U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-7349
eNOTE.COM INC.
(Exact name of small business issuer as specified in its charter)
Delaware 59-345315
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
185 Allen Brook Lane
Williston, Vermont 05495
(802) 288-9000
(Address of principal executive offices, including zip code,
and telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
No |X| .
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes |X| No .
As of October 31, 1999 the issuer had 10,049,491 shares of Common
Stock, par value $0.01 per share, outstanding.
Transitional Small Business Disclosure Format (check one): Yes |_|
No |X|
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eNOTE.COM INC.
FORM 10-QSB
June 30,1999
C O N T E N T S
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at June 30, 1999 and
December 31, 1998 3
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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eNote.com Inc.
Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
Dec. 31, 1998 June 30, 1999
------------------------------
(unaudited)
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ -- $ 3,658,070
Inventories -- 6,637
Accounts receivable, net 18,158 --
Other current assets -- 107,646
------------------------------
Total current assets 18,158 3,772,352
Property and equipment, net 33,761 258,084
Intangible and other assets, net -- 159,613
------------------------------
Total assets $ 51,919 $ 4,190,049
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 44,113 $ 162,599
Accrued expenses 68,368 101,719
Notes Payable-stockholder 147,199 76,163
Convertible Debentures 450,000 80,000
------------------------------
Total current liabilitie 709,680 420,481
------------------------------
Total liabilities $ 709,680 $ 420,481
------------------------------
Stockholders' Equity (deficit)
Common Stock, $0.01 par value per share, 25,000,000
shares authorized, 10,049,491 shares issued
and outstanding on 6/30/99; and 20,000,000 shares
authorized and 589,481 shares issued and outstanding
on 12/31/98 -- 100,495
Convertible Preferred Stock, $0.01 par value per share,
5,000,000 shares authorized, issued and outstanding
on 6/30/99; and 1,000,000 shares authorized and no
shares issued or outstanding on 12/31/98 -- 50,000
Common stock warrants -- 740,000
Additional paid-in capital 56,378 5,969,505
Accumulated deficit (714,139) (3,090,432)
------------------------------
Total stockholders' equity (deficit) (657,761) 3,769,568
------------------------------
Total liabilities and stockholders' equity $ 51,919 $ 4,190,049
==============================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
</TABLE>
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eNote.com Inc
Condensed Consolidated Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
3 mos. Ended 3 mos. Ended 6 mos. Ended 6 mos. Ended
June 30, 1998 June 30,1999 June 30, 1998 June 30,1999
----------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue $ 16,759 $ -- $ 201,596 --
----------------------------------------------------------
Operating expenses:
Sales and marketing -- 71,739 -- 72,934
Product development -- 153,869 -- 210,533
General and administrative 133,298 249,288 295,489 421,262
----------------------------------------------------------
Total operating expenses 133,298 474,896 295,489 704,729
----------------------------------------------------------
Loss from operations (116,540) (474,896) (93,893) (704,729)
Interest and other income, net -- 40,397 -- 40,461
Interest expense (303) (58,325) (481) (58,325)
----------------------------------------------------------
Net loss (116,843) (492,824) (94,374) (722,593)
Preferred stock dividend -- 740,000 -- 740,000
----------------------------------------------------------
Net loss applicable to common shareholders $ (116,843) $(1,232,824) $ (94,374) $(1,462,593)
==========================================================
Net loss per share $ (0.20) $ (0.12) $ (0.16) $ (0.27)
==========================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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eNote.com Inc
Condensed Consolidated Statement of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
6 months Ended 6 months Ended
June 30, 1998 June 30,1999
------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (94,374) $ (722,593)
Adjustments to reconcile net loss
to net cash used in operations:
Depreciation and amortization -- 6,368
Changes in assets and liabilities:
Accounts receivable (117,926) 10,274
Accounts payable 32,943 208,341
Inventory -- (6,640)
Other current assets -- (99,760)
------------------------------
Net cash used in operating activities (179,356) (604,010)
------------------------------
Cash flows from investing activities:
Purchases of property and equipment (17,306) (294,740)
Investment in Solutionet -- (250,000)
Purchases of intangibles -- (95,762)
------------------------------
Net cash used in investing activities (17,306) (640,502)
------------------------------
Cash flows from financing activities:
Proceeds from (repayment of) of convertible debentures 144,699 (121,036)
Issuance of convertible debentures -- 80,000
Proceeds from issuance of convertible preferred stock
and common stock warrants -- 5,000,000
------------------------------
Net cash provided by financing activities 144,699 4,958,964
------------------------------
Increase/(decrease) in cash and cash equivalents (51,963) 3,714,452
Cash and cash equivalents at beginning of the period 49,396 (56,382)
------------------------------
Cash and cash equivalents at end of period $ (2,567) $ 3,658,070
==============================
Supplemental disclosure of noncash financing activities
Conversion of convertible notes -- $ 400,000
Stock issued to consultants -- 1,460,000
------------------------------
Total noncash financing activities $ -- $ 1,860,000
==============================
Preferred stock dividend $ -- $ 740,000
==============================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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eNote.com Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1--The Company and Summary of Significant Accounting Policies:
The Company
eNote.com Inc., formerly Webcor Electronics, Inc. (the "Registrant"),
was incorporated on December 3, 1971, under the laws of the State of Delaware.
