<PAGE>
REGISTRATION NO. 000-23547
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of The Securities Exchange Act of 1934
E.COM INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Oregon 91-1600822
- --------------------------------------- ---------------------------------
(state or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7737 S.W. Cirrus Drive, Beaverton, Oregon 97008
- --------------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including (503) 671-9900
area code ---------------------------------
Securities to be registered pursuant to Section 12(b) of the Act:
Name of each exchange on which each
Title of each class to be so registered class is to be registered
Not Applicable Not Applicable
- --------------------------------------- ---------------------------------
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
- ------------------------------------------------------------------------------
(Title of class)
Warrants to purchase common stock
- ------------------------------------------------------------------------------
(Title of class)
<PAGE>
TABLE OF CONTENTS
PAGE
----
Item 1. Business............................................................1
Item 2. Financial Information..............................................14
Item 3. Properties.........................................................16
Item 4. Security Ownership of Certain Beneficial Owners and Management.....16
Item 5. Directors and Executive Officers...................................17
Item 6. Executive Compensation.............................................18
Item 7. Certain Relationships and Related Transactions.....................19
Item 8. Legal Proceedings..................................................20
Item 9. Market Price of and Dividends on the Registrant's Common Equity
and Related Stockholder Matters....................................20
Item 10. Recent Sales of Unregistered Securities............................20
Item 11. Description of Registrant's Securities to be Registered............21
Item 12. Indemnification of Directors and Officers..........................23
Item 13. Financial Statements and Supplementary Data........................24
Item 14. Changes in and Disagreements With Accountants or Accounting
and Financial Disclosure...........................................24
Item 15. Financial Statements and Exhibits..................................24
<PAGE>
ITEM 1. BUSINESS
E.Com International, Inc., 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 Hewlett Packard handheld personal computers. The Company has
completed development of these products and expects first commercial sales 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
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
1
<PAGE>
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.
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:
- - 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.
- - 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,
2
<PAGE>
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.
- - 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.
- - 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).
- - 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.
- - 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.
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 X X
system
Wireless network capability DataTac DataTac or Mobitex DataTac
Data collection applications X
Data transfer X
E-mail and fax X X
Corporate network access X
Internet access X
Paging X X
Power management X X
Power-save mode X X
Battery life 30+ hours 30+ hours 30+ hours
operation operation operation
Resolution 480 x 320 LCD 480 x 320 LCD
1/2 VGA display 1/2 VGA display
Backlighting X
Durable design X X X
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)
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
3
<PAGE>
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:
- - 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.
- - 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.
- - 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.
- - 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.
- - 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.
- - 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
4
<PAGE>
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, Hong Kong, Korea and Japan. As described
above, these regions 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,
Hanse Telecom in Korea 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 such as IKON, 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.
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 December 15, 1997, the
Company had two 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.
5
<PAGE>
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
CB-RAM Electronics of Beaverton, Oregon for the initial manufacture of the
PDxpress and Discovery I, and Millennium Technology Services of White City,
Oregon for the higher volume manufacturing of the Discovery I. The Company
expects to enter into written agreements with these 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. 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."
6
<PAGE>
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 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 15, 1997, E.Com had twelve full-time employees and three
part-time consulting or contract employees. E.Com is actively seeking
additional qualified personnel where appropriate. 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."
RISK FACTORS
THE INFORMATION SET FORTH IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS" AND ELSEWHERE
IN THIS FORM INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN OF THE RISK FACTORS SET FORTH BELOW AND
INFORMATION APPEARING ELSEWHERE IN THIS FORM.
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
7
<PAGE>
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 September 30, 1997, the Company had an accumulated deficit since
inception of $1,956,075. The Company expects to continue to incur substantial
losses and negative 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 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
8
<PAGE>
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 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 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 prior to the
Company's products 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.
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
9
<PAGE>
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. See "Business--Competition."
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 tend to lag behind such
inventions by several months, 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.
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 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
10
<PAGE>
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 independent, third party contract manufacturers on a sole source basis,
but it expects to engage additional sources in the future. E.Com has
contracted with CB-RAM Electronics of Beaverton, Oregon for the initial
manufacture of the PDxpress and Discovery I, and Millennium Technology
Services, Inc. ("Millennium Technology Services") of White City, Oregon for
the higher volume manufacturing 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.
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
11
<PAGE>
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 PDxpress, 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 two electronics manufacturers 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. Currently, the Company's executive
officers, directors and 5% shareholders and their affiliates beneficially own
approximately 38.6%, 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 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."
12
<PAGE>
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 the
Form, outstanding Warrants 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. 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-- Unit
Warrants."
CURRENT PROSPECTUS AND BLUE SKY REGISTRATION REQUIRED TO EXERCISE THE
WARRANTS. Purchasers of Units 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.
13
<PAGE>
ITEM 2. FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
Statement of Operations Data:
<TABLE>
<CAPTION>
Period from
April 4, 1996
Period from (date of
April 4, 1996 (date Nine months ended inception) to
of inception) to September 30, September 30,
December 31, 1996 1997 1997
------------------- ----------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Sales .................................... -- 1,650 1,650
Loss from operations ..................... 563,688 1,370,047 1,933,735
Loss before provision for income taxes ... 567,210 1,388,865 1,956,075
Loss from operations per common share .... (1.50) -- (1.12)
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
As of December 31, As of September 30,
1996 1997
------------------ -------------------
<S> <C> <C>
Total Assets ............................. 136,019 927,190
Working Capital (Deficit) ................ (298,871) 245,310
Total Long-Term Obligations, less Current
Maturities ............................... 11,650
Total Shareholders (Deficit) Equity ...... (195,825) 433,669
</TABLE>
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 1997.
