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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-23547
E.COM INTERNATIONAL, INC.
(Name of registrant as specified in its Charter)
Oregon 91-1600822
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(State of Incorporation or Organization) (I.R.S. Employer
Identification Number)
7737 S.W. Cirrus Drive, Beaverton, Oregon 97008
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(Address of Principal Executive Offices) (Zip Code)
(503) 671-9900
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(Registrant's Telephone Number)
Securities Registered Under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
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Securities Registered Under Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, No Par Value None
Warrants to purchase common stock None
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 ninety days. YES |_| NO |X|.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein and will not be contained, to
the best of registrant's knowledge, in any definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
The Registrant's common stock held by non-affiliates at March 26, 1998
is not publicly traded. As of March 26, there were 2,375,577 shares of the
Registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Form 10 filed on December 24, 1997 with the Securities
and Exchange Commission is incorporated by reference into Part II, Item 9.
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E.COM INTERNATIONAL, INC.
FORM 10-K
PART I
Item 1. Business
Information in this Annual Report on Form 10-K includes forward-looking
statements, and are often identified by the words "believes", "anticipates" and
similar expressions. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. Factors that could affect the Company's financial results are
described below and in Item 7 of this report. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrences of unanticipated events.
Introduction
E.Com International, Inc. ("E.Com" or the "Company"), an Oregon
corporation established in 1996, develops, manufactures and markets integrated
wireless mobile computing products for mobile computer users. The Company's
Discovery I is a fully integrated smart handheld device that enables the user to
send and receive wireless e-mail and faxes and access and retrieve certain
information from the Internet, corporate networks and remote databases. The
Company's Discovery II is a lower cost fixed memory handheld device that permits
pen-based wireless messaging, e-mail and faxes. The Company's PDxpress is a
mobile, compact docking station that provides integrated wireless communications
capabilities and related battery management functions for certain popular but
now discontinued Hewlett Packard handheld personal computers. The Company has
completed development of these products and expects first commercial sales of
the Discovery I in the first quarter of 1998. E.Com's products are designed to
exploit the rapid response capabilities of wireless data communications in
industries with mobile employees and time-sensitive information requirements,
such as field sales and service, public safety, health care, financial services
and delivery and courier services.
Industry Overview
Demand for wireless communications products, primarily cellular phones
and paging and messaging devices, has exploded in recent years. At the same
time, computer hardware and software in laptop, notebook and handheld computers
have made significant advances in computer memory, speed, functionality and
miniaturization. To date, however, the successful integration of wireless
communications products with computers has been relatively slow to occur due to
the complexities involved in developing and integrating (1) wireless networks
over which data can be transmitted; (2) wireless network "gateways" to integrate
and facilitate data communications between networks; and (3) easy to use,
cost-effective wireless computing products for the end-user. The following
diagram illustrates the critical components of a wireless data communications
solution.
[Diagram contains four interconnected elements: (1) wireless client; (2)
wireless network; (3) wireless gateway; and (4) internet or intranet servers.]
Most wireless networks, which have grown rapidly in recent years, were
designed and optimized for voice, rather than data communications. In
anticipation of growing demand for efficient wireless data communications,
several radio networks were developed for data transmission and deployed by
joint ventures of large computer and telecommunications firms in the United
States. Two of the largest networks, ARDIS and RAM Mobile Data, were developed
by joint ventures of International Business Machines Corporation ("IBM") and
Motorola Inc., and BellSouth Corporation and RAM Broadcast Systems, Inc.,
respectively. These networks, known as "packet radio networks," operate on
different frequencies from cellular phone networks and send and receive data
through highly condensed "packets" of information, rather than through the
continuous stream of transmissions necessary for cellular phones. As a result,
packet radio networks transmit significant volumes of data in seconds (or
microseconds) at a lower cost per kilobyte of data, for small to medium file
sizes, than competing networks now in
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operation. Users can be in continuous contact on a packet radio network for an
entire day, but accrue charges only when actual data packets move over the
network.
Packet radio networks have extensive geographic coverage in the United
States. The ARDIS network, for example, covers the largest 425 metropolitan
areas which includes more than 90% of all businesses and 80% of the total United
States population. The packet radio networks were designed from the outset for
data transmission and incorporate reliability and security features of critical
importance to users, including: (1) rapid data delivery to users 24 hours a day
requiring no end-user action; (2) automatic roaming capabilities among different
geographical areas through unified national networks at no additional cost; (3)
fully encrypted two-way communication providing data reliability and security;
(4) information storage and forwarding when a user logs on (messages are
retained in the system until confirmation of receipt); (5) continuous network
monitoring with minimum power consumption; and (6) extensive user capacity.
Other networks are being developed, modified or expanded to compete with the
packet radio networks, including overlays to cellular networks (known as CDPD),
expansion of paging systems to encompass two-way communications and other new
networks. To date, these alternative data communications networks offer only
limited coverage, service and availability.
In addition to the United States, packet radio networks are becoming
more established in Asia-Pacific countries where traditional telephone land
lines are often economically and geographically impractical and telephone
service may be non-existent, or spotty at best. Singapore Telecommunications
("Singtel"), the largest network in Asia, and Telstra Corporation Limited
("Telstra"), the dominant Australian network, have established packet radio
networks in their regions as an alternative to land line data communications.
Other countries without extensive land line telephone systems are also exploring
establishing packet radio networks.
With the establishment of the packet radio networks by the mid-nineties
and with cellular phones increasingly commonplace, many industry observers have
predicted rapid expansion of wireless data communications. Sales of wireless
computing products, however, have continued to lag far behind sales of cellular
phones, in large part because end-users have been frustrated by problems
resulting from the difficulties of integrating wireless tools, a wireless
network gateway and corporate network and related systems. Unlike cellular
phones, for which the integration of technology has been virtually transparent
to users and the operation identical to traditional wireline phones, to date,
wireless data products have required sophisticated programming to integrate
computer hardware to wireless network gateways to corporate networks. Except for
users of high-price custom systems, prospective users of wireless computing
solutions have had few assurances of operational reliability. Recently, however,
several larger computer systems integrators, such as IKON Office Solutions, Inc.
("IKON") and others, have established reputations for integrating the hardware,
software and wireless network links for wireless data communications at
reasonable cost with performance guarantees. E.Com believes that advances in
systems integration will continue to reduce operational glitches in wireless
data communications.
Finally, most wireless computing tools have been paging devices or
laptop or handheld computers modified to become wireless. Although Norand,
Telxon and Symbol Technologies produce integrated high-performance, custom
systems, their products are generally priced at between $3,000 and $6,000 per
unit and therefore have not enjoyed wide-spread market penetration. Several
companies such as Motorola WDG, Ericsson, U.S. Robotics and Socket
Communications provide PC card products that enable wireless messaging and
paging features in laptop or handheld computers. Although operational as an
add-on or accessory, the wireless features typically have operational
deficiencies such as short battery life or software integration issues that
frustrate most mobile computer users. Laptop computers, although available at
dramatically reduced prices in the last few years, also have drawbacks with
respect to size, weight, ease of use and lack of durability. Similarly, handheld
personal computers have in recent years become increasingly powerful; however,
PC card wireless modems that provide wireless connectivity generally occupy a
critical expansion slot usually needed for extra memory or application plug-ins.
Consequently, the wireless mobile computing market has not had available an
affordable end-user product designed and engineered specifically as a wireless
computing device.
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The E.Com Solution
E.Com's products are wireless communications devices that primarily
rely on the computing power and memory of corporate computer networks. This
mobile platform optimizes performance and minimizes costs by reducing memory
requirements and eliminating the need for a hard drive contained in the devices.
E.Com's products offer its customers the following advantages:
o Seamless integrated wireless connectivity. By incorporating proprietary
software, integrated hardware, application software and packet radio
modems, E.Com's products permit seamless integration with a wireless
network, resulting in wireless communication that is as easy as using a
fax machine or network-wired computer.
o Reasonable price. E.Com's products are priced from the low-end to
lower-mid-range of wireless communications and wireless computing
devices. For example, the Company's flagship product, the Discovery I,
is generally priced at between $1,400 and $2,000 depending upon
configuration, components and customization. Monthly airtime costs are
not included. Competing wireless mobile computing devices range from
$500 for radio network adapters (not including the price of the
portable computer) up to $6,000 for high performance, customized
products.
o E-mail, fax and Internet access. All of E.Com's products enable the
mobile user to send and receive wireless e-mail and faxes, while the
Discovery I and PDxpress permit the mobile user to access and retrieve
certain information from the Internet, corporate networks and remote
databases.
o Lightweight, compact product. The Discovery I and Discovery II weigh 28
ounces and 26 ounces, respectively. Each product measures 4.3" x 7.3" x
1.4," or slightly larger than a typical handheld personal computer, and
is about twice as thick as typical handheld computers. The Discovery I
opens to allow access to a full keyboard and backlighted screen with
touch screen capabilities for pen-based applications. The Discovery II
opens to provide only pen-based touch screen capabilities. The PDxpress
is slightly larger and weighs 26 ounces (without the HP 100/200LX
Palmtop computer).
o Durable product design. E.Com's products are designed to withstand many
of the occasional accidents that accompany mobility, such as being
dropped on the floor.
o Higher capacity and longer battery life. E.Com's proprietary power
management systems, including power save mode, enable its products to
(1) use less energy for functions; (2) extend the capacity of the
batteries for up to 30 hours without recharging; and (3) increase the
life of the battery, reducing significantly the need for costly battery
replacements.
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The following table summarizes key features of the Company's products:
<TABLE>
<CAPTION>
-------------------------------------- ------------------------ ------------------------ -----------------------
Feature Discovery I PDxpress Discovery II
-------------------------------------- ------------------------ ------------------------ -----------------------
<S> <C> <C> <C>
Windows-based operating system X X
-------------------------------------- ------------------------ ------------------------ -----------------------
Wireless network capability DataTac DataTac or Mobitex DataTac
-------------------------------------- ------------------------ ------------------------ -----------------------
Data collection applications X
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Data transfer X
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E-mail and fax X X
-------------------------------------- ------------------------ ------------------------ -----------------------
Corporate network access X
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Internet access X
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Paging X X
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Power management X X
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Power-save mode X X
-------------------------------------- ------------------------ ------------------------ -----------------------
Battery life 30+ hours operation 30+ hours operation 30+ hours operation
-------------------------------------- ------------------------ ------------------------ -----------------------
Resolution 480 x 320 LCD 480 x 320 LCD
1/2 VGA display 1/2 VGA display
-------------------------------------- ------------------------ ------------------------ -----------------------
Backlighting X
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Durable design X X X
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Dimensions 4.3 x 6.7 x 1.4" 7.9 x 5.2 x 1.1" 4.3 x 6.7 x 1.4"
-------------------------------------- ------------------------ ------------------------ -----------------------
Weight 28 ounces 22 ounces (without 26 ounces
HP100/200LX Palmtop)
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Price $1,400 - $2,000 $895 $1,100 - $1,300
-------------------------------------- ------------------------ ------------------------ -----------------------
</TABLE>
Strategy
The Company's objective is to develop and market highly functional,
reasonably priced, integrated, wireless mobile computing products. By
incorporating modular designs in its products to facilitate customizing or
upgrading its products, E.Com intends to be a low-cost producer with the ability
to respond quickly to customer demand and technological and market developments
in wireless communications. E.Com integrates its product designs and proprietary
software with components manufactured by leading technology companies to produce
high quality communication and computing products. Key elements of E.Com's
strategy are as follows:
o Optimize Computing and Communication Performance E.Com has designed its
products to provide flexible mobile computing functions at a
significantly lower price than products with comparable features.