Except where the context indicates otherwise, as used in the financial
statements and in these notes, "Company" means the Registrant together with any
wholly-owned subsidiaries of the Registrant, except with respect to periods
prior to the Navis Transaction (as defined below), for which "Company" means
Navis (as defined below). Notwithstanding that elsewhere in this Quarterly
Report on Form 10-QSB "Company" simply means the Registrant, together with any
wholly-owned subsidiaries of the Registrant, regardless of the time relevant
period.
On February 1, 1989, the Registrant filed a voluntary petition under
Chapter 11 of the Bankruptcy Act. The Registrant's bankruptcy case was later
voluntarily converted into a case under Chapter 7 of the Bankruptcy Act, and, on
November 13, 1996, the Registrant's bankruptcy case was closed. During the
bankruptcy, the Registrant had no assets, liabilities, stockholders' equity,
revenue or expenses, and, as a result of the bankruptcy, there was no cost
assigned to the common stock of the Registrant as of December 31, 1998.
Additionally, the Registrant did not file state and federal regulatory and tax
filings.
Acting in its capacity as a stockholder of the Company, and without
first receiving any consent, approval or authorization of any officer, director
or other stockholder of the Company, Capston Network Company ("Capston") filed a
Certificate for Renewal and Revival of Charter with the Secretary of State of
the State of Delaware on December 26, 1996 (such filing, the "Revival").
Thereafter, Capston filed a Form 10-K on behalf of the Company for the fiscal
years ending March 31, 1989 to and including1996. On or about February 7, 1997,
Capston caused the Company to send to its shareholders a Notice of Special
Meeting and Proxy Statement describing a number of proposals relating to a plan
of reorganization (the "Plan") proposed by Capston. The 1997 Special Meeting
failed to achieve a quorum of stockholders, but a revised plan or reorganization
(the "Revised Plan"), set forth in a Proxy Statement filed April 27, 1998 (the
"1998 Proxy Statement"), was approved on March 23, 1999, after several
adjournments of the 1998 Special Meeting.
The 1998 Proxy Statement contemplated Capston pursuing a business
combination on behalf of the Company and provided that Sally Fonner and other
individuals designated by Capston were to be issued shares of the Company's
common stock, par value $.01 per share (the "Common Stock"), as compensation for
services rendered in connection with the development of the Plan and the Revised
Plan and the management of the Company pending completion of a business
combination. The 1998 Proxy Statement further provided that the Company would
not be obligated to reimburse Capston for the out-of-pocket expenses incurred by
Capston in connection with the filing in Delaware of the Company's Certificate
for Renewal and Revival of Charter, the preparation and filing of the Company's
reports under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"),and the investigation of business opportunities on behalf of the Company.