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 late 1997 at the earliest. The Company
expects to continue development of its products through 1997 and thereafter
to continue development of enhancements, upgrades, software and 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."
PLAN OF OPERATION
During December 1997, the Company plans to commence commercial
production and shipment of its first three products. 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.
14
<PAGE>
RESULTS OF OPERATIONS AND GOING CONCERN
The Company is in the development stage and has not generated any
significant revenues. As of September 30, 1997, the Company had an
accumulated deficit since inception of $1,956,075. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
RESEARCH AND DEVELOPMENT EXPENSES
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 September 30, 1997 were $989,378. 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.
SALES, MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES
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 September 30, 1997 were
approximately $944,841. 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.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations primarily through
private placements of common stock. As of September 30, 1997, amounts raised
in private equity transactions, net of issuance costs, totaled $1,402,875.
Through September 30, 1997, the Company had incurred an accumulated deficit
of $1,956,075, of which $779,657 represented expenses of employee
compensation. The Company had cash and cash equivalents of $372,232 at
September 30, 1997.
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.
RECENT DEVELOPMENTS
From September through December 1997, the Company raised an additional $3.8
million in an exempt private offering. The net proceeds from this offering
together with its existing cash and cash equivalent balances and anticipated
revenues will enable the Company to complete production tooling and setup for
both the PDxpress and the Discovery-TM-; hire additional staff in marketing,
manufacturing and engineering; expand marketing, sales and applications
support necessary to book initial orders for these products; initiate
development on next generation products; and provide working capital as the
Company experiences revenue growth. The Company expects that cash raised
from the recent offering together with anticipated revenues will fund the
Company for at least the next nine to twelve months.. See "Risk
Factors--Capital Requirements."
15
<PAGE>
ITEM 3. 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 4. 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 15, 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) the Named Executive Officer; and (iv) all
executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
Shares Beneficially Owned(1)
-----------------------------
Name Number Percent(2)
- ---------------------------------------- ----------- --------------
<S> <C> <C>
Paulson Investment Company Inc. ........ 290,000 12.2
Barclay Armitage ....................... 250,000 10.5
Steven A. Larson(3) .................... 211,667 8.8
William F. Stephens(4) ................. 103,334 4.3
James M. Sapp(5) ....................... 55,000 2.3
Lawrence C. Neitling ................... 12,500 *
Max E. Toy(6) .......................... 5,000 *
Jonathan D. Birck ...................... -- --
Barry Rahimian(7) ...................... 10,000 *
All executive officers and directors as
a group (seven persons)(8) ............. 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, subject to community property laws, where applicable.
(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 16,667 shares issuable upon exercise of options exercisable
within 60 days after December 15, 1997.
(5) Includes 5,000 shares issuable upon exercise of options exercisable
within 60 days after December 15, 1997.
(6) Includes 5,000 shares issuable upon exercise of options exercisable
within 60 days after December 15, 1997.
(7) Includes 10,000 shares issuable upon exercise of options exercisable
within 60 days after December 15, 1997.
(8) Includes 53,334 shares issuable upon exercise of options exercisable
within 60 days after December 15, 1997.
16
<PAGE>
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The names, ages and positions of the directors and executive officers of
the Company as of the date hereof are as follows:
Name Age Position
- ---- --- --------
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
Max E. Toy 49 Director
- ----------
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 Circuit Board Division which became Merix
Corporation in
17
<PAGE>
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.
MAX E. TOY joined the Company as a director in November 1996. Since
1991, Mr. Toy has been the President and Chief Executive Officer of Paladin
Associates, Inc., a high-technology service business providing sales and
marketing services.
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. See "Management--Benefit Plan." 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 6. EXECUTIVE COMPENSATION
The following table sets forth compensation earned during the fiscal
year ended December 31, 1996 by the Company's President and Chief Executive
Officer. No executive officer received total salary and bonus during such
year in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------- ----------------------------
Name and Principal Securities Underlying
Position Year Salary Bonus Options (#)
- --------------------- ---- -------- ----- ----------------------------
<S> <C> <C> <C> <C>
William F. Stephens
President and CEO 1996 $84,000 -- 50,000
</TABLE>
OPTION GRANTS
The following table sets forth information concerning option grants held
by the Company's officers as of December 15, 1997. The Company has not
issued any stock appreciation rights.
<TABLE>
<CAPTION>
Number of Percentage of
Securities Total Options Granted Exercise
Underlying to Employees as of Price Expiration
Name Options Granted December 15, 1997 Per Share Date
- -------------------- --------------- --------------------- --------- ----------------
<S> <C> <C> <C> <C>
William F. Stephens 50,000 7.5% $3.00 July 26, 2006
100,000 14.9% 3.50 August 22, 2007
Steven A. Larson 50,000 7.5% 3.00 July 27, 2006
100,000 14.9% 3.50 August 22, 2007
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Number of Percentage of
Securities Total Options Granted Exercise
Underlying to Employees as of Price Expiration
Name Options Granted December 15, 1997 Per Share Date
- -------------------- --------------- --------------------- --------- ----------------
<S> <C> <C> <C> <C>
Jonathan D. Birck 100,000 14.9% 3.50 November 25, 2007
Barry Rahimian 30,000 4.5% 3.00 January 1, 2007
45,000 6.7% 3.50 August 22, 2007
</TABLE>
AGGREGATE OPTION EXERCISES AND OPTION VALUES
The following table sets forth information concerning the value of
unexercised options as of December 15, 1997 held by the Company's officers.