E.Com's products require less processing power than laptop computers
because intensive computing functions are performed by a remote server
connected through the wireless network; therefore, E.Com's products are
lighter weight and lower cost than laptops equipped with a wireless
modem. E.Com believes that this approach will significantly expand the
market for wireless mobile computing products. E.Com's products are
designed to provide the user with high-demand features, such as the
ability to send and receive e-mail and faxes and access and retrieve
certain information from the Internet, corporate networks and remote
databases.
o Emphasize Cost-Effective Wireless Solutions. E.Com's modular component
design simplifies and reduces the cost of incorporating enhancements
and upgrades to software or critical components, thereby reducing the
risk of early product obsolescence. In addition, modular design allows
E.Com to customize its products at reasonable cost for volume
purchasers of its products. This modular design reduces manufacturing
costs and allows the Company to respond quickly to changes in market
conditions without the need to completely redesign its products. E.Com
uses contract manufacturers to fabricate and assemble its products so
as to avoid the investment in facilities, equipment and personnel.
o Expand Market by Providing Integrated Wireless Solutions. Most wireless
mobile computing devices available today fail to provide seamless
wireless connectivity. While high performance, customized wireless
computing products provide excellent wireless connectivity, E.Com
believes that such devices have not enjoyed widespread acceptance by
business customers due to the high price (generally $3,000 per unit or
higher) of highly functional products and the poor product
functionality of lower-priced products. E.Com's products, and the
Discovery I in particular, bridge that gap to provide mobility and
highly-functional connectivity at a reasonable price. E.Com believes
that lower-priced wireless computing devices with reliable wireless
connectivity will significantly expand the market for wireless mobile
computing products.
o Offer Customer Support Service. Users of laptop or handheld computers
have faced significant challenges in integrating the software, hardware
and wireless technology necessary to achieve reliable wireless
operation. E.Com has designed its products to provide seamless wireless
connectivity by integrating the features of its products with an
advanced wireless radio modem. Further, E.Com is able to provide
single-source technical support to end-users to solve problems relating
to its products' software, hardware or radio modems.
o Target Mobile Time-Sensitive Applications. E.Com has targeted its
products at industries with mobile employees with time-sensitive
information requirements. Likely users include field sales and
services, public safety, health care, financial services and delivery
and courier services. E.Com's products, and the Discovery I in
particular, are designed for such users who may be dependent on rapidly
changing mission-critical data or who operate in rapidly changing
environments. For such users, the fast response capabilities of E.Com's
wireless products are crucial.
o Establish Strategic Alliances to Create Distribution Channels. The
Company has established strategic alliances to enhance its product
marketing efforts with leading participants in the wireless data
communications markets, including ARDIS, the largest packet radio
network in the United States, and Motorola WDG, the largest supplier of
packet radio modems. All of E.Com's wireless products are equipped with
a Motorola WDG radio modem. The Company is also pursuing alliances with
the largest wireless computer systems integrators as well as other
distribution arrangements with software vendors and distributors. The
Company believes these alliances and relationships will enable it to
take advantage of the superior distribution systems, financial
resources and market presences of these companies in establishing and
eventually maintaining E.Com's products in the wireless data industry.
Sales and Marketing
E.Com's portable products are targeted at mobile users who require fast
reliable access to data in time-sensitive environments, such as field sales and
service, public safety, health care, financial services and delivery and courier
services. Targeted likely users of the Company's products are away from their
offices at least 20% of the time and have information processing and
transmission requirements that extend beyond the capabilities of standard
cellular phones and pagers, but require less memory and processing capabilities
than standard laptop or handheld personal computers.
E.Com's sales and marketing activities are focused primarily on two
geographic regions, the United States and the Asia-Pacific countries of
Singapore, Australia, Malaysia, and Taiwan. As described above, these regions
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have (or will soon have) operational packet radio networks and E.Com believes
that many businesses and mobile employees in these markets want affordable,
reliable, easy to use wireless products.
The Company has established strategic relationships with leading
participants in the wireless data communications markets and is pursuing
alliances with the largest systems integrators as well as other distribution
arrangements with independent software vendors and distributors. Important
distribution channels for E.Com are the packet radio network operators, such as
ARDIS and RAM Mobile Data in the United States, Singtel in Singapore, and
Telstra in Australia. The packet radio network operators, with substantial
available capacity and facing increasing competition, are willing to promote and
distribute E.Com's products in conjunction with promoting their own networks.
All of E.Com's products have been designed to operate on DataTac networks, the
worldwide Motorola standard. Currently, only the PDxpress can also be configured
for the RAM Mobile Data network in the United States. RAM Mobile Data operates
on Mobitex, an Ericsson worldwide network standard similar to DataTAC. The
Company has plans to incorporate Mobitex radio modems into its Discovery I and
Discovery II products in the future.
E.Com is working with systems integrators to develop joint promotion,
distribution and representation arrangements for its Discovery I and Discovery
II products, as well as independent software vendors to develop other
distribution channels for these products. The Company has also established
relationships with authorized resellers of Hewlett Packard handheld personal
computer products to resell E.Com's PDxpress products. E.Com expects the recent
discontinuation of certain Hewlett Packard handheld personal computer products
will reduce the demand for the PDxpress.
To further strengthen its position in the market, E.Com has entered
into an agreement with Motorola WDG in which Motorola WDG has agreed to provide
wireless radio modems for the Company's products. Motorola WDG has also agreed
to undertake joint product and business development and marketing activities
such as distributor training and advertising. The agreement is terminable
without cause by either party on ten day's notice. If the agreement is
terminated by Motorola WDG, there can be no assurance that the Company will be
able to obtain substitute radio modems on favorable terms or on a timely basis.
E.Com also plans to establish a focused direct sales force to market its
products to distributors of communications products and mobile computer
professionals within major corporate accounts to create product awareness,
assist in product evaluations, and provide ongoing education and support.
E.Com's marketing activities to date have been to position the Company
as a manufacturer of reasonably priced, integrated wireless mobile computing
products and to create product awareness. E.Com intends to expend significant
resources to create end user demand, establish brand name recognition and
provide reseller support. As of March 1, 1998, the Company had one and a half
persons in sales, marketing and support. The Company intends to increase its
sales and marketing activities by adding two additional personnel and increasing
promotional activities.
Consistent with industry practice, the Company expects to provide its
distributors with stock balancing and price protection rights which permit these
distributors to return slow moving products to the Company for credit and price
adjustments and for inventories of the Company's products held by distributors
if the Company lowers the price of those products. Actual returns and price
protection may have a material adverse effect on future operating results,
particularly since the Company seeks to continually introduce new and enhanced
products and is likely to face increasing price competition. The Company expects
its agreements with its distributors will generally have terms of one to two
years with automatic renewal provisions and typically provide for the
termination of the agreement by either party upon 60 to 90 days notice.
Manufacturing
E.Com is establishing internal procurement, materials resource
planning, incoming test and battery conditioning, parts kitting, and final test
procedures in its facilities, while outsourcing all printed circuit board
fabrication, board assembly and final integration. E.Com has contracted with
Millennium Technology Services of White City, Oregon for the manufacturing of
the Discovery I and PDxpress. The Company expects to enter into
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written agreements with Millennium and possibly other manufacturers, to provide
for written warranties, service, and other terms of the manufacturing
arrangement. In July 1997, Millennium Technology Services filed a voluntary
petition for Chapter 11 bankruptcy. While the Company expects Millennium
Technology Services to continue to meet its needs, it is exploring alternative
manufacturers for its Discovery I product and believes it would require
approximately two to four weeks to commence production with another
manufacturer, if necessary.
Competition
The Company competes directly with established manufacturers of
high-end wireless mobile computing products, including Norand, Telxon and Symbol
Technologies, all of which have substantially greater financial, technical and
other resources than the Company. Such companies have high volume manufacturing
and extensive marketing and distribution capabilities and may succeed in
establishing technology standards or strategic alliances in the data
communications or mobile computer market, obtain more rapid market acceptance
for their products, or otherwise gain a competitive advantage. The Company
competes indirectly with other established manufacturers of wireless PC modem
products, including Ericsson and U.S. Robotics.
The Company also faces competition from companies that manufacture
pagers (including Motorola WDG, Research in Motion and Socket Communications) or
offer extended paging services and paging networks. Paging networks have evolved
so that many now offer two-way paging that permits users to transmit short
messages. Such companies may seek to expand the capabilities of the paging
networks to match or exceed the capabilities of the packet radio networks. The
Company also faces competition from alternative methods of downloading
information into a mobile computer, primarily over telephone lines. In addition
to competition from companies that offer wireless data communications devices,
the Company could face competition from companies that offer alternative wired
or wireless communications solutions, or from large computer and network
equipment companies.
The overall market for communications products is increasingly
competitive, and the Company expects competition in each of its market areas to
intensify. There can be no assurance that the Company will be able to compete
successfully against existing and new competitors as the market evolves and the
level of competition increases. See "Risk Factors -- Competition and
Technological Advances."
Intellectual Property and Proprietary Rights
E.Com has developed power and battery management systems, software to
integrate such systems and other components to enhance its ability to develop
new hardware and software products quickly, to offer products which run on
multiple host platforms and to manufacture and package products at low cost. The
Company has also developed a software development kit for Windows 3.1 or
PenRight! applications which is used to reduce product development time and
maximize platform independence.
In June 1997 the Company was granted a design patent for its PDxpress
compact docking station. The Company's utility patent for the PDxpress is
currently under consideration. Otherwise, the Company relies on unpatented
proprietary technology and there can be no assurance that others may not
independently develop the same or similar technology or otherwise obtain access
to the Company's proprietary technology. To protect its rights in these areas,
the Company requires all employees and most consultants, advisors and
collaborators to enter into assignment of invention and nondisclosure
agreements. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's trade secrets, know-how or other
proprietary information in the event of any unauthorized use, misappropriation
or disclosure of such trade secrets, know-how or other proprietary information.
The Company has had no experience in enforcing its confidentiality agreements.
See "Risk Factors -- Limited Protection of Proprietary Technology, Infringement
on Competitors' Patents."
Government Regulation
The Company is subject to various Federal Communications Commission
("FCC") regulations. The Company has received certification that its products
comply with certain FCC regulations, and the Company's wireless communications
products operate at frequencies based upon these regulations. Current FCC
regulations
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permit license-free operation of certain FCC-certified wireless products;
however, there can be no assurance that licensing will not be imposed by the FCC
or if imposed, that the Company would meet the requirements of such a licensing
scheme. In addition, the Company's products are dependent on the availability of
certain wireless communications frequencies. However, due to recent and ongoing
auctions by the FCC of frequencies for use by communications infrastructures and
products and changes in the allocation of available frequency spectrum, the
future of remote wireless communications is highly volatile. There can be no
assurance the Company will be able to adapt its products on a timely and
cost-effective basis to adapt to this changing environment.
Employees
As of December 31, 1997, E.Com had twelve full-time employees and three
part-time consulting or contract employees. E.Com is actively seeking additional
qualified personnel for engineering product support and sales and marketing. The
Company's employees are not subject to any collective bargaining agreements and
management regards its relations with employees to be good. See "Risk Factors --
Dependence on Key Personnel."