However, the 1998 Proxy Statement anticipated that the terms of a business
combination transaction might provide for the
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reimbursement of such expenses. Because Sally Fonner was the sole director of
both the Registrant and Capston at the time such expenses were incurred, prior
Staff Accounting Bulletins require under generally accepted accounting
principles the treatment of debiting Capston's unreimbursed expenses incurred on
behalf of the Company as an increase in paid in capital. These expenses are
actual cash expenditures and do not reflect any costs associated with the
operation of Capston nor any personnel time or cost.
On April 5, 1999, the Company acquired Navis Technologies, Ltd.
("Navis") in a transaction whereby the stockholders of Navis exchanged all of
their Navis stock for 8 million shares of newly issued Common Stock, and Navis
became a wholly-owned subsidiary of the Company (the "Navis Transaction"). The
number of shares issued by the Company in the Navis transaction was determined
by arms-length negotiation between the parties. Before the Navis Transaction,
the Company had no material assets, liabilities or business operations. No
relationship existed between the Company and Navis prior to the Navis
Transaction. In connection with the Navis Transaction, the Company issued
540,000 shares of Common Stock to persons designated by Capston, 270,000 shares
of Common Stock to legal counsel for the parties and 650,000 shares of Common
Stock to certain financial consultants as finders' fees. This issuance resulted
in a cost of $1,460,000.
At approximately the same time as the Navis Transaction, the Company
entered into a Purchase and Sale Agreement with Freidlander International
Limited ("Friedlander") dated April 6, 1999 (the "Freidlander Agreement"),
whereby the Company sold 5 million shares of convertible preferred stock, par
value $.01 per share (the "Preferred Stock"), of the Company, and warrants
("Warrants") to purchase 2 million shares of Common Stock to Friedlander for $5
million in cash (the "Friedlander Transaction"). The Preferred Stock has a
liquidation preference of $1 per share, or $5 million in the aggregate, and is
convertible into Common Stock on a share-for-share basis. Since the Warrants are
exercisable immediately, a dividend of $740,000 has been recognized. The
warrants were assigned a value of $.37 per share based on a Black Scholes
valuation.
Since (i) at the time of the Navis Transaction, the Registrant had no
operations since 1996, (ii) the management of Navis would be the succeeding
management of the Registrant after the Navis Transaction and (iii) the
stockholders of Navis would control approximately 80% of the voting stock in the
Registrant after the Navis Transaction (and approximately 53% following the
Friedlander Transaction), the Navis Transaction has been accounted for as a
reverse merger and not as a business combination. No goodwill has been recorded
in connection with the Navis Transaction. As a result, and since the Navis
Transaction and the Friedlander Transaction were substantially interrelated, the
costs incurred in connection with the Navis Transaction and the Friedlander
Transaction have been accounted for as reductions of additional paid-in-capital.
Name Change, Reverse Split and Increase in Authorized Capital
On March 31, 1999, the Company filed an amendment to its Certificate of
Incorporation that, as corrected, (a) effected a one for 12 reverse stock split
of the Common Stock followed immediately by a stock distribution of
((12/6.75)-1) shares of Common Stock for each one share of Common Stock
theretofore outstanding, and (b) increased its authorized capital stock to 25
million shares of Common Stock and 5 million shares of preferred stock. On
September 3, 1999, the Company changed its name from "Webcor Electronics, Inc."
to "eNote.com Inc." in connection with its merger with a newly-formed
wholly-owned subsidiary of the Company.
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As described in the Company's Proxy Statement filed April 27, 1998, no
fractional shares were issued in connection with the reverse split or the stock
distribution and the Company did not pay cash in lieu of such shares. Instead,
the number of shares issued to shareholders entitled to fractional shares were
"rounded up" to the next whole number. In addition, shareholders of record who
held at least 100 shares prior to the one for 12 reverse stock split were issued
no fewer than 100 shares after the one for 12 reverse stock split. These
procedures resulted in the issuance of approximately 41,978 additional shares of
Common Stock by the Company for which the Company received payment of $419.79
from Capston, which the Board of Directors has determined is adequate
consideration for the issuance of such shares. As a result of the amendment, the
3,476,370 shares of Common Stock issued and outstanding immediately prior to
such amendment were consolidated into 589,481 shares of Common Stock. The
post-consolidation Common Stock is listed on the NASD Over The Counter Bulletin
Board under the symbol "ENOT."
