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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-27328
SITE TECHNOLOGIES, INC.
(formerly DeltaPoint, Inc.)
(Exact Name of Registrant as specified in its charter)
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California 77-0216760
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
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380 El Pueblo Rd., Scotts Valley, CA 95066
(Address of principal executive offices)
408-461-3017
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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State the number of shares outstanding of each of the issuer's classes of common
equity, as of October 31, 1998: 8,516,380
Transitional Small Business Disclosure Format (check one) Yes No X
--- ---
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SITE TECHNOLOGIES, INC.
INDEX
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Page
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Part 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1998 (unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Operations (unaudited)
Three months and nine months ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 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
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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)
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SEPT. 30, DECEMBER 31,
1998 1997
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(UNAUDITED)
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ASSETS
Current assets:
Cash and cash equivalents............................... $ 365 $ 3,856
Accounts receivable, net of allowance for doubtful
accounts of $176 and $176........................... 47 96
Inventories ............................................ 39 34
Prepaid expenses and other current assets............... 70 259
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Total current assets............................ 521 4,245
Property and equipment, net............................... 195 309
Purchased software, net .................................. 215 262
Deposits and other assets................................. 47 100
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$ 978 $ 4,916
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 249 $ 788
Accrued liabilities..................................... 424 958
Reserve for returns..................................... 3 55
Notes payable ......................................... -- 350
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Total current liabilities....................... 676 2,151
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..................................... (24,334) (21,837)
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Total shareholders' equity ..................... 302 2,765
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$ 978 $ 4,916
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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)
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
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1998 1997 1998 1997
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Net revenues................... $ 42 $ 182 $ 270 $ 1,677
Cost of revenues............... 4 84 59 553
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Gross profit................. 38 98 211 1,124
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Operating expenses:
Sales and marketing.......... 166 684 1,349 2,926
Research and development..... 264 1,245 1,069 2,592
General and administrative... 107 181 416 660
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537 2,110 2,834 6,178
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Loss from operations........... (500) (2,012) (2,623) (5,054)
Interest income (expense), net. 3 1 46 ( 816)
Other income................... 80 400 80 1,171
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Net loss ...................... $ (417) $(1,611) $(2,497) $ (4,699)
=========== =========== ============ ===========
Net loss per share ............ $ (0.04) $ (0.46) $ (0.29) $ (1.58)
=========== =========== ============ ===========
Shares used in per share
calculations................... 8,516 3,489 8,516 2,966
=========== =========== ============ ===========
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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)
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NINE MONTHS ENDED
SEPTEMBER 30,
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1998 1997
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Cash flows from operating activities:
Net loss................................................. $ (2,497) $(4,699)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization....................... 185 422
In process research and development................. -- 500
Amortization of discounted conversion feature of
notes payable..................................... -- 537
Gain on V-Search disposition/ DeltaGraph disposition.. (80) (1,771)
Change in assets and liabilities:
Accounts receivable............................... 49 1,547
Inventories....................................... (5) (13)
Prepaid expenses and other current assets......... 189 (81)
Accounts payable.................................. (539) 159
Accrued liabilities............................... (534) (591)
Reserve for returns............................... (52) (676)
Deposits and other assets......................... 53 (67)
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Net cash used in operating activities.......... (3,231) (4,133)
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Cash flows from investing activities:
Acquisition of property and equipment................. (24) (80)
V-Search disposition /DeltaGraph disposition.......... 80 1,171
Site Tech Acquisition (net of cash acquired).......... -- (24)
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Net cash used in investing activities.......... 56 1,067
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Cash flows from financing activities:
Proceeds from issuance of common stock, net............ 34 22
Dividend payable....................................... -- (13)
Repayment of notes payable............................. (350) --
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Net cash provided by financing activities...... (316) 9
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Decrease in cash and cash equivalents................... (3,491) (3,057)
Cash and cash equivalents at beginning of period........ 3,856 3,142
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Cash and cash equivalents at end of period.............. $ 365 $ 85
========== =========
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
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SITE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLDIATED 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 provides
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
shares 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 and nine-month periods ended September 30, 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, second and third quarters of 1998.