Item 2. Properties
E.Com currently leases approximately 6,200 square feet of combined use
office, testing and warehouse space at 7737 SW Cirrus Drive in Beaverton,
Oregon. The lease term is three years and expires in September 1999. The Company
believes that the current facilities are adequate but that it will require
additional space in the Spring of 1998 to accommodate planned growth. The
Company anticipates that additional space will be available on reasonable terms
if needed.
Item 3. Legal Proceedings
The Company is not currently subject to any material legal proceedings.
The Company may from time to time become a party to various legal proceedings
arising in the normal course of its business. These actions could include
employee-related issues and disputes with customers.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter ended December 31, 1997.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is not currently traded publicly. As of
December 31, 1997, the Company had 167 shareholders or record. The Company has
not paid cash dividends since its inception. The Company currently intends to
retain all of its earnings, if any, for use in its business and does not
anticipate paying any cash dividends in the foreseeable future. Pursuant to the
Company's Articles of Incorporation and Bylaws, the payment of dividends is
subject to the discretion of the Company's Board of Directors and any terms and
conditions imposed by law.
Item 6. Selected Financial Data
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Statement of Operations Data:
<TABLE>
<CAPTION>
Period from
April 4, 1996 Period from April 4,
Year ended (date of inception) to 1996 (date of inception) to
December 31, 1997 December 31, 1996 December 31, 1997
------------------ ---------------------- --------------------------
<S> <C> <C> <C>
Sales $ 25,237 -- $ 25,237
Cost of Sales 21,797 -- 21,797
----------- -----------
Gross profit 3,440 -- 3,440
----------- ----------- -----------
Operating Expenses
Research and development 1,112,974 $ 230,525 1,343,499
Sales and marketing 238,467 89,649 328,116
General and administrative 655,100 243,514 898,614
----------- ----------- -----------
2,006,541 563,688 2,570,229
----------- ----------- -----------
Loss from operations (2,003,101) (563,688) (2,566,789)
----------- ----------- -----------
Other income (expense)
Interest income 19,139 -- 19,139
Interest expense (29,784) (3,522) (33,306)
----------- ----------- -----------
Net loss $(2,013,746) $ (567,210) $(2,580,956)
----------- ----------- -----------
----------- ----------- -----------
Basic loss per share $ (1.46) $ (.63) $ (2.20)
Shares used in calculation 1,378,365 896,054 1,171,552
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Cash and cash equivalents $1,839,281 $ 16,190
Working capital 1,643,513 (298,831)
Total assets 2,614,249 136,019
Capital lease obligations, less 11,087 --
current portion
Shareholders' equity (deficit) 2,073,215 (195,825)
</TABLE>
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Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
The Company commenced operations in April 1996 and then acquired key
product designs and technologies from EnBloc. Since its formation, the Company
has been in the development stage with its principal activities consisting of
assembling a qualified technical and executive management team, continuing the
development of its products, commencing pre-introduction marketing activities
and raising capital. The Company has generated no significant revenues and has
incurred substantial losses since its inception. The Company expects to continue
to incur significant losses in 1998.
The Company expects revenues to be derived primarily from the sale of
its wireless mobile computing products. The Company does not expect to have any
significant revenues until the second quarter of 1998 at the earliest. Sales are
expected to be through purchase order contracts with each customer, which will
vary as to profitability. The Company expects to continue development of
enhancements, upgrades, and software for the Discovery I and for other new
products. Future revenues, profits and cash flow will depend primarily on market
acceptance of wireless communications through the packet radio networks,
acceptance of the Company's products, competition and other factors. See "Risk
Factors."
The Company's primary product is expected to be the Discovery I, a
fully integrated smart handheld device for wireless data communications. The
Company plans to commence commercial production and shipment of the Discovery
I(TM) late in the first quarter of 1998. The Company intends to purchase certain
manufacturing, tooling and test equipment to support its move to commercial
production. In addition, the Company expects to add to its engineering,
marketing and sales staff to support its shift into commercial product sales.
During 1998, the Company expects to invest in continuing development of
enhancements, upgrades and software for its current products as well as
developing additional new products.
Results of Operations and Going Concern
Comparison of Periods Ended December 31, 1997 and 1996
The Company had revenues of approximately $25 thousand in 1997,
compared to no revenues in the period from inception through December 31, 1996.
Revenues were derived from sales of pre-commercial units of the Company's
Discovery I and PDxpress products to customers for the purpose of evaluating the
products. Upon commencing commercial production, the Company expects its costs
of sales to decline as a percentage of revenues. Operating expenses increased
260% to $2 million in 1997 from $564 thousand for the prior period, reflecting
primarily the Company's research and development efforts for the Discovery I
product, increased headcount, sales and marketing activities and the full year
of operations. all of which has been expensed. The increases in operating
expenses also reflect the continued development of the Company from start-up to
a manufacturer, as the Company added administrative staff and expanded sales and
marketing activities.
Research and development expenses since inception have consisted
primarily of payments to engineering consultants, payments of salaries and
fringe benefits of employees and purchase of engineering parts and materials. To
date, the Company has expensed all such costs. Research and development expenses
from inception to December 31, 1997 were $1.2 million. In response to a purchase
order for the Discovery I (later canceled), in 1997, the Company committed
significant resources to engineering staff and consultants for research and
development of the Discovery I. The Company expects research and development
expenses to decline in the near-term, but this decline will be offset by higher
costs incurred to support higher engineering costs as the Company begins
commercial manufacturing of its initial products. Accordingly, the Company
anticipates that it will devote substantial resources to product development and
hiring additional personnel.
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<PAGE>
Sales, marketing, general and administrative expenses include payroll
and related costs for the Company's administrative and executive personnel,
costs related to the Company's marketing and promotional efforts, office lease
expenses and other overhead costs, including legal and accounting costs and fees
of consultants and professionals. Sales, marketing, general and administrative
expenses from inception through December 31, 1997 were approximately $328
thousand, and increased by 166% in 1997 from the prior period, reflecting
primarily preintroduction activities for the Discovery I. The Company expects
sales, marketing, general and administrative expenses to increase substantially
in future periods as the Company invests in marketing activities to promote its
family of products and as it increases its number of employees and level of
corporate and administrative activities in part due to the additional costs of
being a public company.
Net loss from inception through December 31, 1997 was approximately
$2.6 million, and increased by 255% in 1997 from the prior period, reflecting
primarily the increase in operating expenses.
Liquidity and Capital Resources
To date, the Company has financed its operations primarily through
private placements of common stock. In 1997, the Company raised in private
equity transactions, net of issuance costs, approximately $4.3 million,
including $3 million raised in a private offering during September, November
and December, 1997. At December 31, 1997, the Company had shareholders'
equity of approximately $2.1 million, although from inception through
December 31, 1997, the Company had incurred an accumulated deficit of
approximately $2.6 million. The Company had cash and cash equivalents of $1.8
million at December 31, 1997.
The Company applied the proceeds from the most recent private offering
to payment of outstanding accounts payable, tooling costs, repayment of a
shareholder loan, and salaries, benefits and other regular monthly expenses. The
Company expects to incur additional costs in the first quarter of 1998 to
commercialize its Discovery I, as well as repay additional shareholder debt. The
Company also expects that its operating costs will increase as the Company hires
additional staff to expand its marketing, engineering support and production
capabilities. If and when sales of the Company's products occur, working capital
needs will also increase to finance inventory and accounts receivable. The
Company has had no material commitments for capital expenditures at year end.
The Company's future expenditures and capital requirements will
depend on numerous factors, including the progress of its product
development, manufacturing, sales and marketing programs and sales growth.
The Company expects its cash requirements to increase significantly each year
as it expands its activities and operations to finance increased personnel
costs, inventory and accounts receivable. The Company's auditors have
included an explanatory paragraph in their audit opinion with respect to the
Company's financial statements which states that the Company has no
significant operating revenues and has suffered recurring losses from
operations that raise substantial doubt about its ability to continue as a
going concern. The Company currently expects that its cash and cash
equivalents will satisfy its working capital needs for approximately six to
eight months, assuming that the Company generates no revenues during such
period. The Company does not expect to qualify for loans from commercial
lenders until it achieves substantial revenues. The Company anticipates
needing to raise additional capital, debt or equity, in public or private
offerings, or loan transactions, to finance its continued growth. The Company
intends to call the Warrants and require the exercise thereof promptly after
(if ever) the call provisions are satisfied. See "Risk Factors -- Capital
Requirements."
New Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting
Standard No. 130, "Reporting Comprehensive Income" (SFAS 130"). This statement
establishes standards for reporting and displaying comprehensive income and its
components in a full set of general purpose financial statements. The objective
of SFAS 130 is to report a measure of all changes in equity of an enterprise
that result from transactions and other economic events of the period other than
transactions with owners. The Company expects to adopt SFAS 130 in the first
quarter of 1998 and does not expect comprehensive income to be materially
different from currently reported net income.
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<PAGE>
In June 1997, the FASB issued Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). This statement establishes standards for the way that
public business enterprises report information about operating segments in
interim and annual financial statements. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company expects to adopt SFAS 131 for its fiscal year beginning
January 1, 1998.
Risk Factors
The Company does not provide forecasts of future financial performance.
While E.Com's management is optimistic about the Company's long-term prospects,
the following issues and uncertainties, among others, should be considered in
evaluating its growth outlook.
Uncertain Market Acceptance of E.Com's Products. The Company is
currently focusing on developing and delivering wireless data products for the
specific needs of mobile users in a number of market segments with
time-sensitive information requirements, including field sales and service,
public safety, financial services and delivery and courier services. The Company
believes that reliance by such market segments on full performance laptop or
notebook computers to communicate limited amounts of data incurs unnecessary
costs. However, there can be no assurance the Company will be able to convince
these market segments of the relative benefits of its wireless products, that
such products will gain widespread commercial acceptance or that adoption of
such products will drive increased purchases. In addition, due to the unique
nature of such products, which combine certain technologies and features of
packet radio and mobile computing, the Company believes it will be required to
incur significant expenses for sales and marketing, including advertising, to
educate potential customers.
The mobile computer market represents only a small percentage of the
installed base of personal computers, and there can be no assurance that the
mobile computer market will continue to grow. Because all of the Company's
products are used in mobile computing applications, the Company's future
operating results would be materially adversely affected by any reduction in the
rate of growth of the mobile computer market. See "Business -- Industry
Overview."
Development Stage Enterprise; Expectation of Losses; Negative Cash
Flows. The Company was founded in April 1996 and, as a development stage
enterprise, has not yet generated significant revenues from product sales. As of
December 31, 1997, the Company had incurred since inception aggregate losses of
$2.6 million. The Company expects to continue to incur substantial losses and
negative operating cash flow at least through most of 1997 and possibly
thereafter. There can be no assurance that the Company will become profitable or
cash flow positive at any time in the future. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Operating
results will depend, in part, on matters over which the Company has no control,
including, without limitation, competition, technological and other developments
in the wireless communications and computing industries and general economic
conditions. See "Financial Information Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Emerging Market for Wireless Mobile Computing Products. The market for
wireless mobile computing products is only beginning to emerge, and there can be
no assurance that it will develop sufficiently to enable the Company to achieve
broad commercial acceptance of its products. It is difficult to predict the rate
at which this market will grow, if at all, because this market is relatively
new. There are competing technologies and current and future competitors are
likely to introduce a variety of competing wireless mobile computing solutions.