Basis of presentation
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to Article 10 of Regulation
S-X of the Securities and Exchange Commission. The accompanying unaudited
condensed consolidated financial statements reflect, in the opinion of
management, all adjustments necessary to achieve a fair statement of the
Company's financial position and results for the interim periods presented. All
such adjustments are of a normal and recurring nature. These condensed financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-KSB for the year
ended March 31, 1999.
Principles of consolidation
The condensed consolidated financial statements include the accounts of
the Company and its subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
Change in year end
The Company has determined to adopt the fiscal year of Navis and,
accordingly, is changing its fiscal year end from March 31 to December 31. As a
result, this Quarterly Report on Form 10-QSB reflects the Company's results for
the three and six months ended June 30, 1999 and 1998, and the Company will file
an Annual Report on Form 10-KSB for the year ending December 31, 1999.
Revenue recognition
The Company is in the development stage of its product TVEmail. The
Company expects to launch its product late in the fourth quarter of 1999 with
widespread deployment commencing in the first quarter of 2000. The Company had
no revenue in the quarter ended June 30, 1999. Navis was engaged in the sale of
electronic devices from its inception until its development of the TVEmail
product. As a result, the Company is not considered to be a development stage
enterprise.
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Fair value of financial instruments
The Company's financial instruments, including cash, cash equivalents,
accounts receivable and accounts payable are carried at cost, which approximates
their fair value because of the short-term maturity of these instruments.
Property and equipment
Property and equipment are stated at historical cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the assets, generally five years or less for equipment and
furniture, and the lease term for building improvements.
Reverse Merger
As described above, at the time of the Navis Transaction the Registrant
had had no operations since 1996, the management of Navis became the succeeding
management of the Registrant after the Navis Transaction and the former
stockholders of Navis owned approximately 80% of the outstanding voting power of
the Registrant immediately following the Navis Transaction (and approximately
53% following the Friedlander Transaction). Accordingly, the transaction has
been accounted for as a reverse merger under generally accepted accounting
principles. As a result, Navis is considered to be the acquiring entity and the
Registrant the acquired entity for accounting purposes, even though the
Registrant is the acquirer for legal purposes. As a result of this reverse
merger accounting treatment, (i) the historic financial statements of the
Company for the periods prior to the date of purchase are no longer the historic
financial statements of the Registrant, and therefore, are no longer presented;
(ii) the historical financial statements of the Company for periods prior to the
date of purchase are now those of Navis; and (iii) all reference to the
financial statements of the "Company" apply to the historic financial statements
of Navis prior to, and the Company subsequent to, the date of the Navis
Transaction.
Product Development Costs
The Company's development of TVEmail includes the development of
internal software as well as the purchase of software from third parties. Costs
of purchased third party software are capitalized. All costs in the software
development process which are classified as research and development are
expensed as incurred.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from these estimates.
Stock-Based Compensation
During the first six months of 1999, the Company adopted SFAS No. 123,
"Accounting for Stock-based Compensation." The Company has established a
stock-option plan which has been approved by the Board of Directors. The plan
provides for the grant of (i) non-qualified stock options, (ii) incentive stock
options, (iii) shares of restricted stock, (iv) shares of phantom stock, and
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(v) stock bonuses (collectively "Incentive Awards"). In addition, the Incentive
Stock Plan permits the grant of cash bonuses payable when a participant is
required to recognize income for federal income tax purposes in connection with
the vesting of shares of restricted stock or the grant of a stock bonus.
Full-time employees of the Company and its subsidiaries, including officers and
directors, will be eligible to participate in the Incentive Stock Plan. The
Incentive Stock Plan is administered by a Compensation Committee of the Board of
Directors (the "Committee"), which will consist of two or more directors, each
of whom shall be a "disinterested person" within the meaning of Rule 16b-3 (c )
(2) under Section 16 of the Exchange Act. The Committee will determine which
employees receive grants of Incentive Awards, the type of Incentive Awards and
bonuses granted and the number of shares subject to each Incentive Award. The
Incentive Stock Plan does not prescribe any specific factors to be considered by
the Committee in determining who is to receive Incentive Awards and the amount
of such awards. The total number of shares available for grants cannot exceed 1%
of the total number of shares that were outstanding immediately following the
Navis Transaction. The Company has not issued any grants under its stock plan.