No options were exercised by the Company's officers as of December 15, 1997.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
At December 15, 1997 at December 15, 1997(1)
------------------------------- ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
William F. Stephens 16,667 133,333 $8,334 $16,667
Steven A. Larson 16,667 133,333 8,334 16,667
Jonathan D. Birck -- 100,000 -- --
Barry Rahimian 10,000 65,000 5,000 10,000
</TABLE>
- ----------
(1) Based upon the difference between the fair market value of the
securities underlying the option at December 15, 1997 ($3.50 per share
as determined by the Board of Directors) and the exercise price of the
options.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with William F.
Stephens, the Company's President and Chief Executive Officer, 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. In addition, pursuant to an addendum to the
employment agreement dated December 2, 1996, Mr. Stephens is 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 exceeds the Company's expected
goal for 1997. 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.
On November 26, 1997, the Company entered into an employment agreement
with Jonathan D. Birck, Executive Vice President, whereby Mr. Birck receives
a monthly base salary of $7,500 and certain benefits. Mr. Birck's employment
may be terminated by the Company at any time, for any reason upon 30 days
advance written notice. If the Company terminates Mr. Birck's employment
without cause, Mr. Birck will receive severance payments for three 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
connection with his employment, Mr. Brick was granted 100,000 stock options
that will vest over three and half years. Mr. Birck is also eligible for a
$10,000 bonus during his first year of employment based on attaining certain
objectives.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has entered into several demand notes with a principal
balance of $195,000 as of December 15, 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
19
<PAGE>
notes are term notes payable on the earlier of (i) 180 days after the Escrow
Closing or (ii) February 22, 1999; and interest is payable monthly at an
annual rate of 10%.
ITEM 8. LEGAL PROCEEDINGS
Not applicable.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
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 10. RECENT SALES OF UNREGISTERED SECURITIES
Since inception (April 1996), the Company has sold and issued the
following unregistered securities (all share amounts have been restated to
reflect a one (1) for two (2) reverse stock split effected by the Company on
August 15, 1997):
1. In early April 1996, the Company sold 834,014 shares of Common Stock
to 24 investors at prices ranging from $0.02 to $0.42 per share for
aggregate cash consideration of $116,680.
2. Between May and August 1996, the Company sold 110,170 shares of Common
Stock to eight investors at a price of $3.00 per share for aggregate cash
consideration of $330,501.
3. In December 1996, the Company sold 15,000 shares of Common Stock to
two investors at a price of $4.00 per share for aggregate cash compensation
of $60,000.
4. From January 1997 to July 1997, the Company sold 337,250 Units in
an exempt private placement to accredited investors only. The
Selling Agent for this private placement was Blackwell Donaldson &
Co. Each Unit consisted of one share of Common Stock and one
warrant to purchase one share of Common Stock at a price of $4.00
per Unit for aggregate cash consideration of $1,349,000. The
exercise price for each such warrant is $3.50.
5. From September 1997 to December 1997, the Company sold 1,067 Units
in an exempt private placement to accredited investors only. The
Selling Agent for this private placement was Paulson Investment Company,
Inc. Each Unit consisted of one thousand shares of Common Stock and one
thousand warrants each to purchase one share of Common Stock ("Warrant")
at a price of $3,500 per Unit. The minimum subscription amount was
$10,500 or 3 Units per investor. Aggregate cash consideration of
$3,734,500 was received. The exercise price for each such warrant is
$3.50.
6. From time to time, the Company has issued a total of 65,000
non-qualified options to officers and directors. Each option allows the
holder to purchase one share of the Company's Common Stock at exercise
prices ranging from $3.00 to $3.50.
With respect to sales made, the Company relied on Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"). The Company employed
no advertising or general solicitation in offering the securities. The
securities were offered to a limited number of persons and the transfer thereof
was appropriately restricted by the Company. All shareholders were accredited
investors as that term is defined in Rule 501 of Regulation D under the
Securities Act, and were capable of analyzing the merits and risks of their
investment and acknowledged in writing that they were acquiring the securities
for investment
20
<PAGE>
purposes only, and not with a view toward distribution or resale. Each
investor represented in writing that he/she understood the speculative nature
of his/her investment.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
UNIT WARRANTS. As of December 15, 1997, the Company had issued warrants
to acquire up to 1,571,093 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 the terms and conditions set forth in
the Warrant Agreement, dated as of September 1997 ("Warrant Agreement"),
between the Company and TranSecurities International, Inc., warrant agent of
the Company ("Warrant Agent"),one fully paid and non-assessable share of
Common Stock upon presentation and surrender of a Warrant Certificate with
the instructions for the registration and delivery of Common Stock filled in,
at any time prior to 5:20 P.M., Pacific time, on 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, at the stock transfer office
in Spokane, Washington, of the Warrant Agent or of its successor warrant
agent or, if there be no successor warrant agent, at the corporate offices of
the Company, and upon payment of the Exercise Price (as defined in the
Warrant Agreement) and any applicable taxes paid either in cash, or by
certified or official bank check, payable in lawful money of the United
States of America to the order of the Company. 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 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. For the purpose of the
foregoing sentence, the term "Daily Price" shall mean, for any relevant day,
the closing bid price on that day as reported by the principal exchange or
quotation system on which prices for the Common Stock are reported, provided,
however, that, if the principal quotation system publishes a range of bid
prices, the highest closing bid price shall be used. 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. Reference is made to the Warrant
Agreement for a full description of the rights, limitations of rights,
obligations, duties and immunities of the Warrant Agent, the Company and the
holders of the Warrant Certificates. Copies of the Warrant Agreement are
available for inspection at the stock transfer office of the Warrant Agent or
may be obtained upon written request addressed to the Company at 7737 Cirrus
Drive, Beaverton, Oregon 97008, Attention: Chief Financial Officer.