If the wireless mobile computing market fails to grow, or grows more slowly than
anticipated, the Company's business, operating results and financial condition
will be materially adversely affected. Although the Company intends to conform
its products to meet emerging standards in the wireless mobile computing market,
there can be no assurance that industry standards will emerge or, if they become
established, that the Company will be able to conform to these new standards in
a timely fashion.
Capital Requirements. The Company's capital requirements will depend on
many factors, including, but not limited to, the costs and expense of
commercializing its products, and the market acceptance and competitive position
of its products. There can be no assurance that the Company will be able to
obtain financing, or that if it
13
<PAGE>
is able to obtain financing, it will be able to do so on satisfactory terms or
on a timely basis. If additional funds are raised through the issuance of
equity, convertible debt or similar securities, shareholders may experience
additional dilution and such securities may have rights or preferences senior to
those of the Common Stock. Moreover, if adequate funds were not available to
satisfy the Company's short-term or long-term capital requirements, the Company
would be required to limit its operations significantly. See "Financial
Information - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
Rapid Technological Change; Dependence on Product Development; Product
Defects. The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards and short product life cycles.
Accordingly, the Company's success will be substantially dependent on a number
of factors, including its ability to identify emerging trends in the wireless
mobile computing field, enhance its products by adding features to provide a
more complete solution and differentiate its products from those of its
competitors, maintain a competitive price performance ratio in its products and
bring products to market quickly. Given the emerging nature of the wireless
mobile computing market, there can be no assurance that the Company's products
or technology will not be rendered obsolete by alternative technologies.
Further, short product life cycles expose the Company's products to the risk of
obsolescence and require frequent new product introductions. If the Company is
unable to develop or obtain access to advanced wireless mobile computing
technologies as they become available, or is unable to design, develop, contract
for the manufacturing of and introduce competitive new products on a timely
basis, its future operating results will be materially adversely affected. Any
significant delays in the design, development, manufacture or shipment of new or
enhanced products would also materially adversely affect the Company's results
of operations.
The markets for mobile computers and their peripherals and for wireless
mobile computing products are extremely competitive and characterized by rapidly
advancing technology, frequent changes in user preferences and frequent product
introductions. The Company's PDxpress, for example, is targeted at users of a
popular Hewlett Packard handheld personal computer that was discontinued in late
1997. The future success of the Company will depend in large part on its
ability, and that of its strategic partners, to keep pace with advances in
software and hardware technologies for wireless mobile computing. There can be
no assurance that the Company will be able to respond effectively to these
technological changes or to new product introductions by others.
Although the Company performs testing prior to new product
introductions, the Company's hardware and software products may contain
undetected flaws, which may not be discovered until the products have been used
by customers. From time to time, the Company may temporarily suspend or delay
shipments or divert development resources from other projects to correct a
particular product deficiency. Such efforts to identify and correct errors and
make design changes may be expensive and time consuming. Failure to discover
product deficiencies in the future could delay product introductions or
shipments, require the Company to recall previously shipped products to make
design modifications or cause unfavorable publicity, any of which could have a
material adverse effect on the Company's operating results.
Packet Radio Networks Fail to Gain Market Acceptance. The Company's
products are designed to operate on the worldwide DataTAC and Mobitex packet
radio networks, and operate on the FCC-approved frequencies for messaging
technologies in the United States. New competitive wireless technologies, such
as Cellular Digital Packet Data ("CDPD") in the United States and Global System
for Mobile Communications Packet Radio Service ("GSM-GPRS") in Europe, being
developed by various market participants are not compatible with the DataTAC or
Mobitex packet radio networks and may be at different frequencies. If these new
technologies succeed, carriers may cease to support DataTAC and Mobitex, and,
while the Company expects to be able to upgrade its radio modems as necessary,
there is no assurance that the Company will be able to develop future products
based upon these new technologies. In addition, such developments could
significantly affect the Company's operations by diverting the Company's efforts
or increasing the opportunity for additional competition.
Competition and Technological Advances. The overall market for
communications products is increasingly competitive, and the Company expects
competition in each of its market areas to intensify. Wireless mobile computing
products are currently available in the market, although at prices significantly
higher than the Company's targeted prices. The Company's products compete
directly with those of established manufacturers of
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<PAGE>
high-end wireless mobile computing products, including companies such as Norand
Corporation ("Norand"), Telxon Corporation ("Telxon") and Symbol Technologies,
Inc. ("Symbol Technologies"), all of which have substantially greater financial,
technical and other resources than the Company. The Company also competes
indirectly with other established manufacturers of wireless PC modem products,
including Ericsson, Inc. ("Ericsson") and U.S. Robotics Corporation ("U.S.
Robotics"). If another wireless mobile computing product competitive to the
Company's products were introduced and acquired significant market share, the
Company's business could be adversely affected.
The Company also faces competition from companies that manufacture
pagers (including Motorola, Inc. ("Motorola"), Research in Motion Limited
("Research in Motion") and Socket Communications, Inc. ("Socket
Communications")) or offer extended paging services and paging networks. Paging
networks have evolved so that many now offer two way paging that permits users
to transmit short messages. Such companies may seek to expand the capabilities
of the paging networks to match or exceed the capabilities of the packet radio
networks. The Company also faces competition from alternative methods of
downloading information into a mobile computer, primarily over telephone lines.
In addition to competition from companies that offer wireless data
communications devices, the Company could face competition from companies that
offer alternative wired or wireless communications solutions, or from large
computer and network equipment companies. The Company's business plan does not,
at this time, envision its products becoming available as consumer electronics
products; however, if products similar to the Company's products were to become
the focus of the consumer electronics industry, the Company would then have to
compete with companies that dominate that industry such as Casio Inc., Compaq
Computer Corporation, and NEC America Inc.
The Company's competitors and potential competitors have substantially
greater financial, marketing, technical and other resources than the Company and
may succeed in establishing technology standards or strategic alliances in the
wireless mobile computing market, obtain more rapid market acceptance for their
products, or otherwise gain a competitive advantage. There can be no assurance
that the Company will succeed in developing products or technologies that are
more effective or better accepted in the market than those developed by its
competitors. In addition, there can be no assurance that the Company's
competitors will not succeed in developing wireless mobile computing products
that would render the Company's products and proposed products obsolete. The
Company will also be competing with companies that have high volume
manufacturing and extensive marketing and distribution capabilities, areas in
which the Company has limited or no experience. Increased competition, direct
and indirect, could materially adversely affect the Company's revenues and
profitability through pricing pressure and loss of market share. There can be no
assurance that the Company will be able to compete successfully against existing
and new competitors as the market evolves and the level of competition
increases.
Limited Protection of Proprietary Technology; Infringement on
Competitors' Patents. Except for a design patent granted for its compact docking
station, the Company relies on unpatented proprietary technology. Third parties
could develop the same or similar technology or otherwise obtain access to the
Company's proprietary technology. The Company has filed, and intends to continue
to file, applications as appropriate for patents covering its products; however,
there can be no assurance that patents will issue from any of its pending
applications or, if patents do issue, that the claims allowed will be
sufficiently broad to protect the Company's technology. Furthermore, there can
be no assurance that any patents issued to the Company will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
proprietary protection to the Company. Since United States patent applications
are maintained in secrecy until patents issue, and since the publication of
inventions in technical or patent literature tends to lag behind such inventions
by several months or years, the Company cannot be certain that it was the first
creator of inventions covered by its pending patent applications, that it was
the first to file patent applications for such inventions or that the Company is
not infringing on the patents of others. The Company has also trademarked some
of its proprietary product names and logos and claims copyright protection for
its proprietary software. See "Business - Competition."
Although the Company continues to implement protective measures and
intends to defend its proprietary rights vigorously, there can be no assurance
that these efforts will be successful. There can also be no assurance
15
<PAGE>
that third parties will not assert intellectual property infringement claims
against the Company. Litigation may be necessary to enforce the Company's
patents, trademarks, copyrights or other intellectual property rights, to
protect the Company's trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement. The
defense and prosecution of such patent suits could result in substantial costs
and diversion of resources and could have a material adverse effect on the
Company's business and results of operations regardless of the final outcome of
such litigation. This is particularly true in foreign countries where the
expenses associated with such proceedings can be prohibitive. An adverse outcome
in the defense of a patent suit could subject the Company to significant
liabilities to third parties, require the Company and others to cease selling
its products, or require disputed rights to be licensed from third parties. Such
licenses may not be available on satisfactory terms, or at all. Moreover, if
claims of infringement are asserted against future co-development partners or
customers of the Company, those partners or customers may seek indemnification
from the Company for damages or expenses they incur.
To protect its rights, the Company requires all employees and most
consultants, advisors and collaborators to enter into assignment of invention
and nondisclosure agreements. There can be no assurance, however, that these
agreements will provide meaningful protection for the Company's trade secrets,
know-how or other proprietary information in the event of any unauthorized use,
misappropriation or disclosure of such trade secrets, know-how or other
proprietary information. To date, the Company has had no experience in enforcing
such agreements. See ":Business - Intellectual Property and Proprietary Rights."
Dependence on Future Collaborations; Dependence on Third Parties. The
Company's strategy for the manufacture of existing and proposed products and
distribution of its products includes entering into manufacturing contracts,
supply contracts and/or distribution agreements with participants in various
segments of the wireless mobile computing markets. The Company's success will
depend not only on the Company's continued relationships with these parties, but
also on its ability to enter into additional strategic arrangements with new
partners on commercially reasonable terms. The Company believes that, in
particular, relationships with application software developers and systems
integrators are extremely important in creating commercial uses for the
Company's products necessary to achieve growth. There can be no assurance that
the Company will be able to negotiate such alliances on acceptable terms, if at
all. See "Financial Information - Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business - Strategy."
The Company will rely significantly on its distributors and resellers
for the marketing and distribution of its products. The Company's agreements
with distributors and resellers, in large part, will be non-exclusive and may be
terminated on short notice by either party without cause. The Company's
distributors and resellers will not be within the control of the Company, will
not be obligated to purchase products from the Company and may represent other
lines of products. These distributors and resellers may give higher priority to
the sale of other products, which could include products of competitors. A
reduction in sales effort or discontinuance of sales of the Company's products
by its distributors and resellers could lead to reduced sales and could
materially adversely affect the Company' operating results. The Company may be
unable to recruit distributors and resellers in the future. Moreover, the
distribution industry has been characterized from time to time by financial
difficulties experienced by resellers and distributors. Any such problems could
lead to reduced sales and could materially adversely affect the Company's
operating results.
Reliance on Third Party Contract Manufacturers and Component Suppliers.
The Company subcontracts the manufacture of substantially all of its products to
an independent, third party contract manufacturer on a sole source basis, but it
expects to evaluate additional sources in the future. E.Com has contracted with
Millennium Technology Services, Inc. ("Millennium Technology Services") of White
City, Oregon for the manufacture of the Discovery I. The Company performs the
final product testing on a sampled basis at its Beaverton, Oregon facility. In
July 1997, Millennium Technology Services filed a voluntary petition for Chapter
11 bankruptcy. While the Company expects Millennium Technology Services to
continue to meet its needs, it is exploring alternative manufacturers for its
Discovery I product and believes it would require approximately two to four
weeks to commence production with another manufacturer, if necessary. There can
be no assurance, however, that the Company will be able to contract with an
alternative manufacturer on favorable terms and on a timely basis.