Employee Benefit Plans
On July 19, 1999 the Board of Directors approved the Company's 401K
plan. The plan was established for the purpose of providing retirement benefits
to eligible employees in accordance with the plan and to enable employees to
supplement their retirement by election to have the employer contribute amounts
to the plan in lieu of payments to such employee in cash. The plan is intended
to satisfy the provisions of section 401(k) of the Internal Revenue Code of
1986, as amended. At this time the plan is funded solely by employee
contributions.
Note 2--Net Loss Per Common Share:
As required, the Company adopted SFAS No. 128, "Earnings per Share,"
for the year ended December 31, 1997. SFAS No. 128 changes the method used to
calculate earnings per share and requires the restatement of all prior periods.
Under SFAS No. 128, the Company is required to present basic and diluted
earnings per share if applicable. Basic earnings per share is based on weighted
average number of shares outstanding during the period. Diluted earnings per
share includes the weighted average number of shares outstanding and gives
effect to potentially dilutive common shares such as options, warrants and
convertible debt and preferred stock outstanding.
Net loss per common share for the three and six months ended June 30,
1998 and 1999 is based on the weighted average number of shares of common stock
outstanding during the periods. Potentially dilutive securities include options,
warrants and convertible preferred stock; however, such securities have not been
included in the calculations of the net loss per common share as their effect is
antidilutive where, as here, there is a loss rather than earnings. Therefore,
there is no difference between the basic and diluted net loss per common share
for any of the periods presented.
Although, pursuant to the reverse merger accounting treatment of the
Navis Transaction, the Company's historical financial statements are now those
of Navis rather than the Registrant, the Company's historical equity, and thus
the number of shares used in calculating net loss per common share, is still
that of the Registrant (as adjusted for the reverse split and Common Stock
distribution). The Company's net loss per common share has been calculated in
accordance with generally accepted accounting principals but is not necessarily
a reliable measure of the Company's results.
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The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated:
<TABLE>
<CAPTION>
three months three months six months ended six months
ended June 30, ended June 30, June 30, 1998 ended June 30,
1998 1999 1999
<S> <C> <C> <C> <C>
Numerator for basic net loss per share - Net
(loss) applicable to common shareholders $(116,843) $(1,232,824) $(94,374) $(1,462,593)
Denominator for basic net loss per share -
weighted average shares 589,481 10,049,491 589,481 5,319,315
Basic and diluted net (loss) per share $ (0.20) $ (0.12) $(0.16) $(0.27)
</TABLE>
Note 3--Income Taxes:
In connection with the Company's acquisition of Navis, Navis's status
as an S Corporation was terminated, and Navis became subject to federal and
state income taxes. No deferred tax benefit has been provided for due to the
uncertainty of future earnings.
Note 4--Borrowings:
Notes Payable
Notes payable consists of amounts payable to various individuals and a
current shareholder (and president) of the Company, which are unsecured.
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1999
----------------- -------------
<S> <C> <C> <C>
Unsecured Stockholder loans, 12% interest $ 147,199 $ 76,163
Convertible Debentures, 12% interest,
$1/share conversion rate 450,000 --
Convertible Debentures, 12% interest,
$3/share conversion rate -- 80,000
---------------------------------
Total $ 597,199 $156,163
</TABLE>
Note 5--Leasing Arrangements:
The Company leases certain land, buildings and equipment. These leases
are classified as operating leases that expire at various times between 2000 and
2003. Certain of these leases contain renewal options and have escalation
clauses tied to changes in the Consumer Price Index. Under the terms of the
leases, the Company is generally responsible for the payment of property taxes,
insurance and maintenance costs related to the leased property.
On May 31, 1999 the Company entered into a 5-year lease on its current
corporate offices with Airmouse House Partnership, Ltd. The president of the
Company is the General partner in Airmouse House and as such, makes the
partnership a related party, however, the terms of the lease are not more
favorable than would be obtainable by the Company in an arms length transaction
with an unaffiliated third party.
