-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OqQuFCpu+dEPqtA+pEGwaP6yrYewguz0pPbbX1AVD/GR1IZdTB+DaOz7yac5JjEw zICMEGZ0BAUkeL0X/leypQ== 0001047469-98-030820.txt : 19980814 0001047469-98-030820.hdr.sgml : 19980814 ACCESSION NUMBER: 0001047469-98-030820 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SITE TECHNOLOGIES INC CENTRAL INDEX KEY: 0001003754 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770216760 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-11741 FILM NUMBER: 98684344 BUSINESS ADDRESS: STREET 1: 380 EL PUEBLO DR STREET 2: STE 100 CITY: SCOTTS VALLEY STATE: CA ZIP: 95066-4212 BUSINESS PHONE: 4086484000 MAIL ADDRESS: STREET 1: 380 EL PUEBLO DRIVE STREET 2: STE 100 CITY: SCOTTS VALLEY STATE: CA ZIP: 95066-4212 10QSB 1 10QSB - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 JUNE 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) 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) ------------------------ Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / State the number of shares outstanding of each of the issuer's classes of common equity, as of July 31, 1998: 8,516,380 Transitional Small Business Disclosure Format (check one) Yes / / No /X/ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SITE TECHNOLOGIES, INC. INDEX
PAGE ----- Part I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Condensed Consolidated Balance Sheets June 30, 1998 (unaudited) and December 31, 1997... 3 Condensed Consolidated Statements of Operations (unaudited) Three months and six months ended June 30, 1998 and 1997.......................................................... 4 Condensed Consolidated Statements of Cash Flows (unaudited) Six months ended June 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....................................................................... 21 Item 6. Exhibits and Reports on Form 8-K........................................................ 21 Signature..................................................................................................... 22
2 PART I. FINANCIAL INFORMATION ITEM I. CONSOLIDATED FINANCIAL STATEMENTS SITE TECHNOLOGIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT NUMBER OF SHARES)
DECEMBER 31, 1997 JUNE 30, ------------ 1998 ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents........................................................... $ 796 $ 3,856 Accounts receivable, net of allowance for doubtful accounts of $176 and $176........ 51 96 Inventories......................................................................... 40 34 Prepaid expenses and other current assets........................................... 76 259 ----------- ------------ Total current assets.............................................................. 963 4,245 Property and equipment, net........................................................... 241 309 Purchased software, net............................................................... 237 262 Deposits and other assets............................................................. 46 100 ----------- ------------ $ 1,487 $ 4,916 ----------- ------------ ----------- ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.................................................................... $ 299 $ 788 Accrued liabilities................................................................. 464 958 Reserve for returns................................................................. 6 55 Notes payable....................................................................... -- 350 ----------- ------------ Total current liabilities......................................................... 769 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................................................................. (23,918) (21,837) ----------- ------------ Total shareholders' equity........................................................ 718 2,765 ----------- ------------ $ 1,487 $ 4,916 ----------- ------------ ----------- ------------
The accompanying notes are an integral part of these condensed financial statements. 3 SITE TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA, UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 -------------------- -------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Net revenues............................................................ $ 57 $ 472 $ 227 $ 1,495 Cost of revenues........................................................ 14 150 54 470 --------- --------- --------- --------- Gross profit.......................................................... 43 322 173 1,025 --------- --------- --------- --------- Operating expenses: Sales and marketing................................................... 429 782 1,183 2,241 Research and development.............................................. 353 616 805 1,347 General and administrative............................................ 119 241 311 479 --------- --------- --------- --------- 901 1,639 2,299 4,067 --------- --------- --------- --------- Loss from operations.................................................... (858) (1,317) (2,126) (3,042) Interest (expense) income, net.......................................... 17 (21) 43 (817) Other income............................................................ -- 771 -- 771 --------- --------- --------- --------- Net loss................................................................ $ (841) $ (567) $ (2,083) $ (3,088) --------- --------- --------- --------- --------- --------- --------- --------- Net loss per share...................................................... $ (0.09) $ (0.21) $ (0.24) $ (1.20) --------- --------- --------- --------- --------- --------- --------- --------- Shares used in per share calculations................................... 8,516 2,652 8,516 2,571 --------- --------- --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these condensed financial statements. 4 SITE TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS, UNAUDITED)
SIX MONTHS ENDED JUNE 30, -------------------- 1998 1997 --------- --------- Cash flows from operating activities: Net loss..................................................................................... $ (2,083) $ (3,088) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................................................ 118 342 Amortization of discounted conversion feature of notes payable........................... -- 537 Gain on DeltaGraph disposition............................................................. -- (771) Change in assets and liabilities: Accounts receivable...................................................................... 45 1,092 Inventories.............................................................................. (6) 16 Prepaid expenses and other current assets................................................ 183 (129) Accounts payable......................................................................... (489) 67 Accrued liabilities...................................................................... (494) (223) Reserve for returns...................................................................... (49) (546) Deposits and other assets................................................................ 54 4 --------- --------- Net cash used in operating activities.................................................. (2,721) (2,699) --------- --------- Cash flows from investing activities: Acquisition of property and equipment...................................................... (23) (24) DeltaGraph disposition..................................................................... -- 771 --------- --------- Net cash used in investing activities.................................................. (23) 747 --------- --------- Cash flows from financing activities: Proceeds from issuance of common stock, net................................................ 34 21 Repayment of notes payable................................................................. (350) -- --------- --------- Net cash provided by financing activities.............................................. (316) 21 --------- --------- Decrease in cash and cash equivalents........................................................ (3,060) (1,931) Cash and cash equivalents at beginning of period............................................. 3,856 3,142 --------- --------- Cash and cash equivalents at end of period................................................... $ 796 $ 1,211 --------- --------- --------- ---------