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E.Com relies on sole source components including radio modems
manufactured by Motorola Wireless Data Group ("Motorola WDG"), 386 chips
manufactured by Advanced Micro Devices, Inc. and wireline fax/modems
manufactured by Rockwell International Corporation. In addition, the Company
purchases standardized commodities electronics products from a number of
independent suppliers. Currently, the Company has a supply contract with
Motorola WDG for the purchase of radio modems used in its products. The contract
is terminable at will by either party upon ten days' notice. If this contract is
terminated by Motorola WDG, there can be no assurance that the Company will be
able to obtain substitute radio modems on favorable terms or on a timely basis.
Certain components used in the Company's products may not be available without a
long lead-time. If market demand develops for any of the Company's products, the
Company may experience some delay in responding to such demand since production
will be subject to time constraints inherent in obtaining the necessary
components. The Company has already experienced delays in obtaining supplies of
display boards and plastics for its PDxpress and Discovery I products. There is
no assurance that the Company will not experience such problems and/or delays in
future production.
Although to date the Company has generally been able to obtain adequate
supplies of all components, certain of these components are purchased on a
purchase order basis, and the Company does not have long-term supply contracts
for many of its components. There can be no assurance that the Company will not
be affected by component shortages. Although the Company's suppliers are
generally large, well financed organizations, a supplier experiencing financial
or operational difficulties that resulted in a reduction or interruption in
supply to the Company would materially adversely affect the Company's results of
operations until the Company established sufficient manufacturing supply through
an alternative source. The Company's inability in the future to obtain
sufficient limited source components, or to develop alternative sources, could
result in delays in product introductions or shipments, which could have a
material adverse effect on the Company's results of operations.
Future Product Development Required. Although the Company has developed
the PDxpress, Discovery I and Discovery II and is ready to manufacture PDxpress
and Discovery I units, the Company will need to conduct further limited testing
of the Discovery I and Discovery II prior to full production. There can be no
assurance that the Company will be successful in developing its line of products
or that the development will occur on a timely basis before competing products
acquire significant market share. In addition, delays in the testing and
debugging of products may delay the introduction of, or prevent the Company from
introducing, new, follow-on products to the marketplace and adversely affect the
Company's competitive position, financial condition and results of operations.
See "Business."
Lack of Manufacturing Experience. In order for the Company to be
successful as a product or component manufacturer, its products must be
manufactured to meet high quality standards in commercial quantities at
competitive prices. The Company currently has limited experience and capability
to manufacture products in commercial quantities and has contracted with an
electronics manufacturer for initial manufacture of the PDxpress and Discovery
I. The Company is establishing internal procurement, materials resource
planning, incoming test and battery conditioning, parts kitting and final test
procedures in its facilities to better manage its capacity and reduce costs;
however, it outsources all printed circuit board fabrication, board assembly and
final integration. There can be no assurance that the Company will meet its
manufacturing targets as expected or that it will be able to obtain its
objective of reducing costs while achieving high volume development. See
"Business - Strategy" and "-- Manufacturing."
Control By Existing Shareholders. As of December 31, 1997, the
Company's executive officers, directors and 5% shareholders and their affiliates
beneficially own approximately 39.5%, of the Company's outstanding shares of
Common Stock. Accordingly, these individuals will have the ability to influence
the election of the Company's directors as well as significant corporate matters
requiring approval by the shareholders of the Company. Such concentration of
ownership and the lack of cumulative voting also may have the effect of delaying
or preventing a change in control of the Company.
Dependence on Key Personnel. The Company's development and operations
to date have been, and are expected in the immediate future to be, substantially
dependent on the services of its President and Chief Executive Officer, William
F. Stephens. The loss of Mr. Stephens' services could materially and adversely
affect the
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Company's business prospects. The Company is also dependent on the continued
service of certain other key management as well as its hardware and software
engineering personnel, the loss of whose services could significantly delay the
achievement of the Company's planned development objectives. The Company has not
purchased key man life insurance on any of its personnel. Achievement of the
Company's business objectives will require substantial additional expertise in
the areas of technology, finance, manufacturing and marketing. The Company is
actively seeking additional qualified personnel. Competition for qualified
personnel is intense, and the loss of key personnel, or the inability to attract
and retain the additional highly skilled personnel required for the expansion of
the Company's activities, could have a material adverse effect on the Company's
business and results of operations. See "Business - Employees."
Regulation. The Company is subject to various FCC regulations. Current
FCC regulations permit license-free operation of certain FCC-certified wireless
products. There can be no assurance that licensing will not be imposed by the
FCC or if imposed, that the Company would meet its licensing requirements. The
Company's products comply with certain FCC regulations, and the Company's
wireless communications products operate at frequencies based upon these
regulations. Due to recent and ongoing auctions by the FCC of frequencies for
use by communications infrastructures and products and changes in the allocation
of available frequency spectrum the future of remote wireless communications is
highly volatile.
Potential Effect of Anti-Takeover Provisions. The Company's Bylaws
contain certain procedural requirements that could have the effect of delaying
the ability of some shareholders to bring matters before a meeting of the
shareholders or to nominate directors. In addition, certain provisions of Oregon
law could have the effect of delaying, deterring or preventing a change in
control of the Company. See "Description of Registrant's Securities to be
Registered -- Provisions Affecting Acquisitions and Business Combinations."
Absence of Dividends. The Company has not paid cash dividends since its
inception. The Company currently intends to retain all of its earnings, if any,
for use in its business and does not anticipate paying any cash dividends in the
foreseeable future. Pursuant to the Company's Articles of Incorporation and
Bylaws, the payment of dividends is subject to the discretion of the Company's
Board of Directors and any terms and conditions imposed by law.
Redemption of Warrants. As described in greater detail elsewhere in
this Prospectus, outstanding Warrants issued from September 1997 to December
1997 are subject to redemption at $0.25 per Warrant on 30 days written notice at
any time the Common Stock closes at at least $5.00 per share as reported by the
OTC Bulletin Board for each of ten consecutive trading days immediately
preceding the date of the notice of redemption. Warrants issued from January
1997 to July 1997 are subject to redemption at $0.50 per Warrant on 30 days
written notice if the Company files a registration statement with the Commission
for an initial public offering of the Common Stock; an initial public offering
of the Common Stock closes at a price of at least $4.00 per share; or the
Company achieves revenues of at least $4 million. In the event the Company
exercises the right to redeem the Warrants, a holder will be forced either to
exercise the Warrants or accept the redemption price. See "Description of
Registrant's Securities to be Registered -- Warrants."
Current Prospectus and Blue Sky Registration Required to Exercise the
Warrants. Warrant holders will be able to exercise the Warrants included therein
only if a current prospectus relating to the Common Stock underlying such
Warrants is then in effect, and only if such Common Stock is qualified for sale
or exempt from qualification under applicable state securities laws of the
states in which such holders of the Warrants reside. The value of the Warrants
may be impaired if a current prospectus covering the Common Stock issuable upon
exercise of the Warrants is not kept effective, or if such Common Stock is not
qualified or exempt from qualification in the states in which the holders of
Warrants reside.
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Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required hereunder are
included in the annual report as set forth in Item 14 hereof.
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure
The Company reported a change of its independent auditor from BDO Seidman
LLP to KPMG Peat Marwick LLP in its Form 10 filed with the Securities and
Exchange Commission on December 23, 1997 which is hereby incorporated by
reference.
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PART III
Item 10. Directors and Executive Officers of the Registrant
The names, ages and positions of the directors and executive officers
of the Company as of the date hereof are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- ---- --------
<S> <C> <C>
William F. Stephens 49 President, Chief Executive Officer and Director
Jonathan D. Birck 49 Executive Vice President
Barry Rahimian 34 Vice President of Sales and Marketing
Steven A. Larson 48 Chairman of the Board and Vice President of Corporate
Development
Lawrence C. Neitling 49 Director
James M. Sapp 46 Director
</TABLE>
- -----------------
William F. Stephens, a co-founder of the Company, has served as its
President and Chief Executive Officer and as a Director since its formation in
April 1996. From October 1995 to April 1996, Mr. Stephens was the President and
Chief Executive Officer of EnBloc. Mr. Stephens was the founder and from April
1993 to October 1995 served as the President of Scientific Imaging Technologies,
Inc., a developer of advanced electronic imaging devices and systems. From
December 1990 to April 1993, he was President of Photonics Marketing Associates.
Mr. Stephens holds a B.S. and M.S. in electrical engineering from Texas Tech
University.
Jonathan D. Birck joined the Company in November 1997 as Executive Vice
President. From 1984 to the present, Mr. Birck has served as President of
Virtual Corporation, a manufacturer of diagnostic hearing test equipment.
Virtual Corporation ceased production in December 1996. Since that time, Mr.
Birck's role as President of Virtual Corporation has been to assist with the
winding up of the corporation's affairs. From 1981 to 1984, Mr. Birck was
President of Northwest Instrument Systems, Inc., a manufacturer of electronic
test instrumentation. Mr. Birck holds a BSEE degree from Purdue University and
an MSEE degree from Stanford University.
Barry Rahimian has been Vice President of Sales and Marketing
since July 1996. Prior to joining the Company, Mr. Rahimian served as Division
Marketing Manager of Electro Scientific Industries, Inc. from October 1992 to
June 1994, and Director of Worldwide Sales and Marketing for Scientific Imaging
Technologies, Inc. from June 1994 to June 1996. Mr. Rahimian holds a B.S. in
mechanical engineering from Oregon State University and an M.B.A. from Stanford
University.
Steven A. Larson, a co-founder of the Company, has been Chairman of the
Board since its formation in April 1996 and Vice President of Corporate
Development since August 1997. From 1987 to the present, Mr. Larson has been
Chairman and Chief Executive Officer of Decision Point Data, Inc., a provider of
software development and data processing services.
Lawrence C. Neitling joined the Company as a director in August 1997.
Since July 1997 he has been Vice President and General Manager of Grass Valley
Products, a division of Tektronix, Inc., a leading producer of electronic
products for television stations and cable companies. From May 1994 to May 1997,
Mr. Neitling was President and Chief Operating Officer of Merix Corporation, a
developer and manufacturer of high performance printed circuit boards. From 1985
until May 1994, Mr. Neitling held a series of managerial positions at Tektronix
20
<PAGE>
Circuit Board Division which became Merix Corporation in May 1994. Mr. Neitling
is a graduate of Portland State University and serves as a member of its
Engineering Advisory Board.
James M. Sapp has served as a director of the Company since September
1996. Mr. Sapp is the founder and has served as Chairman of Planned Marketing
Solutions of California, Inc. since April 1979. He is also the founder and has
served as Chairman of Championship Sport Games Inc. since June 1987, and was the
founder and Chairman of Slamma Jamma Inc. from February 1992 to January 1997.
Mr. Sapp has also been a business agent for Clyde Drexler of the NBA Houston
Rockets since 1993.
The Company's Board of Directors consists of five directors. Directors
of the Company hold office until the next annual meeting of shareholders or
until their successors have been elected and duly qualified. The Company's 1997
Incentive Compensation Plan provides for the grant of options to directors under
certain circumstances. In accordance with the Company's Bylaws, directors may be
paid for their expenses of attendance at each meeting of the Board of Directors
and may be paid a fee for such attendance or a stated salary as director.
Currently, non-employee directors receive 5,000 options per year for their
services and for their participation at Board meetings. In addition, Mr. Larson,
Chairman of the Board, serves as Vice President of Corporate Development and
receives compensation from the Company for his services. All directors are
reimbursed for reasonable travel and other out-of-pocket expenses incurred in
attending meetings of the Board of Directors.
Executive officers are elected by the Board of Directors of the Company
at the first meeting after each annual meeting of shareholders and hold office
until their successors are elected and duly qualified.