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The following is a schedule by year of minimum future rental expense
(net of sublease income) on noncancellable operating leases as of June 30, 1999:
Year-ending December 31,
2000 $84,142
2001 88,529
2002 97,365
2003 100,000
Thereafter 16,667
---------
Total minimum future rentals $ 386,703
Note 6--Subsequent Events
Subsequent to the close of the quarter, the Company acquired the assets
of WebATM from Gary Cronin, an employee of the Company, for $100,000 cash. See
the Company's Annual Report on Form 10-KSB for the year ended March 31, 1999,
under the caption "Description of Business--Acquisition of Assets." The Company
also entered into an agreement to purchase 55% of Solutionet for $250,000 in
cash, subject to certain closing requirements. See the Company's Annual Report
on Form 10-KSB for the year ended March 31, 1999, under the caption "Description
of Business--Acquisition of Assets." The closing requirements have since been
fulfilled, and the Solutionet transaction closed on October 18, 1999.
Item 2. Management's Discussion and Analysis or Plan of Operation.
Forward-Looking Statements
When used in this report, press releases and elsewhere by eNote.com
Inc. (the "Company") and its management from time to time, the words "believes,"
"anticipates," "intends" and "expects" and similar expressions are intended to
identify forward-looking statements that involve a number of risks and
uncertainties. Additionally, statements contained in this discussion that are
not historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act,
including statements regarding expectations, beliefs, intentions or strategies
regarding the future. The Company intends that all forward-looking statements be
subject to the safe-harbor provisions of the Private Securities Litigation
Reform Act of 1995. These forward-looking statements reflect the Company's views
as of the date they are made with respect to future events and financial
performance, but are subject to many risks and uncertainties, which could cause
the actual results of the Company to differ materially from any future results
expressed or implied by such forward-looking statements. Factors that could
cause actual results to differ materially or adversely include, without
limitation, any inability or delay in the development or manufacture of the
Company's TVEmail system, including the in-home TVEmail terminals (the "Client
Hardware"), the Company's proprietary back-end server systems (the
"ServerSystems") and the graphical user interface ("GUI"), as well as the other
risks described in the Company's Annual Report on Form 10-KSB under the caption
"Management's Discussion and Analysis or Plan of Operation--Certain Trends and
Uncertainties." (a copy of which description is filed as an exhibit to this
Quarterly Report on Form 10-QSB) The Company does not undertake to update
forward-looking statements.
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Plan of Operation
As a result of the Company's case under the Bankruptcy Act, which was
closed on November 13, 1996, (the "Bankruptcy"), as of December 31, 1998, the
Company had no assets, liabilities, or ongoing operations and had not engaged in
any business activities since February 1990. The Company had no operations
during the year ended December 31, 1998 and no material assets or liabilities as
of December 31, 1998.
In a transaction consummated as of April 5, 1999, the Company acquired
all of the capital stock of Navis Technologies, Ltd. ("Navis") in exchange for 8
million shares of the Company's common stock, par value $.01 per share ("Common
Stock"). In a transaction consummated as of April 6, 1999, the Company raised $5
million in gross proceeds through the sale to Friedlander International Limited
("Friedlander") of 5 million shares of convertible preferred stock, par value
$.01 per share ("Preferred Stock"), and warrants ("Warrants") to purchase 2
million shares of Common Stock.
The Company raised $5 million as of April 6, 1999, and otherwise has no
capital resources. The Company intends to use this capital to finalize its
development of the Client Hardware, to install ServerSystems to run the TVEmail
network, to complete the GUI, to perform marketing studies and to produce the
pilot production runs for TVEmail. The Company expects to complete such
endeavors in the fourth quarter of 1999 and believes that the $5 million will
satisfy its cash requirements to do so. However, in order for the Company to
begin mass production of the Client Hardware or to initiate sales and marketing
efforts relating to the TVEmail service, the Company anticipates it will have to
raise substantial additional funding through either debt or equity financing in
the fourth quarter of 1999. If the Company cannot raise such funds, its business
may be materially and adversely affected.