NOTE 4 -- COMPREHENSIVE INCOME:
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 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 September 30, 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 May 1998 the Company released the enterprise edition of the SiteSweeper
product.
In light of its diminishing cash balances (due primarily to limited
revenues from its newly introduced products), in May and June 1998 the Company
significantly rationalized its workforce, reducing its head count from 33 to 11,
and significantly reduced its expenses and operations in the areas of sales and
marketing. In June 1998, the Company also hired a financial advisory firm,
Alliant Partners, to aid it in evaluating strategic options. At its June 19,
1998 annual shareholders meeting, the Company's shareholders elected six
directors, of whom four have since resigned. These actions significantly
increase the Company's reliance on the remaining directors (Messrs. Jeffrey Ait
and Terry Millard), particularly Mr. Ait who is also the Company's Chief
Executive Officer and Chief Financial Officer. In order to converse its limited
remaining cash balances, the Company has sharply curtailed operational
activities since June 1998 by, among other things, further reducing
non-technology headcount (eliminating sales and marketing personnel) and
limiting related marketing expenditures. In addition, the remaining directors
have continued to focus on evaluating strategic options for the Company,
including a sale of the Company to a third party or a sale of the Company's
assets. There can be no assurance that the Company can successfully identify an
acceptable strategic option or that such strategic option, once identified, will
be consummated on a timely basis or at all.
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 assets related to its DeltaGraph software
product for $910,000 in cash to SPSS Inc. ("SPSS"). 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. As part of the DeltaGraph Disposition, DeltaPoint 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
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disposition provided the Company with much needed liquidity.
V-Search Disposition. On September 30, 1998, the Company consummated the
sale of its V-Search technology and related patents. This was technology that
the Company acquired in the Site Tech Acquisition. The Company sold the assets
relating to V-Search in cash to Daniel Edgar. The Company received a cash
payment of $100,000.
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 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 increased its use of non-retail distribution channels including value
added resellers ("VARs"), original equipment manufacturers ("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 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
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 September 30, 1998.
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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, if any, will be entirely
dependent on the success of its Internet software products (the success of which
is limited by the Company's current cash situation). 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 significant reduction in operating expenses. To the
extent the Company is able to secure a strategic partnership, the Company plans
to continue its investment in developing new and updated versions of its
Internet software products.
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For the Year Ended
December 31, 1997
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Actual Pro Forma
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Net Revenues $ 1,827 $ 1,197
Loss from Operations (8,551) $(9,819)
Gross Profit Percentage 57.0% 50.0%
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Historic and Anticipated Losses. The Company incurred net losses of
$8,159,000 for the year ended December 31, 1997 and $2,497,000 for the nine
months ended September 30, 1998, and had an accumulated deficit of $24,334,000
as of September 30, 1998. In light of the Company's current cash and personnel
constraints, unless the Company is able to secure a strategic partner, it
currently expects to incur operating losses indefinitely. The Company's future
operating results will depend on many factors, including strategic partnerships,
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 secure a
strategic partner or 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.
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. There can be no assurance the
Company will be profitable on a quarter to quarter or any other basis in the
future.
Critical Need for Capital; Going Concern Assumption. Due to the Company's
accumulated losses, the report of the Company's independent accountants,
PricewaterhouseCoopers 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.
As of September 30, 1998 the Company's cash and cash equivalents totaled
approximately $365,000. The Company anticipates that its existing capital
resources and cash generated from operations, if any, will be sufficient to meet
the Company's cash requirements at its reduced level of operations only through
approximately December 1998. The Company has recently retained a financial
advisory service to assist in exploring the Company's strategic options. There
is no assurance that any strategic option will be available to the Company on
acceptable terms, or at all.