Item 11. Executive Compensation
The following table sets forth compensation earned during the fiscal
years ended December 31, 1996 and 1997 by the Company's President and Chief
Executive Officer (the "CEO"). No executive officer received total salary and
bonus during 1996 in excess of $100,000. The CEO received total salary and bonus
in the amount of $97,000 during 1997. No other executive officer received total
salary and bonus during 1997 in excess of $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
- ---------------------------- ------------ ------------------------------------------- ---------------------
Long-Term
Compensation
Annual Compensation Awards
- ---------------------------- ------------ --------------------- --------------------- ---------------------
Securities
Name and Principal Underlying
Position Year Salary ($) Bonus ($) Options/SARs (#)
- ---------------------------- ------------ --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
1996 84,000 -- 50,000
William F. Stephens
President and CEO 1997 91,000 6,000 100,000
- ---------------------------- ------------ --------------------- --------------------- ---------------------
</TABLE>
21
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth information concerning option grants
held by the Company's President and CEO as of December 31, 1997. The Company has
not issued any stock appreciation rights.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term (1)
-------------- ---------------------- ----------- ---------------- ------------- -------------
Number of
Securities % of Total
Underlying Options/SARs Granted Exercise
Name Options/ to Employees In or Base
SARs Granted Fiscal Year Price Expiration
(#) ($/Sh) Date 5%($) 10%($)
- --------------------- -------------- ---------------------- ----------- ---------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
William F. Stephens 50,000 7.5% 3.00 July 26, 2006 79,236 199,713
- --------------------- -------------- ---------------------- ----------- ---------------- ------------- -------------
100,000 14.9% 3.50 August 22, 2007 212,250 551,443
- --------------------- -------------- ---------------------- ----------- ---------------- ------------- -------------
</TABLE>
(1) Represents amounts that may be realized upon exercise of the options
immediately prior to the expiration of their terms assuming appreciation of
5% and 10% over the option term. The 5% and 10% numbers are calculated
based on rules required by the SEC and do not reflect the Company's
estimate of future stock price growth. The actual value realized may be
greater or less than the potential realizable value set forth.
Aggregated Option Exercises and Option Values
The following table sets forth information concerning the value of
unexercised options as of December 31, 1997 held by the Company's President and
CEO. No options were exercised by the Company's President and CEO as of December
31, 1997.
<TABLE>
<CAPTION>
-------------------------------------- ---------------------------------------
Number of Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
At December 31, 1997 (#) at December 31, 1997 ($)(1)
--------------------------- ------------------- ------------------ ------------------- -------------------
<S> <C> <C> <C> <C>
Name Exercisable Unexercisable Exercisable Unexercisable
--------------------------- ------------------- ------------------ ------------------- -------------------
William F. Stephens 16,667 133,333 8,334 16,667
--------------------------- ------------------- ------------------ ------------------- -------------------
</TABLE>
(1) Based upon the difference between the fair market value of the securities
underlying the option at December 31, 1997 ($3.50 per share as determined
by the Board of Directors) and the exercise price of the options.
Compensation of Directors
In accordance with the Company's Bylaws, directors may be paid for
their expenses of attendance at each meeting of the Board of Directors and may
be paid a fee for such attendance or a stated salary as director. Currently,
non-employee directors receive 5,000 options per year for their services and for
their participation at Board meetings. All directors are reimbursed for
reasonable travel and other out-of-pocket expenses incurred in attending
meetings of the Board of Directors.
22
<PAGE>
Employment Agreement
The Company entered into an employment agreement with William F.
Stephens, the Company's President and CEO, effective May 1, 1996, whereby Mr.
Stephens receives a monthly base salary and certain benefits. Mr. Stephens'
employment may be terminated by the Company at any time, for any reason upon 30
days advance written notice. If the Company terminates Mr. Stephens' employment
without cause, Mr. Stephens will receive severance payments for six months, and
if his employment is terminated as a result of his death or disability, he will
receive any severance or disability payments to which he may be entitled under
the Company's standard benefit plans then in effect. In July 1996, the Company's
Board of Directors resolved that Mr. Stephens' base salary of $7,000 would
increase to $9,000 commencing February 1, 1997. Mr. Stephens voluntarily
suspended this increase until September 1997. In addition, pursuant to an
addendum to the employment agreement dated December 2, 1996, Mr. Stephens was
eligible for a 1997 annual cash performance bonus of $25,000 plus an additional
bonus equal to 2% of that portion of net revenue which exceeded the Company's
expected goal for 1997. The Board gave him a $6,000 bonus, as a result of his
willingness to voluntarily suspend his salary increase. On August 22, 1997, the
Board of Directors authorized a grant to Mr. Stephens of 100,000 incentive stock
options that will vest over three years.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of December 31, 1997 by
(i) each person known by the Company to own beneficially more than 5% of the
Company's outstanding Common Stock ("Principal Shareholder"); (ii) each of the
Company's directors; (iii) each of the Company's executive officers; and (iv)
all executive officers and directors of the Company as a group.
23
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Owned (1)
----------------------------
Name and Addresses Number Percent(2)
- ----------------------------- ------------- -------------
<S> <C> <C>
Paulson Investment Company Inc. ................... 290,000 12.2
811 Front Ave., Suite 200
Portland, OR 97204
Barclay Armitage .................................. 250,000 10.5
Murray Business Center
3601 SW Murray Blvd., Suite 62
Beaverton, OR 97005
Steven A. Larson(3) ............................... 211,667 8.8
7737 S.W. Cirrus Drive
Beaverton, OR 97008
William F. Stephens(3) ............................ 103,334 4.3
James M. Sapp(4) .................................. 55,000 2.3
Lawrence C. Neitling .............................. 12,500 *
Max E. Toy(4) ..................................... 5,000 *
Jonathan D. Birck ................................. -- --
Barry Rahimian(5) ................................. 10,000 *
All executive officers and directors as a
group (seven persons)(6) .......................... 397,501 16.4
</TABLE>
- ------------------
* less than one percent
(1) Shares not outstanding but deemed beneficially owned by virtue of the
right of an individual to acquire them within 60 days are treated as
outstanding for determining the amount and percentage of Common Stock
owned by such individual. To the Company's knowledge, each person has sole
voting and sole investment power with respect to the shares shown.
(2) Rounded to the nearest 1/10th of one percent, based on 2,375,577 shares of
Common Stock outstanding and assuming no exercise of any warrants or any
outstanding options.
(3) Includes 16,667 shares issuable upon exercise of options exercisable
within 60 days after December 15, 1997.
(4) Includes 5,000 shares issuable upon exercise of options exercisable within
60 days after December 15, 1997.
(5) Includes 10,000 shares issuable upon exercise of options exercisable
within 60 days after December 15, 1997.
(6) Includes 53,334 shares issuable upon exercise of options exercisable
within 60 days after December 15, 1997.
Item 13. Certain Relationships and Related Transactions
The Company has entered into several demand notes with a principal
balance of $195,000 as of December 31, 1997 with A&B Partnership and W.B.
Armitage Trust, both affiliated with Barclay Armitage, a principal shareholder,
in exchange for cash advances to provide working capital for the Company. All
notes are term notes payable on March 20, 1998; and interest is payable monthly
at an annual rate of 10%.
24
<PAGE>
PART IV
Item 14. Exhibits, Financial Schedules, and Reports on Form 8-K
The Financial Statements are found on pages F-1 through F-20 of this
Form 10-K. The Financial Statement Table of Contents is on Page F-1. The Exhibit
Index is found on Page 26 of this Form 10-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of
Beaverton, State of Oregon on this 27th day of March, 1998.
E.COM INTERNATIONAL, INC.
By /s/ William F. Stephens
-----------------------------------
William F. Stephens
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities indicated on this 27th day of March, 1998.
Signatures Title
---------------- ------------------
/s/ William F. Stephens President, Chief Executive Officer,
- -------------------------------- Director and Principal Financial Officer
William F. Stephens
/s/ Steven A. Larson Chairman of the Board and Vice President
- -------------------------------- of Corporate Development
Steven A. Larson
/s/ Lawrence C. Neitling Director
- --------------------------------
Lawrence C. Neitling
/s/ James M. Sapp Director
- --------------------------------
James M. Sapp
25
<PAGE>
EXHIBIT INDEX
FROM 10-K
E.COM INTERNATIONAL, INC.
<TABLE>
<CAPTION>
Exhibit
No. Description
- --------------- ---------------------------------------------
<S> <C>
3.1+ Articles of Incorporation of the Company
3.2+ Bylaws of the Company
4.1+ Form of Warrant Number One for Purchase of Common Stock
4.2+ Form of Warrant Number Two for Purchase of Common Stock
4.3+ Warrant Agreement including Form of Warrant
4.4+ Form of Warrant for Purchase of Units
10.1+ Employment Agreement between the Company and William F. Stephens
10.2+ Employment Agreement between the Company and Jonathan D. Birck
10.3+ Contract between Company and Motorola Wireless Data Group
10.4+ Agreement between Company and L.G. Zangani, Inc.
10.5+ 1997 Incentive Compensation Plan
10.6+ Lease with Gateway Columbia Properties
16+ Letter from BDO Seidman, LLP Regarding Change in Certifying Accountant
27 Financial Data Schedule
</TABLE>
+ Filed previously with the Company's Registration Statement on Form 10 (No.
000-23547) filed with the Securities and Exchange Commission on December
24, 1997.
Copies of Exhibits may be obtained upon request directed to Mr. William F.
Stephens, E.Com International, Inc., 7737 S.W. Cirrus Drive, Beaverton, Oregon
97008.
26
<PAGE>
E.COM INTERNATIONAL, INC.
FINANCIAL STATEMENTS
Index
Independent Auditors' Report....................................... F-2
Balance Sheets..................................................... F-3
Statements of Operations........................................... F-4
Statements of Shareholders' Equity (Deficit)....................... F-5
Statements of Cash Flows........................................... F-6
Notes to Financial Statements...................................... F-8
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
E.Com International, Inc.:
We have audited the accompanying balance sheets of E.Com International, Inc. (a
company in the development stage) as of December 31, 1997 and 1996, and the
related statements of operations, shareholders' equity (deficit), and cash flows
for the year ended December 31, 1997, for the period from April 4, 1996 (date of
inception) to December 31, 1996 and for the period from April 4, 1996 (date of
inception) to December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of E.Com International, Inc. (a
company in the development stage) as of December 31, 1997 and 1996, and the
results of its operations and its cash flows for the year ended December 31,
1997, for the period from April 4, 1996 (date of inception) to December 31, 1996
and for the period from April 4, 1996 (date of inception) to December 31, 1997
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 2 to the
financial statements, the Company has no significant operating revenues and has
suffered recurring losses from operations that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Portland, Oregon KPMG PEAT MARWICK LLP
February 27, 1998
F-2
<PAGE>
E.COM INTERNATIONAL, INC.