The accompanying notes are an integral part of these condensed financial statements. 5 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 six-month periods ended June 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 and second quarter 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 June 30, 1998 and 1997 were identical to the net losses reported in the Condensed Consolidated Statement of Operations. 6 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 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, with the primary focus being the identification of a strategic partner for the Company. At its June 19, 1998 annual shareholders meeting, the Company's shareholders elected six directors, of whom four have since resigned to pursue other activities. 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 Company is currently evaluating the addition of other directors, if necessary, and with the assistance of Alliant is actively seeking to identify a successful strategic partner (of which there can be no assurance). 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 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 7 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 plans to significantly increase 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 June 30, 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 significant reduction in operating expenses. To the extent the Company is able to secure a strategic 8 partnership, the Company plans to continue its investment in developing new and updated versions of its Internet software products.
FOR THE YEAR ENDED DECEMBER 31, 1997 ---------------------- ACTUAL PRO FORMA --------- ----------- Net Revenues........................................................... $ 1,827 $ 1,197 Loss from Operations................................................... (8,551) $ (9,819) Gross Profit Percentage................................................ 57.0% 50.0%
HISTORIC AND ANTICIPATED LOSSES. The Company incurred net losses of $8,159,000 for the year ended December 31, 1997 and $2,083,000 for the six months ended June 30, 1998, and had an accumulated deficit of $23,918,000 as of June 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, Price Waterhouse LLP, with respect to the Company's consolidated financial statements for 1997 and 1996 contains an explanatory paragraph concerning the Company's ability to continue as a going concern. As of June 30, 1998 the Company's cash and cash equivalents totaled approximately $796,000. 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. 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 9 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 JUNE 30, 1998 AND 1997 NET REVENUES. Net revenues for the three-month period ended June 30, 1998 decreased by 87% to $57,000 from $472,000 for the corresponding period in the prior year. The decrease in revenue was primarily attributable to the Company's reduction in operating expenses which significantly reduced the Company's ability to market its newly released products and the June 1997 disposition of the DeltaGraph product line which accounted for $51,000 in revenue for the second quarter ended June 30, 1997 for which no corresponding revenue was earned in the second quarter ended June 30, 1998. For the three-month period ended June 30, 1998, international revenue decreased to 0% of net revenues compared to 3.2% for the period ended June 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 international revenue to remain flat unless the Company establishes other international distribution channels. 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 June 30, 1998 increased as a percentage of net revenues to 75% from 68% 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 June 30, 1998 decreased in absolute dollars to $429,000 or 752% of net revenues compared to $782,000 or 166% 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. 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, if the Company is successful in obtaining a strategic relationship. RESEARCH AND DEVELOPMENT. Research and development expenses for the three month period ended June 30, 1998 decreased in absolute dollars to $353,000 or 619% of net revenues compared to $616,000 or 131% 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. GENERAL AND ADMINISTRATIVE. General and administrative expenses for the three month period ended June 30, 1998 decreased in absolute dollars to $119,000 or 208% of net revenues compared to $241,000 or 51% 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 10 administrative expenses may increase in absolute dollars in future periods to the extent that the Company may expand 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) increased by $38,000 to $17,000 during the second quarter of fiscal 1998 from $(21,000) 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 June 30, 1997 consists entirely of the one-time gain resulting from the DeltaGraph Disposition consummated on June 27, 1997. PROVISION FOR INCOME TAXES. There was no provision for taxes during the three month periods ended June 30 1998 and 1997 due to net operating losses and the availability of net operating loss carryforwards. SIX MONTHS ENDED JUNE 30, 1998 AND 1997 NET REVENUES. Net revenues for the six month period ended June 30, 1998 decreased by 84% to $227,000 from $1,495,000 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 second quarter ended June 30, 1997 for which no corresponding revenue was earned in the six months ended June 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 six-month period ended June 30, 1998, international revenue decreased to 0% of net revenues compared to 26.8% for the period ended June 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 international revenue to remain flat unless the Company establishes other international distribution channels. GROSS PROFIT. Gross profit for the six-month period ended June 30, 1998 increased as a percentage of net revenues to 76% 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 six month period ended June 30, 1998 decreased in absolute dollars to $1,183,000 or 521% of net revenues compared to $2,241,000 or 150% 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. 