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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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net Revenues. Net revenues for the three-month period ended September 30,
1998 decreased by 77% to $42,000 from $182,000 for the corresponding period in
the prior year. The decrease in revenue was primarily attributable to the
Company's reduction in operating expenses, which together with the related
reduction in headcount, significantly reduced the Company's ability to market
its newly released products. For the three-month period ended September 30, 1998
and 1997, there were no international revenues. The Company's domestic and
international sales have been 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 September 30, 1998 increased as a percentage of
net revenues to 90% from 54% 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 September 30, 1998 decreased, in absolute dollars, to $166,000 or 395% of
net revenues compared to $684,000 or 376% 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 reduce its expenses including
through headcount reductions.
Research and Development. Research and development expenses for the three
month period ended September 30, 1998 decreased to $264,000 or 628% of net
revenues compared to $1,245,000 or 684% of revenues for the corresponding period
in the prior year. The decrease in research and development expenses was
primarily due to a $500,000 write-off for the portion of the Site Tech
Acquisition technology determined to be in-process research and development and
a $89,000 severance charge relating to the departure of one of the Company's
founders during the period ended September 30, 1997. In addition, there was a
decrease in staffing and outside consultants due to the Company's continued
effort to reduce its expenses.
General and Administrative. General and administrative expenses for the
three month period ended September 30, 1998 decreased in absolute dollars to
$107,000 or 254% of net revenues compared to $181,000 or 99% of revenues for the
corresponding period in the prior year. The decrease in general and
administrative expenses, in absolute dollars, was primarily attributable to a
decrease in staffing.
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Interest income, net. Interest income, 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 increased
by $2,000 to $3,000 during the third quarter of fiscal 1998 from $1,000 during
the comparable 1997 period. This increase was primarily attributable to interest
earned on the Company's cash and cash equivalent balances.
Other income. Other income for the three months ended September 30, 1998
consists entirely of the one-time gain resulting from the disposition of the
Company's V-Search technology and patent. The other income for the three months
ended September 30, 1997 consists entirely of the one-time gain resulting from
the management fee relating to the DeltaGraph Disposition consummated on June
27, 1997.
Provision for Income Taxes. There was no provision for taxes during the
three-month periods ended September 30 1998 and 1997 due to net operating losses
and the availability of net operating loss carryforwards.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net Revenues. Net revenues for the nine-month period ended September 30,
1998 decreased by 84% to $270,000 from $1,677,000 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
$659,000 in revenue for the nine months ended September 30, 1997 for which no
corresponding revenue was earned in the nine months ended September 30, 1998 and
the Company's reduction in operating expenses which significantly reduced the
Company's ability to market its newly released products. For the nine-month
period ended September 30, 1998, international revenue decreased to 0% of net
revenues compared to 23.7% for the period ended September 30, 1997. The decrease
in international revenues was attributable to the sale of the DeltaGraph product
line as the Company's Japanese and major international distributor principally
sold DeltaGraph products. The Company expects limited international revenue.
Gross Profit. Gross profit for the nine-month period ended September 30,
1998 increased as a percentage of net revenues to 78% from 67% 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 for the nine month period
ended September 30, 1998 decreased in absolute dollars to $1,349,000 or 499% of
net revenues compared to $2,926,000 or 174% of revenues for the corresponding
period in the prior year. The decrease in sales and marketing expenses, in
absolute dollars, was primarily due to the Company's continued effort to reduce
its expenses.
Research and Development. Research and development expenses for the nine
month period ended September 30, 1998 decreased in absolute dollars to
$1,069,000 or 395% of net revenues compared to $2,592,000 or 155% of revenues
for the corresponding period in the prior year. The decrease in research and
development expenses, in absolute dollars, was primarily due to decrease in
staffing and outside consultants. In addition, there was a $500,000 write-off
for the portion of the Site Tech Acquisition technology determined to be
in-process research and development and a $89,000 severance charge relating to
the departure of one of the Company's founders during the nine month period
ending September 30, 1997.