The Company shall not be required upon the exercise of the Warrants
evidenced by a Warrant Certificate to issue fractions of Warrants, Common
Stock or other securities, but may make adjustment therefor in cash on the
basis of the current market value of any fractional interest as provided in
the Warrant Agreement.
In certain cases, the sale of securities by the Company upon exercise of
Warrants would violate the securities laws of the United States, certain
states thereof or other jurisdictions. The Company has agreed to use its
best efforts to cause a registration statement to continue to be effective
during the term of the Warrants with respect to such sales under the Act, and
to take such action under the laws of various states as may be required to
cause the sale of securities upon exercise to be lawful. However, the
Company will not be required to honor the exercise of Warrants if, in the
opinion of the Board of Directors, upon advice of counsel, the sale of
securities upon such exercise would be unlawful. In certain cases, the
Company may, but is not required to, purchase Warrants submitted for exercise
for a cash price equal to the difference between the market price of the
securities obtainable upon such exercise and the exercise price of such
Warrants.
21
<PAGE>
A Warrant Certificate, with or without other Certificates, upon
surrender to the Warrant Agent, any successor warrant agent or, in the
absence of any successor warrant agent, at the corporate offices of the
Company, may be exchanged for another Warrant Certificate or Certificates
evidencing in the aggregate the same number of Warrants as the Warrant
Certificate or Certificates so surrendered. If the Warrants evidenced by a
Warrant Certificate shall be exercised in part, the holder hereof shall be
entitled to receive upon surrender hereof another Warrant Certificate or
Certificates evidencing the number of Warrants not so exercised.
No holder of Warrants, as such, shall be entitled to vote, receive
dividends or be deemed the holder of Common Stock or any other securities of
the Company which may at any time be issuable on the exercise of Warrants for
any purpose whatever, nor shall anything contained in the Warrant Agreement
be construed to confer upon the holder of a Warrant Certificate, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof or give or withhold consent to any corporate action (whether
upon any matter submitted to stockholders at any meeting thereof, or give or
withhold consent to any merger, recapitalization, issuance of stock,
reclassification of stock, change of par value or change of stock to no par
value, consolidation, conveyance or otherwise) or to receive notice of
meetings or other actions affecting stockholders (except as provided in the
Warrant Agreement) or to receive dividends or subscription rights or
otherwise until the Warrants shall have been exercised and the Common Stock
purchasable upon the exercise thereof shall have become deliverable as
provided in the Warrant Agreement.
If a Warrant Certificate shall be surrendered for exercise within any
period during which the transfer books for the Company's Common Stock or
other class of stock purchasable upon the exercise of the Warrants are closed
for any purpose, the Company shall not be required to make delivery of
certificates for shares purchasable upon such transfer until the date of the
reopening of said transfer books.
Every holder of Warrants by accepting the same consents and agrees with
the Company, the Warrant Agent, and with every other holder of Warrants that:
(a) Warrant Certificates are transferable on the registry books of the
Warrant Agent only upon the terms and conditions set forth in the Warrant
Agreement, and
(b) the Company and the Warrant Agent may deem and treat the person in
whose name a Warrant Certificate is registered as the absolute owner thereof
(notwithstanding any notation of ownership or other writing thereon made by
anyone other than the Company or the Warrant Agent) for all purposes whatever
and neither the Company nor the Warrant Agent shall be affected by any notice
to the contrary.
The Company shall not be required to issue or deliver any certificate
for shares of Common Stock or other securities upon the exercise of Warrants
until any tax which may be payable in respect thereof by the holder thereof
pursuant to the Warrant Agreement shall have been paid, such tax being
payable by such holder at the time of surrender.
REPRESENTATIVES' WARRANT. In connection with an exempt private
offering, the Company issued a warrant to the Representatives thereof (the
Representatives' Warrant) and reserved up to 213,400 shares of Common Stock
for issuance upon exercise of the Representatives' Warrant (including the
Warrants issuable upon exercise of the Representatives' Warrant). The
Representatives' Warrant entitles the holder to acquire 106.7 Units equal to
10% of the number of Units sold in the exempt private offering (including
Units purchased by the Representatives) at an exercise price of $3,500 per
Unit. The Representatives' Warrant is exercisable at any time until December
5, 2002.
