,242,000 for the three
months ended March 31, 1998, and had an accumulated deficit of $23,079,000 as of
March 31, 1998. 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 introduction and commercial acceptance
of the Company's Internet software products (including Internet software
products targeted by the Company at the SMB and corporate department user
markets); continued emergence of the evolving Internet software product market;
the Company's success in expanding its use of non-retail distribution channels
for SMB and corporate department user Internet software solutions including
VARs, OEMs and ISPs; the mix of revenues derived from product sales and royalty
fees and the level of product and price competition. In particular, there can be
no assurance that the Company will be successful in its efforts to introduce
additional products targeted at the SMB or the corporate department user market
or to expand its distribution channels in order to service these markets.
FLUCTUATIONS. The Company's results of operations have historically varied
substantially from quarter to quarter and the Company expects they will continue
to do so. In the past, the Company's operating results have varied significantly
as a result of a number of factors, including the size and timing of customer
orders or license agreements, product mix, the revenues derived from product
sales and license fees, the existence and terms of royalty and packaging
arrangements, seasonality, the timing of the introduction and customer
acceptance of new products or product enhancements by the Company's competitors,
new product or version releases by the Company, changes in pricing policies by
the Company or its competitors, marketing and promotional expenditures, research
and development expenditures and changes in general economic conditions.
Furthermore, the Company has often recognized a substantial portion of its
revenues in the last month of each 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.
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
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statements for 1997 and 1996 contains an explanatory paragraph concerning the
Company's ability to continue as a going concern.
RESULTS OF OPERATIONS
NET REVENUES. Net revenues for the three-month period ended March 31, 1998
decreased by 83% to $170,000 from $1,023,000 for the corresponding period in the
prior year. The decrease in revenue was primarily attributable to the June 1997
disposition of the DeltaGraph product line which accounted for $607,000 in
revenue for the first quarter ended March 31, 1997 for which no corresponding
revenue was earned in the first quarter ended March 31, 1998. For the
three-month period ended March 31, 1998, international revenue decreased to 0%
of net revenues compared to 37.3% for the period ended March 31, 1997. The
decrease in international revenues was attributable to the sale of the
DeltaGraph product as the Company's Japanese and major international distributor
principally sold DeltaGraph products. The company expects international revenue
to remain flat until the Company establishes other international distribution
channels. The Company's domestic and international sales are principally
denominated in United States dollars. Movements in currency exchange rates did
not have a material impact on the total revenue in the periods presented.
However, there can be no assurance that future movements in currency exchange
rates will not have a material adverse effect on the Company's future revenues
and results of operations.
GROSS PROFIT. Cost of revenues consists of direct materials, labor,
overhead, freight, post customer support, royalties and contract manufacturing
costs associated with the manufacturing of the Company's products. Gross profit
for the three-month period ended March 31, 1998 increased as a percentage of net
revenues to 76.5% from 68.7% for the corresponding period in the prior fiscal
year. The Company's gross profit has varied quarter to quarter as a result of a
number of factors including changes in customer and product mix, inventory
write-offs due to new product releases and third party royalty obligations for
the Company's Internet products.
SALES AND MARKETING. Sales and marketing expenses include sales
commissions, compensation of sales and marketing personnel and cost of
promotional activities. Sales and marketing expenses for the three month period
ended March 31, 1998 decreased to $754,000 or 443.5% of net revenues compared to
$1,459,000 or 142.6% of revenues for the corresponding period in the prior year.
The decrease in sales and marketing expenses was primarily due to the Company's
continued effort to manage its expenses. The Company expects that sales and
marketing expenses may increase in absolute dollars in future periods to support
further development of the Company's new products and updated versions of the
Company's existing products.
RESEARCH AND DEVELOPMENT. Research and development expenses for the three
month period ended March 31, 1998 decreased to $452,000 or 265.9% of net
revenues compared to $731,000 or 71.5% of revenues for the corresponding period
in the prior year. The decrease in research and development expenses was
primarily due to decrease in staffing and outside consultants.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three month period ended March 31, 1998 decreased in absolute dollars to
$192,000 or 112.9% of net revenues compared to $238,000 or 23.3% of revenues for
the corresponding period in the prior year. The decrease in general and
administrative expenses was primarily attributable to a change in the mix and
number of general and administrative employees. The Company expects that general
and administrative expenses may increase in absolute dollars in future periods
to the extent that the Company expands its operations.
INTEREST INCOME (EXPENSE), NET. Interest income (expense), net includes
interest payable on the Company's convertible promissory notes payable
(converted to common stock during 1997), amortization of the discounted
conversion feature and deferred costs incurred in connection with the issuance
of such notes payable, offset by interest income earned on cash and cash
equivalents. Interest income (expense)
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decreased by $848,000 to $26,000 during the first quarter of fiscal 1998 from
$(796,000) during the comparable 1997 period. This decrease was primarily
attributable to amortization of the discounted conversion feature of convertible
promissory notes payable and the related deferred issuance costs which totaled
$(799,000) during the quarter ended March 31, 1997.