General and Administrative. General and administrative expenses for the
nine month period ended September 30, 1998 decreased in absolute dollars to
$416,000 or 154% of net revenues compared to $660,000 or 39% of revenues for the
corresponding period in the prior year. The decrease in general and
administrative expenses, in absolute dollars, was primarily attributable to a
decrease in staffing. General and administrative expenses may increase in
absolute dollars in future periods to the extent that the Company may expand its
operations.
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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) during the first nine months of 1998
increased to $46,000 from $(852,000) during the first nine months of 1997. This
increase was primarily attributable to the recognition of the discounted
conversion feature of the Convertible Notes and the related deferred debt
issuance costs which totaled $(799,000) in the nine months ended September 30,
1997.
Other income. Other income for the nine months ended September 30, 1998
consists entirely of the one-time gain resulting from the sale of the Company's
V-Search technology and patent. The other income for the nine months ended
September 30, 1997 consists entirely of the one-time gain resulting from the
DeltaGraph Disposition consummated on June 27, 1997 and the related management
fee.
Provision for Income Taxes. There was no provision for taxes during the
nine-month period ended September 30 1998 and 1997 due to net operating losses
and the availability of net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had a working capital deficit of
$155,000 and shareholders' equity of $302,000. 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 the sale of the DeltaGraph product line and other limited assets
sales. 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 $3,231,000 in the nine-month
period ended September 30, 1998 and $4,133,000 for the corresponding period of
the prior year. Net cash used in 1998 consisted primarily of a net loss of
$2,497,000. Net cash used in 1997 consisted primarily of a net loss of
$4,699,000 offset by non-cash items and other working capital changes.
Net cash used in financing activities totaled $316,000 in the nine month
period ended September 30, 1998 primarily resulting from the repayment of notes
payable totaling $350,000 resulting from the Inlet Technology Acquisition. Net
cash provided by financing activities were insignificant during the nine-month
period ended September 30, 1997. Net cash from financing activities in the first
nine months of 1997 consisted of the exercise of stock options and the common
stock issued in the Site Tech acquisition.
During the nine-period ended September 30, 1998, 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 nine-month period ended September 30, 1998 the Company's
capital expenditures totaled approximately $24,000. Net cash provided by
investing activities during the nine months ended September 30, 1997 totaled
$1,067,000 and primarily resulted from the DeltaGraph Disposition offset by
property and equipment purchases.
At September 30, 1998 the Company's cash and cash equivalents was $365,000.
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.
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THE YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer programs
that have date-sensitive software may recognize a date using "00" as the
calendar year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company is currently assessing its exposure but believes that it has
limited exposure to Year 2000 issues for the products it has sold.
The Company has begun its assessment of its systems affected by the Year
2000 issue and anticipates that it will not be required to modify or replace
significant portions of its software so that its computer systems will properly
utilize dates past December 31, 1999.
There can be no guarantee that the systems of other companies on which the
Company's systems rely will be timely converted, or that a failure to convert by
another company, or a conversion that is incompatible with the Company's systems
would not have a material adverse effect on the Company.
***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 $2,497,000 for the nine months ended
September 30, 1998 and had an accumulated deficit of $24,334,000 as of September
30, 1998. In light of the Company's current cash and personnel constraints,
unless the Company consummates an acceptable strategic option, it currently
expects to incur operating losses indefinitely. There can be no assurance that
the Company will not incur significant additional losses, will successfully
identify a strategic option, 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 reduce its
operating expenses and to identify a strategic option, 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 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.
At September 30, 1998 the Company's cash and cash equivalents totaled
approximately $365,000. The Company anticipates that its existing capital
resources and cash generated from operations, if any, will be sufficient to meet
the Company's cash requirements at its reduced level of operations only through
December 1998. The Company has recently retained a financial advisory service to
assist in exploring the Company's strategic options. There can be no assurance
that any strategic option will be available to the Company on acceptable terms,
or at all. The Company's future capital requirements will depend upon numerous
factors, including the amount of revenues generated from operations and the
progress of the
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Company's ability to locate a strategic option or partner, none of which can be
predicted with certainty. The Company has experienced in the past, and expects
to continue to experience, operational difficulties and delays in product
development and marketing activities due to working capital constraints. Any
such difficulties or delays could have a materially adverse effect on the
Company's business, financial condition and results of operations.