OTHER WARRANTS. As of December 15, 1997, the Company has issued
warrants to acquire up to 352,250 shares of Common Stock at an exercise price
of $3.50 subject to the warrant. The warrants expire in January 1999, unless
earlier redeemed. The Company may redeem the warrants, at $0.50 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;
22
<PAGE>
(2) an initial public offering of the Company's Common Stock closes on 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. 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.
STOCK OPTIONS
The Company has reserved 1,000,000 shares for issuance upon the exercise
of options granted under the 1997 Incentive Compensation Plan. As of
December 15, 1997, the Company had stock options outstanding to purchase up
to 670,000 shares of Common Stock at exercise prices ranging from $3.00 to
$4.00 per share. These options were granted under the 1997 Incentive
Compensation Plan. As of December 15, 1997, 76,667 options were exercisable.
Outstanding options will vest, if at all, beginning May 1, 1997 through May
25, 2001 and will expire during the period between May 1, 2006 and November
25, 2007.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 13.1 of the Company's Bylaws (the "Bylaws"), requires
indemnification of directors or officers of the Company to the fullest extent
not prohibited by the Oregon Business Corporation Act (the "Act"). The effects
of the Bylaws and the Act (the "Indemnification Provisions") are summarized as
follows:
(a) The Indemnification Provisions grant a right of indemnification in
respect of any action, suit or proceeding (other than an action by or in
the right of the Company) against expenses (including attorney fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred, if the person concerned acted in good faith and in a manner the
person reasonably believed to be in or not opposed to the best interests of
the Company, was not adjudged liable on the basis of receipt of an improper
personal benefit and, with respect to any criminal action or proceeding,
had no reasonable cause to believe the conduct was unlawful. The
termination of an action, suit or proceeding by judgment, order,
settlement, conviction or plea of nolo contendere does not, of itself,
create a presumption that the person did not meet the required standards of
conduct.
(b) The Indemnification Provisions grant a right of indemnification in
respect of any action or suit by or in the right of the Company against the
expenses (including attorney fees) actually and reasonably incurred if the
person concerned acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the Company,
except that no right of indemnification will be granted if the person is
adjudged to be liable to the Company.
(c) Every person who has been wholly successful on the merits of a
controversy described in (a) or (b) above is entitled to indemnification as
a matter of right.
(d) Because the limits of permissible indemnification under Oregon law
are not clearly defined, the Indemnification Provisions may provide
indemnification broader than that described in (a) and (b).
(e) The Company may advance to a director or officer the expenses
incurred in defending any action, suit or proceeding in advance of its
final disposition if the director or officer affirms in writing in good
faith that he or she has met the standard of conduct to be entitled to
indemnification as described in (a) or (b) above and furnishes the company
a written undertaking to repay any amount advanced if it is determined that
the person did not meet the required standard of conduct.
23
<PAGE>
The Company may obtain insurance for the protection of its directors and
officers against any liability asserted against them in their official
capacities. The rights of indemnification described above are not exclusive of
any other rights of indemnification to which the persons indemnified may be
entitled under any bylaw, agreement, vote of shareholders or directors or
otherwise.
Insofar as indemnification for liabilities arising under the Securities
Act, may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. The Company believes that its Articles of Incorporation and
Bylaw provisions and indemnification agreements are necessary to attract and
retain qualified persons as directors and officers.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For information concerning the financial statements filed as part of this
Registration Statement, see "Item 15. Financial Statements and Exhibits."
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OR ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 27, 1997, the Company engaged the accounting firm of KPMG Peat
Marwick LLP ("KPMG") as principal accountants for the period ended December
31, 1996. KPMG replaced BDO Seidman LLP ("BDO") as of the date reported
above. The change in the Company's independent accountants was the result of
the Company's decision to terminate their relationship with BDO. The Company
solicited a formal proposal from KPMG due to KPMG's excellent reputation and
expertise in high-technology start-up companies. The Company's Board of
Directors approved the engagement of KPMG on June 27, 1997.
During the most recent fiscal year, there have been no disagreements with
BDO on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure or any reportable events.
BDO's report on the financial statements for the period ended November 30,
1996 contained no adverse opinion or disclaimer of opinion and was not qualified
or modified as to uncertainty, audit scope or accounting principles.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report ........................................ F-2
Balance Sheets ...................................................... F-3
Statements of Operations ............................................ F-4
Statements of Shareholders' (Deficit) Equity ........................ F-5
Statements of Cash Flows ............................................ F-6
Notes to Financial Statements ....................................... F-7
24
<PAGE>
EXHIBIT INDEX
<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
27.1 Financial Data Schedule
</TABLE>
- ----------
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 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.
E.COM INTERNATIONAL, INC.