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, if the Company is successful in obtaining a strategic relationship. RESEARCH AND DEVELOPMENT. Research and development expenses for the six month period ended June 30, 1998 decreased in absolute dollars to $805,000 or 354% of net revenues compared to $1,347,000 or 90% 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. GENERAL AND ADMINISTRATIVE. General and administrative expenses for the six month period ended June 30, 1998 decreased in absolute dollars to $311,000 or 137% of net revenues compared to $479,000 or 11 32% 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. 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 six months of 1998 increased to $43,000 from $(817,000) during the first six 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 six months ended June 30, 1997. OTHER INCOME. Other income for the six months ended June 30, 1997 consists entirely of the one-time gain resulting from the DeltaGraph Disposition consummated on June 27, 1997. PROVISION FOR INCOME TAXES. There was no provision for taxes during the six month periods ended June 30 1998 and 1997 due to net operating losses and the availability of net operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1998, the Company had working capital of $194,000 and shareholders' equity of $718,000. 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. 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 $2,721,000 in the six month period ended June 30, 1998 and $2,699,000 for the corresponding period of the prior year. Net cash used in 1998 consisted primarily of a net loss of $2,083,000. Net cash used in 1997 consisted primarily of a net loss of $3,088,000 offset by other working capital changes. Net cash used in financing activities totaled $316,000 in the six month period ended June 30, 1998 primarily resulting from the repayment of notes payable totaling $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 six month period ended June 30, 1998 the Company's capital expenditures totaled approximately $23,000. At June 30, 1998 the Company's cash and cash equivalents was $796,000. 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. 12 ***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 $2,083,000 for the six months ended June 30, 1998 and had an accumulated deficit of $23,918,000 as of June 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. There can be no assurance that the Company will not incur significant additional losses, will successfully identify a strategic partner, 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 partner, 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 June 30, 1998 the Company's cash and cash equivalents totaled approximately $800,000. 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, particularly identifying a strategic partner. 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 Company's ability to locate a strategic 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. The Company is currently evaluating the addition of other directors, if necessary. 13 As a result of its cash constraints during most of 1997 and continuing through June 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." 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 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. 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." 14 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 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 15 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. 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. 16 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 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. 17 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." 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. 18 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 six month period ended June 30, 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 DeltaGraph Disposition, the Company expects that international Internet revenues will remain flat unless other international distribution channels can be established. In the longer term, the Company may take measures, including the hiring of additional sales and marketing persons, to reestablish its level of international sales. In light of, among other things, the Company's need to redevelop 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 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 19 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 could adversely affect the ability or willingness of broker-dealers to sell and/or make a market in the Company's Common Stock and the ability of purchasers of the Company's Common Stock to sell their securities in the secondary market. While the Company intends to apply for relisting on the Nasdaq SmallCap Market should it ever satisfy the conditions of listing and intends to take actions to prevent delisting from the Pacific Exchange, there can be no assurance that relisting will occur or that delisting will not occur in the future. Even if the Company achieves relisting for the Common Stock on the Nasdaq SmallCap Market, the liquidity of the Common Stock will remain limited as the Nasdaq SmallCap Market and the Pacific Exchange are a significantly less liquid markets then the Nasdaq National Market. If the Company should continue to experience losses from operations, it may be unable to maintain the standards for continued quotation on the Nasdaq SmallCap Market (if relisted) and the Pacific Exchange, and the shares of Common Stock could be subject to removal from the Nasdaq SmallCap Market and the Pacific Exchange. Any limitation on the ability of any principal market maker in the Company's Common Stock, to make a market in the Company's Common Stock could adversely impact the liquidity or trading price of the Company's Common Stock, which could have a material adverse impact on the market price of the Company's Common Stock. 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. 20 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. There are no material pending legal proceedings against the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's Annual Meeting of Shareholders on June 19, 1998, the following individuals were elected to the Board of Directors:
VOTES FOR VOTES WITHHELD ------------ ------------------- Jeffrey F. Ait............................................. 7,569,326 133,684 Stephen Mendel............................................. 7,569,326 133,684 Terry Millard.............................................. 7,569,326 133,684 Steven Fingerhood.......................................... 7,569,326 133,684 Allan Kaplan............................................... 7,569,326 133,684 Steven Farber.............................................. 7,569,326 133,684
The following proposal was approved at the Company's Annual Meeting:
AFFIRMATIVE NEGATIVE VOTES BROKER VOTES VOTES WITHHELD NON-VOTES ---------- ----------- ----------- ------------- 1. Ratify the appointment of Price Waterhouse LLP as independent Auditors for the fiscal year ended December 31, 1998.............................................. 7,644,325 50,150 8,535 --
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) List of Exhibits 27.1 Financial Data Schedule 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: August 13, 1998 22 EX-27.1 2 EX-27.1 FDS
5 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. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 796 0 227 176 40 963 1,515 1,274 1,487 769 0 0 0 24,636 (23,918) 1,487 227 227 54 54 2,299 0 0 (2,083) 0 (2,083) 0 0 0 (2,083) (0.24) (0.24)
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