PROVISION FOR INCOME TAXES. There was no provision for taxes during the
three month periods ended March 31, 1998 and 1997 due to net operating losses
and the availability of net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had working capital of $947,000 and
shareholders' equity of $1,557,000. 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.
The Company used net cash in operations of $1,448,000 in the three month
period ended March 31, 1998 and $1,608,000 for the corresponding period of the
prior year. Net cash used in 1998 consisted primarily of a net loss of
$1,242,000. Net cash used in 1997 consisted primarily of a net loss of
$2,521,000 which includes interest and amortization charges totaling $799,000
relating to the convertible promissory notes payable.
Net cash used in financing activities totaled $316,000 in the three month
period ended March 31, 1998 primarily resulting from the repayment of notes
payable totalling $350,000 resulting from the Inlet Technology Acquisition. Net
cash from financing activities in 1997 consisted primarily of $21,000 in net
proceeds for a stock option exercise.
The Company's capital expenditures related primarily to purchases of
personal computers and computer workstations to support the Company's
development work and other property and equipment. For the three month period
ended March 31, 1998 the Company's capital expenditures totaled approximately
$16,000.
At March 31, 1998 the Company's cash and cash equivalents was $2,076,000.
See "Factors That May Affect Future Results--Recent Losses and Expected Losses;
Accumulated Deficit; Going Concern Assumption, Future Capital Needs; No
Assurance of Future Financing"; and "--Dependence on Limited Number of Key
Personnel: Personnel Limitations: Ability to Manage Growth". To the extent the
Company continues to incur losses or grows in the future, its operating and
investing activities will use cash and, consequently, such losses or growth will
require the Company to obtain additional sources of financing in the future and
to continue 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.
***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 $1,242,000 for the three months ended
March 31, 1998 and had an accumulated deficit of $23,079,000 as of March 31,
1998. 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. Although the Company has taken measures to
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reduce its operating expenses, to the extent the Company continues to incur
losses or grows in the future, its operating and investing activities will use
cash and, consequently, such losses or growth will require the Company to obtain
additional sources of financing in the future (including through possible asset
sales) or to continue to further reduce operating expenses. There can be no
assurance that additional financing can be obtained on acceptable terms or at
all.
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 contained in the Company's Annual Report
on Form 10-KSB.
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 focus on Internet software products and its reduced level of
operations, the Company has previously rationalized its workforce, including
administrative and engineering resources. Recently, the Company shifted its
principal strategic focus from the designing and engineering of products to the
sales and marketing of products. As part of this strategic shift and in order to
conserve its cash balances, in May 1998, the Company rationalized its workforce
significantly. These reductions were made primarily in the areas of engineering,
finance and operations. The Company's previous and recent workforce
rationalization has challenged, and will 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 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 target markets would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "--Distribution Risks: Substantial Reseller Customer Concentration" and
"Rapid Technological Change; Risk of Product Delays: Risk of Product Defects."
The Company's 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
improve its financial systems and controls in conjunction 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."
DEPENDENCE ON INTERNET SOFTWARE PRODUCTS AND RELATED STRATEGY; DEPENDENCE ON
CONTINUED EMERGENCE OF INTERNET SOFTWARE MARKET.
Prior to 1996, the Company derived substantially all of its product revenues
from licenses of DeltaGraph charting and graphics software products. With the
DeltaGraph Disposition, the Company's
12
<PAGE>
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 quality control product for the Web professional; QuickSite 3.0, its updated
version of QuickSite 2.5, introduced in March 1998; SiteMaster 4.0 its
client/server, multi-authoring, dynamic site development and management product
and SiteSweeper 2.0 Enterprise Edition, its enterprise edition of its quality
control product for the Web professional which is anticipated to be released in
May 1998. 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 introduced SiteMaster 4.0, a
client/server, multi-authoring site, dynamic development and management solution
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
13
<PAGE>
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. 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.
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 has
de-emphasized 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 VAR, OEM and 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, 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 a significant portion of the Company's
retail software sales in the past. Sales to Ingram Micro Inc. constituted
approximately 15% of the Company's revenues from the sale of Internet products
for the three months ended March 31, 1998. The Company is currently
de-emphasizing its sales through the retailers, however 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, could, unless or until replaced, materially adversely affect the
Company's business, financial condition and results of operations in the near
future. 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.
14
<PAGE>
RAPID TECHNOLOGICAL CHANGE; RISK OF PRODUCT DELAYS; RISK OF PRODUCT DEFECTS
The markets in which the Company competes are characterized by ongoing
technological developments, frequent new product announcements and
introductions, evolving industry standards and changing customer requirements.