Date: February 5, 1998 By /s/ William F. Stephens
-----------------------------
Name: William F. Stephens
Title: President and Chief Executive Officer
26
<PAGE>
FINANCIAL STATEMENTS
KPMG PEAT MARWICK
MARLENE ERICKSON
E.COM INTERNATIONAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997 (UNAUDITED)
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
E.Com International, Inc.:
We have audited the accompanying balance sheet of E.Com International, Inc. (a
company in the development stage) as of December 31, 1996, and the related
statements of operations, shareholders' deficit, and cash flows for the period
from April 4, 1996 (date of inception) to December 31, 1996. 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 audit 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 audit provides 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, 1996, and the results of
its operations and its cash flows for the year then ended 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 suffered recurring losses from operations
and has a net capital deficiency 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
July 18, 1997, except as to note 10 /s/ KPMG Peat Marwick LLP
which is as of August 15, 1997 KPMG Peat Marwick LLP
F-2
<PAGE>
E.COM INTERNATIONAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
ASSETS 1996 1997
----------- -------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 16,190 372,232
Inventories 8,916 307,104
Prepaid expenses and other assets 7,907 47,845
------------ -------------
Total current assets 33,013 727,181
------------ -------------
Property and equipment, net 87,739 138,017
Intangible assets, net 9,767 21,242
Prepaid software royalties -- 40,750
Other assets 5,500 --
------------ -------------
$ 136,019 927,190
------------ -------------
------------ -------------
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable 59,026 119,073
Accrued liabilities 45,818 165,725
Notes payable to shareholder 195,000 195,000
Contract payable 32,000 --
Current portion of capital lease
obligations -- 2,073
------------ -------------
Total current liabilities 331,844 481,871
------------ -------------
Capital lease obligations, less current
portion -- 11,650
Commitments
Shareholders (deficit) equity:
Common stock, no par value, authorized
10,000,000 shares; 951,684 and
1,588,434 (unaudited) issued and
outstanding at December 31, 1996 and
September 30, 1997, respectively 377,181 1,752,073
Warrants outstanding -- 637,671
Subscriptions receivable from sale of
stock (5,796) --
Deficit accumulated during the
development stage (567,210) (1,956,075)
------------ -------------
Total shareholders (deficit) equity (195,825) 433,669
------------ -------------
$ 136,019 927,190
------------ -------------
------------ -------------
</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, APRIL 4,
1996 (DATE OF NINE MONTHS 1996 (DATE OF
INCEPTION) TO ENDED INCEPTION) TO
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1997
--------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Sales $ -- 1,650 1,650
Cost of sales -- 1,166 1,166
--------- --------- ---------
Gross profit -- 484 484
--------- --------- ---------
Operating expenses:
Research and development 230,525 758,853 989,378
Sales and marketing 89,649 166,707 256,356
General and administrative 243,514 444,971 688,485
--------- --------- ---------
563,688 1,370,531 1,934,219
--------- --------- ---------
Loss from operations (563,688) (1,370,047) (1,933,735)
Other income (expense):
Interest income -- 4,976 4,976
Interest expense (3,522) (23,794) (27,316)
--------- --------- ---------
Loss before provision for
income taxes (567,210) (1,388,865) (1,956,075)
Provision for income taxes -- -- --
--------- --------- ---------
Net loss $(567,210) (1,388,865) (1,956,075)
--------- --------- ---------
Net loss per share $ (0.63) (1.15) (1.82)
Shares used in computing
net loss per share 896,054 1,206,766 1,073,534
--------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
E.COM INTERNATIONAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
Notes Deficit
Receivable accumulated Total
Common stock from during the shareholders
----------------------- Warrants sale of development (deficit)
Shares Amount outstanding stock stage equity
--------- ---------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
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 (unaudited) 636,750 1,374,892 637,671 -- -- 2,012,563
Payments received on receivable
(unaudited) -- -- -- 5,796 -- 5,796
Net loss (unaudited) -- -- -- -- (1,388,865) (1,388,865)
--------- ---------- -------- -------- ----------- ------------
Balance at September 30, 1997
(unaudited) 1,588,434 $1,752,073 637,671 -- (1,956,075) 433,669
--------- ---------- -------- -------- ----------- ------------
--------- ---------- -------- -------- ----------- ------------
</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, April 4,
1996 (date of Nine months 1996 (date of
inception) to ended inception) to
December 31, September 30, September 30,
1996 1997 1997
------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (567,210) (1,388,865) (1,956,075)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 11,335 78,589 89,924
Write off of acquired products in development 39,098 -- 39,098
Changes in operating assets and liabilities:
Inventories (6,990) (298,188) (305,178)
Prepaid expenses and other assets (25,964) (92,430) (118,394)
Accounts payable and accrued liabilities 104,844 179,954 284,798
---------- ----------- -----------
Net cash used in operating activities (444,887) (1,520,940) (1,965,827)
---------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (73,765) (108,592) (182,357)
Acquisition of EnBloc assets (31,543) -- (31,543)
---------- ----------- -----------
Net cash used in investing activities (105,308) (108,592) (213,900)
---------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock and warrants, net 371,385 1,912,563 2,283,948
Proceeds from issuance of notes payable to shareholders 195,000 225,000 420,000
Repayment of notes payable to shareholders -- (125,000) (125,000)
Principal payments under capital lease obligation -- (785) (785)
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 566,385 1,985,574 2,551,959
---------- ----------- -----------
Net change in cash and cash equivalents 16,190 356,042 372,232
Cash and cash equivalents at beginning of period -- 16,190 --
---------- ----------- -----------
Cash and cash equivalents at end of period $ 16,190 372,232 372,232
---------- ----------- -----------
---------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 2,148 23,794 25,942
---------- ----------- -----------
---------- ----------- -----------
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-6
<PAGE>
E.COM INTERNATIONAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) Summary of Significant Accounting Policies
(a) 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 plans to develop, manufacture and market
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.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments having an original maturity
of three months or less to be cash equivalents.
(c) Inventory
Inventory, consisting principally of raw materials, parts and supplies, are
valued at the lower of cost (first
in, first
out method) or market.