(A Company in the Development Stage)
Balance Sheets
<TABLE>
<CAPTION>
December 31
---------------------------
1997 1996
----------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,839,281 $ 16,190
Inventories 315,023 8,916
Prepaid expenses and other assets 19,156 7,907
----------- ---------
Total current assets 2,173,460 33,013
----------- ---------
Property and equipment, net 380,206 87,739
Intangible assets, net 19,833 9,767
Prepaid software royalties, net 40,750 --
Other assets -- 5,500
----------- ---------
$ 2,614,249 $ 136,019
----------- ---------
----------- ---------
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Accounts payable 237,245 59,026
Accrued liabilities 95,558 45,818
Notes payable to shareholder 195,000 195,000
Contract payable -- 32,000
Current portion of capital lease obligations 2,144 --
----------- ---------
Total current liabilities 529,947 331,844
----------- ---------
Capital lease obligations, less current portion 11,087 --
Commitments
Shareholders' equity (deficit):
Common stock, no par value, authorized 10,000,000 shares;
2,375,577 and 951,684 issued and outstanding at December
31, 1997 and 1996, respectively 3,386,025 377,181
Warrants outstanding 1,268,146 --
Subscriptions receivable from sale of stock -- (5,796)
Deficit accumulated during the development stage (2,580,956) (567,210)
----------- ---------
Total shareholders' equity (deficit) 2,073,215 (195,825)
----------- ---------
$ 2,614,249 $ 136,019
----------- ---------
----------- ---------
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
E.COM, INTERNATIONAL, INC.
(A Company in the Development Stage)
Statements of Operations
<TABLE>
<CAPTION>
Period from Period from
April 4, 1996 April 4, 1996
(date of (date of
Year ended inception) to inception) to
December 31, December 31, December 31,
1997 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Sales $ 25,237 $ -- $ 25,237
Cost of sales 21,797 -- 21,797
----------- ----------- -----------
Gross profit 3,440 -- 3,440
----------- ----------- -----------
Operating expenses:
Research and development 1,112,974 230,525 1,343,499
Sales and marketing 238,467 89,649 328,116
General and administrative 655,100 243,514 898,614
----------- ----------- -----------
2,006,541 563,688 2,570,229
----------- ----------- -----------
Loss from operations (2,003,101) (563,688) (2,566,789)
Other income (expense):
Interest income 19,139 -- 19,139
Interest expense (29,784) (3,522) (33,306)
----------- ----------- -----------
Loss before provision for income taxes (2,013,746) (567,210) (2,580,956)
Provision for income taxes -- -- --
----------- ----------- -----------
Net loss $(2,013,746) $ (567,210) $(2,580,956)
----------- ----------- -----------
----------- ----------- -----------
Basic loss per share $ (1.46) $ (.63) $ (2.20)
----------- ----------- -----------
----------- ----------- -----------
Shares used in calculation 1,378,365 896,054 1,171,552
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
E.COM, INTERNATIONAL, INC.
(A Company in the Development Stage)
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Deficit
Notes accumulated Total
Common stock receivable during the shareholders'
-------------------------- Warrants from sale development equity
Shares Amount outstanding of stock stage (deficit)
---------- ---------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 4, 1996 (date
of inception) -- $ -- -- $ -- $ -- $ --
Issuance of common shares 951,684 377,181 -- (5,796) -- 371,385
Net loss -- -- -- -- (567,210) (567,210)
---------- ---------- ---------- ------- ----------- -----------
Balance at December 31, 1996 951,684 377,181 -- (5,796) (567,210) (195,825)
Issuance of common shares and
warrants, net of
approximately $1,032,000 in
offering expenses 1,423,893 3,008,844 1,268,146 -- -- 4,276,990
Payments received on receivable
from sale of stock -- -- -- 5,796 -- 5,796
Net loss -- -- -- -- (2,013,746) (2,013,746)
---------- ---------- ---------- ------- ----------- -----------
Balance at December 31, 1997 $2,375,577 $3,386,025 $1,268,146 $ -- $(2,580,956) $ 2,073,215
---------- ---------- ---------- ------- ----------- -----------
---------- ---------- ---------- ------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
E.COM, INTERNATIONAL, INC.
(A Company in the Development Stage)
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from Period from
April 4, 1996 April 4, 1996
(date of (date of
Year ended inception) to inception) to
December 31, December 31, December 31,
1997 1996 1997
-------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,013,746) $(567,210) $(2,580,956)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 115,746 11,335 127,081
Write off of acquired products in development -- 39,098 39,098
Changes in operating assets and liabilities:
Inventories (306,107) (6,990) (313,097)
Prepaid expenses and other assets (64,420) (25,964) (90,384)
Accounts payable and accrued liabilities 227,959 104,844 332,803
----------- --------- -----------
Net cash used in operating activities (2,040,568) (444,887) (2,485,455)
----------- --------- -----------
Cash flows from investing activities:
Capital expenditures (385,850) (73,765) (459,615)
Acquisition of EnBloc assets -- (31,543) (31,543)
----------- --------- -----------
Net cash used in investing activities (385,850) (105,308) (491,158)
----------- --------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock and warrants, net 4,176,990 371,385 4,548,375
Proceeds from issuance of notes payable to shareholders 225,000 195,000 420,000
Repayment of notes payable to shareholders (125,000) -- (125,000)
Principal payments under capital lease obligation (1,277) -- (1,277)
Repayment of contract payable (32,000) -- (32,000)
Payments received on subscriptions receivable from sale
of stock 5,796 -- 5,796
----------- --------- -----------
Net cash provided by financing activities 4,249,509 566,385 4,815,894
----------- --------- -----------
Net increase in cash and cash equivalents 1,823,091 16,190 1,839,281
Cash and cash equivalents at beginning of period 16,190 -- --
----------- --------- -----------
Cash and cash equivalents at end of period $ 1,839,281 $ 16,190 $ 1,839,281
----------- --------- -----------
----------- --------- -----------
</TABLE>
F-6
<PAGE>
E.COM, INTERNATIONAL, INC.
(A Company in the Development Stage)
Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
Period from Period from
April 4, 1996 April 4, 1996
(date of (date of
Year ended inception) to inception) to
December 31, December 31, December 31,
1997 1996 1997
------------ ------------- -------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 16,040 $ 2,148 $ 18,188
-------- ------- --------
-------- ------- --------
Supplemental schedule of noncash investing and financing activities:
Effective May 1, 1996, the Company purchased certain assets of
EnBloc for $63,543. In conjunction with the acquisition, a contract
payable was incurred as follows:
Fair value of assets acquired -- 63,543 63,543
Cash consideration -- 31,543 31,543
-------- ------- --------
Contract payable incurred $ -- $32,000 $ 32,000
-------- ------- --------
-------- ------- --------
Sale of common stock for subscriptions receivable $ -- $ 5,796 $ 5,796
Capital lease obligation incurred for purchase of equipment 14,508 -- 14,508
Warrants issued for partial compensation to selling agent 53,241 -- 53,241
Note payable to shareholder converted to common stock 100,000 -- 100,000
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
E.COM, INTERNATIONAL, INC.
(A Company in the Development Stage)
Notes to Financial Statements
December 31, 1997 and 1996
(1) Summary of Significant Accounting Policies
Nature of Business
The financial statements include the accounts of E.Com International,
Inc. (E.Com or the Company). The Company was incorporated on April 4,
1996 as E.B.I Acquisition, Inc. and changed its name as of January 10,
1997. It is a development stage company which is in the process of
developing, manufacturing and marketing integrated wireless mobile
computing products for the mobile computer market. Since inception the
Company has primarily been engaged in product development, market
development and organizational development activities.
On May 1, 1996, the Company acquired key product designs and technologies
from EnBloc, Inc. (EnBloc). The acquisition was accounted for using the
purchase method, and the estimated fair values of the assets purchased
and liabilities assumed were recorded in the financial statements on the
date of acquisition.
Cash and Cash Equivalents
The Company considers all highly liquid investments having an original
maturity of three months or less to be cash equivalents.
Inventory
Inventory, consisting principally of raw materials, parts and supplies,
are valued at the lower of cost (first-in, first-out method) or market.
Property and Equipment
Property and equipment is stated at cost. Equipment under capital lease
is stated at the present value of minimum lease payments.
Depreciation is provided using the straight-line method over the
following estimated useful lives:
<TABLE>
<S> <C>
Furniture and fixtures 5 to 7
Computers and equipment 3 to 7
Leasehold improvements 5
</TABLE>
Depreciation for tooling is provided using the straight-line method over
the estimated useful life of the asset or the product life, whichever is
shorter; generally one year.
Equipment under capital lease is amortized straight-line over five years
which is the shorter of the estimated useful life of the asset or the
lease term.
F-8
<PAGE>
Intangible Assets
Intangible assets include the E.Com trademark and logo, and patents.
These intangible assets are being amortized using the straight-line
method over the three year estimated useful life of the assets.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents. Cash
and cash equivalents consist of deposits and money market funds placed
with various high credit quality financial institutions.
Net Income (Loss) Per Share
The Company has adopted Statement of Financial Accounting Standards
(SFAS) No. 128 (SFAS No. 128) "Earnings Per Share". SFAS No. 128 requires
presentation of basic and diluted net income (loss) per share. Basic net
income (loss) per share is net income (loss) available to common
shareholders divided by the weighted-average number of common shares
outstanding. Diluted net income (loss) per share is similar to basic
except that the denominator includes potential common shares that, had
they been issued, would have had a dilutive effect.
(2) Development Stage Business and Going Concern
E.Com has been in development stage since its inception on April 4, 1996.
The Company has no significant operating revenues and has suffered
significant recurring losses from operations through December 31, 1997.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management of the Company has initiated the
following actions to address these conditions.
The Company is in the process of developing and introducing a series of
integrated wireless mobile communications and computing products for the
mobile computer market. Since acquiring product designs and technologies
from EnBloc in 1996 (see note 3 - Business Acquisition), the Company has
focused on assembling a qualified technical and executive management
team, developing key modular product designs, improving battery
management technology, refining manufacturing technology for mobile
computing docking stations and fully integrated wireless handheld
personal computers and
F-9
<PAGE>
raising capital. The Company expects to generate product sales revenue
during the first half of 1998.
The Company's initial products include the PDxpress, a lightweight
compact docking station, and the Discovery I and Discovery II, integrated
palmtop mobile computing products. These products will allow the user
wireless access to files and databases via the Internet as well as
corporate intranets, and to send and receive wireless e-mail and faxes,
as well as order entry, status checks and remote data base queries. The
Company's products are designed for the growing markets of field sales
and services organizations, financial services representatives, health
services providers, and the transportation industry.
(3) Business Acquisition
The Company acquired key product designs and technologies from EnBloc,
effective May 1, 1996 for a promise to pay $32,000 in cash and the
assumption of certain vendor liabilities. The $63,543 total purchase
price was allocated to assets acquired based upon preliminary estimates
of fair values as follows:
<TABLE>
<S> <C>
Products in development $39,098
Furniture and fixtures 20,169
Computers and equipment 2,350
Inventory 1,926
--------
Total $63,543
--------
--------
</TABLE>
The acquired products in development were considered not to have attained
technological feasibility and were expensed subsequent to the
acquisition.
(4) Property and Equipment
<TABLE>
<CAPTION>
December 31
---------------------------
1997 1996
--------- ---------
<S> <C> <C>
Leasehold improvements $ 9,928 $ 9,928
Furniture and fixtures 50,955 47,870
Computers and equipment 47,374 38,486
Tooling 313,080 --
Equipment under capital lease 14,508 --
---------- --------
435,845 96,284
Less accumulated depreciation and amortization (55,639) (8,545)
--------- --------
$ 380,206 $ 87,739
---------- ---------
---------- ---------
</TABLE>
F-10
<PAGE>
(5) Intangible Assets
<TABLE>
<CAPTION>
December 31
------------------------------
1997 1996
-------- --------
<S> <C> <C>
Trademark and logo $ 21,464 $ 12,242
Patents and other 10,076 315
-------- --------
31,540 12,557
Accumulated amortization (11,707) (2,790)
-------- --------
Intangible assets, net $ 19,833 $ 9,767
-------- --------
-------- --------
</TABLE>
(6) Related Party Transactions
Notes payable to shareholder consists of several unsecured demand notes
issued to one of the Company's principal shareholders in exchange for
cash advances to provide working capital for the Company. The notes and
interest are payable on demand, with interest at an annual rate of 10%.