The introduction of products embodying new technologies and the emergence of new
industry standards and practices can render existing products obsolete and
unmarketable. The Company's future success depends upon its ability on a timely
basis to enhance its existing products, introduce new products that address the
changing requirements of its customers and anticipate or respond to
technological advances, emerging industry standards and practices in a timely,
cost-effective manner. There can be no assurance that the Company will be
successful in developing, introducing and marketing new products or enhancements
to existing products or will not experience difficulties that could delay or
prevent the successful development, introduction or marketing of these products,
or that its new products and product enhancements will adequately meet the
requirements of the marketplace and achieve any significant degree of commercial
acceptance. Software products such as those offered by the Company often contain
errors or "bugs" that can adversely affect the performance of the product or
damage a user's data. The Company has in the past discovered software defects in
its products that have adversely affected its business and operating results. If
the Company is unable, for technological or other reasons, to develop and
introduce new products or enhancements of existing products in a timely manner
or if new versions of existing products contain unacceptable levels of product
defects or do not achieve a significant degree of market acceptance, or any of
the above situations occur there could be a material adverse effect on the
Company's business, financial condition and results of operations.
COMPETITION
The Company competes on the basis of certain factors, including product
quality, first-to-market product capabilities, product performance, ease of use,
customer support and price. The Company believes it currently competes favorably
overall with respect to these factors.
The 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.
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
15
<PAGE>
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 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.
16
<PAGE>
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
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company's revenues from international operations accounted for
approximately 11%, 8% and 0% of the Company's net revenues in 1996, 1997 and the
three month period ended March 31, 1998, respectively, all of which were derived
from sales in Japan to Nippon Polaroid Kabushiki Kaisha, the Company's Japanese
distributor. In light of the recent DeltaGraph Disposition, the Company expects
that international Internet revenues will remain flat until 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 difficulties in accounts
receivable collection, longer payment cycles, exposure to currency fluctuations,
political and economic instability and the burden of complying with a wide
variety of foreign laws and regulatory requirements. The Company also believes
that it is exposed to greater levels of software piracy in international markets
because of the weaker protection afforded to intellectual property in some
foreign jurisdictions
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
17
<PAGE>
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 and since its secondary
offering of shares in October 1997. 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
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.
18
<PAGE>
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. ("HJ
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.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no material pending legal proceedings against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Special Meeting of Shareholders on January 16, 1998, the
following proposals were approved:
<TABLE>
<CAPTION>
AFFIRMATIVE NEGATIVE VOTES BROKER
VOTES VOTES WITHHELD NON-VOTES
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
1. Amendment to the Company's Articles of Incorporation
to change the Company's name to "Site Technologies,
Inc."................................................. 7,094,197 61,715 34,300 --
2. Amendment to the 1995 Stock Option Plan, increasing
the reserved shares by 1,200,000, provide a maximum
number of shares subject to option or stock
appreciation rights that may be granted annually to a
single employee under the Option Plan, be 500,000
shares, that in the first year of employment, an
employee may receive a grant of up to 400,000 shares,
increase the number of shares that will be granted to
new members of the Company's Board of Directors to a
one-time grant of 50,000 and an automatic annual grant
of 2,500 and to allow discretionary grants of stock
options to all non-employee members of the Company's
Board of Directors.................................... 1,528,165 371,638 100,330 5,190,079
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
On January 23, 1998 the Company filed an 8-K announcing the approval by the
Company's shareholders to amend the Articles of the Incorporation to change the
Company's name to Site Technologies, Inc.
EXHIBITS
<TABLE>
<C> <S>
27.1 Financial Data Schedule
</TABLE>
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
SITE TECHNOLOGIES, INC.
By: /s/ JEFFREY F. AIT
-----------------------------------------
Jeffrey F. Ait
CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER AND
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
Date: May 15, 1998
21
<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 3 AND 4 OF THE COMPANY'S FORM 10-QSB FOR THE YEAR-TO-DATE AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,076
<SECURITIES> 0
<RECEIVABLES> 279
<ALLOWANCES> 176
<INVENTORY> 32
<CURRENT-ASSETS> 2,381
<PP&E> 1,506
<DEPRECIATION> 1,228
<TOTAL-ASSETS> 2,991
<CURRENT-LIABILITIES> 1,434
<BONDS> 0
0
0
<COMMON> 24,636
<OTHER-SE> (23,079)
<TOTAL-LIABILITY-AND-EQUITY> 1,557
<SALES> 170
<TOTAL-REVENUES> 170
<CGS> 40
<TOTAL-COSTS> 40
<OTHER-EXPENSES> 1,398
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,242)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,242)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,242)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