(d) 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:
Years
Furniture and fixtures 5 to 7
Computers and equipment 3 to 7
Leasehold improvements 5
(Continued)
F-7
<PAGE>
E.COM INTERNATIONAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
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.
(e) Intangible Assets
Intangible assets include the E.Com trademark and logo, and patents acquired in
the purchase of EnBloc. These intangible assets are being amortized using the
straight-line method over the three year estimated useful life of the assets.
(f) 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.
(g) Interim Financial Statements
The accompanying unaudited financial statements for the nine months ended
September 30, 1997 have been prepared on substantially the same basis as the
audited financial statements, and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the financial
information set forth therein.
(h) 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.
(i) 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.
(j) Net Loss Per Share
Net loss per share is computed using net loss for the period and is based on
the weighted average number of shares of common stock outstanding and common
equivalent shares if dilutive.
(Continued)
F-8
<PAGE>
E.COM INTERNATIONAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
(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, has accumulated a deficit during
the development stage of $567,210, and has negative working capital of $298,831
at December 31, 1996. 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 raising capital. The
Company completed a private offering of common stock and warrants during early
1997, expects to complete an additional private offering of common stock and
warrants during the third quarter of 1997 and expects to generate product sales
revenue during the second half of 1997. See notes 10(b) and 11.
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.
(Continued)
F-9
<PAGE>
E.COM INTERNATIONAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
(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. At December 31, 1996, the Company had paid or settled
substantially all of the vendor liabilities assumed from EnBloc for $31,543, and
had recorded a payable of $32,000 to EnBloc. The $63,543 total purchase price
was allocated to assets acquired based upon preliminary estimates of fair values
as follows:
Products in development $39,098
Furniture and fixtures 20,169
Computers and equipment 2,350
Inventory 1,926
-------
Total $63,543
-------
-------
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, September 30,
1996 1997
------------ -------------
(Unaudited)
<S> <C> <C>
Leasehold improvements $ 9,928 9,928
Furniture and fixtures 47,870 49,932
Computers and equipment 38,486 44,919
Tooling -- 100,097
Equipment under capital lease -- 14,508
------- -------
96,284 219,384
Less accumulated depreciation and amortization (8,545) (81,367)
------- -------
$87,739 138,017
------- -------
------- -------
</TABLE>
(Continued)
F-10
<PAGE>
E.COM INTERNATIONAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
(5) Intangible Assets
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------------ -------------
(Unaudited)
<S> <C> <C>
Trademark and logo $12,242 21,193
Patents and other 315 8,606
------- ------
12,557 29,799
Accumulated amortization (2,790) (8,557)
------- ------
Intangible assets, net $ 9,767 21,242
------- ------
------- ------
</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 are payable on demand and
interest is payable monthly at an annual rate of 10%. At December 31, 1996, 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 $1,374.
The Company has 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 will pay
Mr. Larson $3,000 per month until July 31, 1997 for these services. At December
31, 1996, the Company had paid Mr. Larson a total of $9,000 pursuant to this
agreement and accrued the remaining $6,000. Effective July 26, 1996, the
Company 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.
At December 31, 1996, the Company had received common stock subscription
agreements from various shareholders who had not yet paid for the shares. The
amount due from these shareholders at December 31, 1996 was $5,796.
(Continued)
F-11
<PAGE>
E.COM INTERNATIONAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
(7) Income Taxes
The actual benefit differs from the "expected" benefit computed by applying the
U.S. federal corporate rate are as follows:
<TABLE>
<CAPTION>
December 31,
1996
------------
<S> <C>
Computed "expected" income tax benefit (34)%
Increases (decreases) resulting from:
State income taxes, net of federal tax benefit (4)
Increase in valuation allowance 38
Actual tax benefit -- %
</TABLE>
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,
1996
------------
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $200,992
Tax basis intangible assets, due to differences
in amortization 14,548
Accrued vacation 2,373
--------
Total gross deferred tax assets 217,913
--------
Less valuation allowance (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>
(Continued)
F-12
<PAGE>
E.COM INTERNATIONAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
The valuation allowance for the deferred tax assets as of April 9, 1996 (date of
inception) was $-0-. The net change in the total valuation allowance for the
period ended December 31, 1996 was an increase of $216,326.
At December 31, 1996, the Company has a net operating loss carryforwards of
approximately $524,000 to offset future income for federal and state purposes
which will expire in 2011.
(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. Future minimum rental commitments under the existing
leases are as follows:
Year ending December 31,
1997 $ 54,981
1998 56,663
1999 40,995
--------
Total $152,639
--------
--------
Rent expense for the period from April 4, 1996 (date of inception) to December
31, 1996 and the nine months ended September 30, 1997 was $27,489 and $48,858
(unaudited), respectively.
(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.
(Continued)
F-13
<PAGE>
E.COM INTERNATIONAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
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 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 6.3%, 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 1996
was $78,948, which would be 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 the
period from April 4, 1996 (date of inception) to December 31, 1996 would
approximate the pro forma disclosure as follows:
Net loss:
As reported $(567,210)
---------
---------
Pro forma $(574,045)
---------
---------
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.