At December 31, 1997, the Company was current in its payment and
obligations on all notes, the principal balance of the notes totaled
$195,000 and accrued interest totaled $15,118.
The Company had a contract with Steven A. Larson, a significant
shareholder who is also a director, for Mr. Larson to perform research
and develop equity financing resources for the Company and to assist with
corporate strategy and related issues. Under the contract, dated August
1, 1996, the Company paid Mr. Larson $3,000 per month until July 31, 1997
for these services. The Company also granted Mr. Larson options to
acquire 50,000 shares of the Company's common stock at $3.00 per share
vesting one third as of May 31, 1997, 1998 and 1999, respectively.
(7) Income Taxes
The actual benefit differs from the "expected" benefit computed by
applying the U.S. federal corporate rate for the year ended December 31,
1997 and for the period from April 4, 1996 (date of inception) to
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Computed "expected" income tax benefit (34)% (34)%
Increases (decreases) resulting from:
State income taxes, net of federal tax benefit (4) (4)
Increase in valuation allowance 41 38
Research and experimentation credit (3) --
------- ------
Actual tax benefit --% --%
------- ------
------- ------
</TABLE>
F-11
<PAGE>
The tax effects of temporary differences and net operating loss
carryforwards which give rise to significant portions of deferred tax
assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
December 31
------------------------------
1997 1996
----------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 908,717 $ 200,992
Obsolete inventory 61,914 --
Tax basis intangible assets, due to differences in
amortization 92 14,548
Accrued vacation 6,878 2,373
Research and experimentation credit
carryforwards 67,661 --
Property and equipment, due to differences in
depreciation 3,780 --
----------- ---------
Total gross deferred tax assets 1,049,042 217,913
----------- ---------
Less valuation allowance (1,049,042) (216,326)
----------- ---------
Net deferred tax assets -- 1,587
Deferred tax liabilities:
Property and equipment, due to differences in
depreciation -- 1,587
----------- ---------
Total deferred tax liabilities -- 1,587
----------- ---------
Net deferred tax liability (asset) $ -- $ --
----------- ---------
----------- ---------
</TABLE>
The valuation allowance for the deferred tax assets as of April 4, 1996
(date of inception) was $-0-. The net change in the total valuation
allowance for the year ended December 31, 1997 and for the period from
April 4, 1996 (date of inception) to December 31, 1996 was an increase of
$832,716 and $216,326, respectively. A valuation allowance is established
when necessary to reduce deferred taxes to the amount expected to be
realized.
At December 31, 1997, the Company has a net operating loss carryforwards
of approximately $2,370,000 to offset future income for federal and state
purposes which will expire in 2011 - 2012. In addition, the Company has
research and experimentation credit carryforwards for federal and state
purposes of approximately $57,000 and $17,000, respectively, to reduce
future federal and state income taxes, if any, which expire in 2011 -
2012.
A provision of the Internal Revenue Code requires the utilization of net
operating losses be limited when there is a change of more than 50% in
ownership of the Company. The Company appears to have incurred an
ownership change under IRC Section 382. This potential ownership change
would limit the utilization of any operating losses and research and
experimentation credits incurred prior to
F-12
<PAGE>
the change in ownership date. The Company intends to complete an analysis
under IRC Section 382 to determine if any ownership change has occurred.
(8) Commitments
The Company leases office space under an operating lease which expires
September 30, 1999 and leases certain office equipment under an operating
lease which expires October 29, 1998. Rent expense incurred under these
leases for the year ended December 31, 1997 and for the period from April
4, 1996 (date of inception) to December 31, 1996 was $65,629 and $27,489,
respectively.
The Company is obligated under a capital lease for certain office
equipment. The lease expires April 2002. The gross amounts of equipment
and accumulated amortization recorded under the capital lease was $14,508
and $1,381 as of December 31, 1997, respectively.
Future minimum lease payments under noncancelable operating leases and
future minimum capital lease payments as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
Capital lease Operating lease
--------------- ---------------
<S> <C> <C>
Year ending December 31:
1998 $ 3,804 $56,663
1999 3,804 40,995
2000 3,804 --
2001 3,804 --
2002 1,268 --
------- -------
Total minimum lease payments 16,484 $97,658
-------
-------
Less amount representing interest 3,253
-------
Present value of net minimum capital lease
payments 13,231
Less current portion of capital lease obligations 2,144
-------
Capital lease obligations, less current portion $11,087
-------
-------
</TABLE>
(9) Incentive Compensation Plan
The Company has an Incentive Compensation Plan (the Incentive Plan),
under which shares of the Company's common stock may be made available to
the Company's employees, officers, directors and selected non-employee
agents, consultants, advisors, persons involved in the sale of
distribution of the Company's products and independent contractors of the
Company.
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123), which defines a fair value based method of
accounting for an employee stock option and similar equity instrument. As
permitted under SFAS 123, the Company has elected to continue to account
for its stock-based compensation plan under Accounting Principal Board
Opinion No. 25, Accounting for Stock Issued
F-13
<PAGE>
to Employees (APB 25), and related interpretations. Accordingly, no
compensation expense has been recognized for the Plan. The Company has
computed, for pro forma disclosure purposes, the value of options granted
under the Incentive Plan using the minimum value method as prescribed by
SFAS 123. The following weighted average assumptions for grants used in
the calculation are as follows: a risk-free interest rate of 6.25%, an
expected dividend yield of 0%, and an expected life of five years.
Using the minimum value method, the total value of options granted during
1997 and 1996 was $512,522 and $78,948, respectively, which is amortized
on a pro forma basis over the vesting period of the options. If the
Company had accounted for its stock-based compensation plan in accordance
with SFAS 123, the Company's net loss for year ended December 31, 1997
and for the period from April 4, 1996 (date of inception) to December 31,
1996 would approximate the pro forma disclosure as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Net loss:
As reported $(2,013,746) $(567,210)
----------- ---------
----------- ---------
Pro forma $(2,082,269) $(574,045)
----------- ---------
----------- ---------
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts and additional awards are anticipated in
future years.
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
Weighted
Number of average price per
shares share
-------------- ------------------
<S> <C> <C>
Options outstanding April 6, 1996 -- $--
Granted 100,000 3.00
Exercised -- --
Canceled -- --
--------------
Options outstanding at December 31, 1996 100,000 3.00
Granted 570,000 3.44
Exercised -- --
Canceled -- --
--------------
Options outstanding at December 31, 1997 670,000 3.37
--------------
--------------
</TABLE>
Options become exercisable over a period of generally four years from the
date of grant as determined by the Board, at prices generally not less
than the fair market value at the date of grant. At December 31, 1997,
61,666 options were exercisable. As of December 31, 1997, the Company had
reserved 1,000,000 shares for issuance under the Incentive Plan, with
330,000 shares available for future grant.
F-14
<PAGE>
(10) Shareholders' Equity
The Company issued the warrants in conjunction with sales of the common
stock during 1997. The warrants issued between September 1997 and
December 1997 are described below as "Second Offering Warrants". In
connection with such sales the Company also issued the selling agent
warrants to purchase 10% of the number of units (each unit consisted of
1,000 shares of the Common Stock and 1,000 Warrants each to purchase one
share of the Common Stock) sold in the offering (the Unit Warrants). The
Company also issued warrants in connection with sales of the Common Stock
from January 1997 to July 1997, described below as "First Offering
Warrants". In connection with this private offering the Company also
issued the selling agent for that transaction warrants to purchase 35,000
shares of the common stock (the Selling Agent's Warrants").
Second Offering Warrants
As of December 31, 1997, the Company had issued warrants to acquire up to
1,077,143 shares of common stock at an exercise price of $3.50, subject
to the warrant. Each warrant entitles the holder thereof to purchase from
the Company, subject to certain terms and conditions one fully paid and
non-assessable share of common stock prior to December 31, 2002 or, if
such warrant is redeemed as provided in the Warrant Agreement, at any
time prior to the effective time of such redemption.
Each warrant initially entitles the holder to purchase one share of
common stock for $3.50, subject to reduction by $0.01 per day for each
day after the 90th day following the last day on which warrants are sold
by the Company on which a registration relating in part to the warrants
and the common stock obtainable on exercise thereof is not effective
under the Securities Act of 1933, as amended. The number and kind of
securities or other property for which the warrants are exercisable (and
the rate of reduction, if any, in the Exercise Price) are subject to
further adjustment in certain events, such as mergers, splits, stock
dividends, recapitalizations and the like, to prevent dilution. The
Company may redeem any or all outstanding and unexercised warrants at any
time if the Daily Price, as defined, has exceeded $5.00 for twenty
consecutive trading days immediately preceding the date of notice of such
redemption, upon 30 days notice, at a price equal to $0.25 per Warrant.
All warrants not exercised or redeemed prior to December 31, 2002 will
automatically expire. The warrants are issued subject to all of the
terms, provisions and conditions of the Warrant Agreement.
Unit Warrants
In connection with an exempt private offering, the Company issued
warrants to the selling agent thereof and reserved up to 213,400 shares
of common stock for issuance upon exercise of the Unit Warrants
(including the shares underlying the Warrants issuable upon exercise of
the Unit Warrants). The Unit Warrants entitle the holder to acquire
106,700 shares of the common stock and 106,700 warrants to acquire one
share each of the common stock. The Unit Warrants are exercisable at any
time until December 5, 2002.
First Offering Warrants
As of December 31, 1997 the Company had issued First Offering Warrants to
acquire up to 352,250 shares of common stock at an exercise price of
$3.50. The First Offering Warrants expire in January 1999, unless earlier
redeemed. The Company may redeem the First Offering Warrants, at $.50 per
warrant, upon at least 30 days prior written notice by the Company to the
holders, if (1) the Company files a registration statement with the
Commission for an initial public offering of the Company's common stock;
(2) an initial public offering of the Company's common stock closes on
F-15
<PAGE>
or before the expiration of the warrants at a price of at least $4.00 per
share; or (3) the Company achieves revenues of at least $4 million.
Selling Agent's Warrants
The Company has also issued warrants to acquire up to 35,000 shares of
common stock at an exercise price of $2.00 per share which will expire on
the fifth anniversary after the date of the Company's initial public
offering. Such warrants contain no call option.
F-16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
audited financial statements of E.Com International, Inc. and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,839,281
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 315,023
<CURRENT-ASSETS> 2,173,460
<PP&E> 435,845
<DEPRECIATION> 55,639
<TOTAL-ASSETS> 2,614,249
<CURRENT-LIABILITIES> 529,947
<BONDS> 0
0
0
<COMMON> 3,386,025
<OTHER-SE> 1,268,146
<TOTAL-LIABILITY-AND-EQUITY> 2,614,249
<SALES> 25,237
<TOTAL-REVENUES> 3,440
<CGS> 21,797
<TOTAL-COSTS> 2,006,541
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (29,784)
<INCOME-PRETAX> (2,013,746)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,003,101)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,013,746)
<EPS-PRIMARY> (1.46)
<EPS-DILUTED> (1.46)
</TABLE>