Dependence on Limited Number of Key Personnel and Directors; Personnel
Limitations; Ability to Manage Growth
The Company's success depends substantially upon the contributions of
several key personnel. In June and July of 1998, four of the six directors
elected at the Company's annual shareholders meeting resigned. These actions
significantly increase the Company's reliance on the remaining directors
(Messrs. Jeffrey Ait and Terry Millard), particularly Mr. Ait who is also the
Company's Chief Executive Officer and Chief Financial Officer. The failure to
attract and retain key personnel and directors 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 continuing
through September 30, 1998 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 took several steps in order to conserve its cash balances.
In order to conserve its cash balances, in May 1998, the Company rationalized
its workforce significantly by reducing its headcount from 33 to 11. 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." 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 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 was 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, particularly in light of the Company's minimal
operations and activities. 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
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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 and may consider an
acquisition or a strategic option. 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. 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 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. Based on the Company's restricted operations and marketing
activities, there can be no assurance that the Company will be able to
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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. 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.
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 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,
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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 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 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."
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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 each 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 or finds a strategic partner, the Company intends
to continue to make significant expenditures to enhance its sales and marketing
activities and to continue to make significant expenditures for research and
development activities. As such expenditures occur, the Company may be unable to
reduce such expenditures quickly if revenue is less than expected. The Company
generally does not operate with a significant order backlog and a substantial
portion of its revenue in any quarter is derived from orders booked in that
quarter, which are difficult to forecast and which are typically concentrated at
the end of the quarter. Accordingly, the Company's sales expectations are based
almost entirely on its internal estimates of future demand and not on firm
customer orders. Due to the foregoing factors, the Company believes that quarter
to quarter comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
In addition, 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
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
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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 currently 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 has
adversely affected the ability and 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.
In addition to being adversely impacted by poor operating results and cash
constraints, the trading price and liquidity of the Company's stock has been
adversely impacted by the lack of a significant market maker. In September 1998,
H.J. Meyers & Co., the principal market maker for the Company's stock, ceased
operations. The Company does not know when it will be able to replace H.J.
Meyers & Co., and the lack of a significant market maker will continue to
adversely impact the liquidity and market price of the Company's stock.
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.
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PART II. OTHER INFORMATION
<TABLE>
<S> <C>
ITEM 1. LEGAL PROCEEDINGS.
There are no material pending legal proceedings against the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) LIST OF EXHIBITS
27.1 Financial Data Schedule
</TABLE>
- --------
- --------------------------------------------------------------------------------
20
<PAGE> 21
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.
SITE TECHNOLOGIES, INC.
By: /s/ Jeffrey F. Ait
-------------------------------------
Jeffrey F. Ait
Chief Executive Officer and
Chief Financial Officer and
(Principal Accounting Officer)
Date: November 9, 1998
21
<PAGE> 22
EXHIBIT INDEX
Exhibit
Number Description
- ------- ------------------------------------------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGE 3 AND 4 OF THE COMPANY'S FORM 10QSB FOR THE YEAR-TO-DATE.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 365
<SECURITIES> 0
<RECEIVABLES> 223
<ALLOWANCES> 176
<INVENTORY> 39
<CURRENT-ASSETS> 521
<PP&E> 1,515
<DEPRECIATION> 1,320
<TOTAL-ASSETS> 978
<CURRENT-LIABILITIES> 676
<BONDS> 0
0
0
<COMMON> 24,636
<OTHER-SE> (24,334)
<TOTAL-LIABILITY-AND-EQUITY> 978
<SALES> 270
<TOTAL-REVENUES> 270
<CGS> 59
<TOTAL-COSTS> 59
<OTHER-EXPENSES> 2,834
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,497)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,497)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,497)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