(Continued)
F-14
<PAGE>
E.COM INTERNATIONAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
Weighted
average
Number price per
of shares share
--------- ---------
<S> <C> <C>
Options outstanding at April 4, 1996 -- $ --
Granted 100,000 3.00
Exercised -- --
Canceled -- --
---------
Options outstanding at December 31, 1996 100,000 3.00
Granted (unaudited) 475,000 3.42
Exercised (unaudited) --
Canceled (unaudited) 25,000 3.00
---------
Options outstanding at September 30, 1997
(unaudited) 550,000 3.35
---------
---------
</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, 1996, no options were
exercisable. As of December 31, 1996, the Company had reserved 500,000 shares
for issuance under the Incentive Plan, with 400,000 shares available for future
grant. See note 10(b).
(10) Subsequent Events
(a) Amendment of Articles of Incorporation
On January 10, 1997, the Company amended its articles of incorporation to
increase the authorized capital of the Company to 20,000,000 shares of common
stock, and to change the Company's name to E.Com International, Inc.
On August 15, 1997, in conjunction with a 1 for 2 reverse stock split (see note
10(c)), the Company amended its articles of incorporation to decrease the
authorized capital of the Company to 10,000,000 shares of common stock.
(Continued)
F-15
<PAGE>
E.COM INTERNATIONAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
(b) Private Offerings
Beginning in February 1997, the Company conducted a private offering of the
Company's common stock, offering to sell up to 350,000 investment units at a
price of $4.00 per unit, generating gross proceeds of up to $1.4 million (the
Offering). Each Unit consisted of one share of the Company's common stock and
one warrant to purchase an additional share of common stock at a price of $8.00
per share. The warrants may be redeemed for $.50 per share under certain
conditions. The Company used the services of an underwriter as a selling agent
to facilitate the Offering on a best efforts basis. The underwriter was
compensated by a combination of cash commissions, reimbursement of expenses and
additional warrants. Through June 30, 1997, the Company had sold 306,000 units,
generating gross proceeds of $1,224,000 and net proceeds of approximately
$991,000 after deducting offering expenses of $233,000. At June 30, 1997, the
Company also held $25,000 in cash from an Offering subscription received but not
yet closed. The Company has issued 35,000 warrants to the underwriter as
compensation and 15,000 warrants to previous shareholders.
In August 1997, the Company signed a letter of intent with a different
underwriter to conduct another private offering of the Company's common stock
(the Proposed Offering). Under the terms of the Proposed Offering, the Company
has agreed to 1) effect a 1 for 2 reverse split of its common stock; 2) offer
to sell 1,000 to 1,500 Units at a price of $3,500 per Unit, generating gross
proceeds of up to $5.25 million; and 3) increase the number of shares reserved
for its Incentive Compensation Plan by 500,000 share to 1,000,000 shares. Each
Unit in the Proposed Offering will consist of 1,000 shares of the Company's
common stock and warrants to purchase up to 1,000 additional shares of common
stock at a price of $3.50 per share. Unexercised warrants may be redeemed by
the Company at $.25 per share if certain conditions are met. In addition, the
Company and underwriter have agreed to reduce the exercise price of the warrants
issued in the Offering to $3.50 per share.
The Company plans to use the services of the underwriter as a selling agent to
facilitate the sale of Units on a best efforts basis. In August 1997 the
underwriter made an initial purchase for its own account of 90 Units from the
Proposed Offering and has agreed to purchase up to 200 additional Units
following completion of the private placement memorandum for the Proposed
Offering. The underwriter will be compensated by a combination of cash
commissions, reimbursements of expenses and additional warrants.
The net proceeds of the Proposed Offering available to the Company, if any, will
be reduced by the underwriter's compensation and by other legal, accounting and
administrative expenses related to the Proposed Offering. The Company intends
to use these net proceeds to fund marketing, production tooling, additional
product and software development, addition of personnel and expansion of
facilities, repayment of debt and for working capital.
(Continued)
F-16
<PAGE>
E.COM INTERNATIONAL, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
(c) Stock Split
On August 15, 1997, the shareholders of the Company approved a 1 for 2 reverse
stock split and the Proposed Offering. The share amounts in these statements
have been restated to reflect the split.
(11) Capital Structure
The Company has authorized 10,000,000 shares of no par value common stock with
951,684 shares outstanding at December 31, 1996. Each share of common stock is
entitled to one vote.
(12) Unaudited Recent Developments
Pursuant to the Offering discussed in note 10(b), the Company has sold 31,250
units from June 30, 1997 to December 16, 1997. The Company has received
approximately $112,500, net of the underwriter's commission.
Pursuant to the Proposed Offering discussed in note 10(b), the Company has
sold 1,067 units as of December 16, 1997. The Company has received
approximately $3,361,000, net of the underwriter's commission.
F-17
<PAGE>
[BDO Seidman, LLP Letterhead]
February 5, 1998
Securities and Exchange Commission
Judiciary Plaza
450 5th Street, N.W.
Washington, D.C. 20549
Re: E.Com International, Inc.
Ladies and Gentlemen:
Our firm, BDO Seidman, LLP ("BDO"), served as principal accountants to
E.Com International, Inc. (the "Company") until June 1997 when the Company
replaced BDO with KPMG Peat Marwick LLP as its principal accountants. We
hereby concur with the statements made by the Company in Item 14 of the Form
10 filed with the SEC on December 14, 1997 (Registration No. 000-23547)
concerning the dismissal of BDO as the Company's principal accountants.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