The TVEmail system is comprised of two principal elements: the Client
Hardware; and the ServerSystems. The Company has completed the initial design
and "proof of concept" phases on both the Client Hardware and the ServerSystems
and is now performing value engineering on the Client Hardware. Beta versions of
the Client Hardware became available for pilot deployment in the third quarter
of 1999. The Company commenced initial pilot production in November 1999, and,
depending on the success of the Company's field trials and financing efforts,
the Company may commence full scale commercial deployment of the TVEmail system
as early as the fourth quarter of 1999. However, such schedule is subject to
many risks and uncertainties, including those set forth in the Company's Annual
Report on Form 10-KSB under the caption "Management's Discussion and
Analysis--Certain Trends and Uncertainties," and the Company's progress towards
commercial deployment of the TVEmail system may be made at a significantly
slower rate, through different avenues, or not at all.
During the next twelve months, the Company expects its research and
development efforts to be focused on the final development and production of
version 1 of the TVEmail device and further research and development for version
2 of the TVEmail device. The Company spent approximately $211,000 on research
and development in the first six months of 1999 and expects to spend an
aggregate of approximately $1.3 million on research and development in the next
twelve months, however, there can be no assurance that unanticipated technical
obstacles, lack of funds, changes in strategy or other factors will not cause
actual research and development expenses to differ materially from the Company's
expectations.
-13-
<PAGE>
The Company purchased approximately $133,000 of computer equipment, lab
equipment and development tools in the first six months of 1999 and plans to
purchase approximately $400,000 to $500,000 in computer equipment, lab equipment
and development tools over the next twelve months. These capital outlays could
be substantially greater, if the Company decides to handle certain functions,
such as manufacturing, marketing or customer service in-house as opposed to
contracting them out.
As of October 31, 1999, the Company had 21 full-time employees
(including its executive officers) and two part-time employees. Within the next
twelve months, the Company expects to hire approximately 20 additional employees
in engineering, product development and customer service. The number of hires
may increase substantially if the Company decides to handle certain functions,
such as manufacturing, marketing or customer service in-house. The Company has
not yet decided whether it will seek to establish the internal resources
necessary for any of such functions, and the necessity for such functions can
only be assessed once the TVEmail system is ready for mass production, if ever.
While the Company currently plans to begin its sales of its TVEmail
device and its internet service in the fourth quarter of 1999, there can be no
assurance that difficulties in research and development, network development,
manufacturing or financing, or other factors will not delay the launch date or
prevent such launch altogether.
Management's Discussion and Analysis
For the three and six months ended June 30, 1998, Navis received
revenues totaling approximately $17,000 and $202,000, respectively, for sales on
certain chips, advanced remote control units and wireless keyboards, and from
contract engineering and consulting work in the field of network computer ("NC")
input devices and wireless communications. During the three and six months ended
June 30, 1999, the Navis received no revenues, as it had discontinued its
NC-related sales and contract engineering and consulting work in order to focus
exclusively on developing TVEmail.
The Company's expenses increased from approximately 133,000 and
295,000, respectively, for the three and six months ended June 30, 1998 to
approximately 475,000 and 705,000, respectively, for the analogous periods in
1999, due to the initiation of development efforts relating to the TVEmail
systems, which increases were partially offset by the Company's discontinuation
of NC-related sales, contract engineering and consulting.
The Company has had no revenues in 1999 and there can be no assurance
that the Company will have significant revenues, if any, in the near future, or
ever. As of June 30, 1999, the Company had approximately $3.7 million in cash
and cash equivalents. If the Company continues to use its cash reserves at its
current rate of approximately $200,000 per month without obtaining financing,
the Company will run out of money around March of 2000. Insufficient funds may
require the Company: to delay, scale back or eliminate some or all of its
research and product development programs; to license third parties to
commercialize products or technologies that the Company would otherwise seek to
develop itself; to sell itself to a third party; to cease operations; or to
declare bankruptcy. There can be no assurance that the Company will not engage
in additional or alternate development or other activities that may cause the
company to use up its cash at a faster rate than currently planned, or that the
Company will be able to obtain adequate financing when needed or on terms
acceptable to the Company.
-14-
<PAGE>
Part II Other Information
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
On May 3, 1999, Navis sold $50,000 and $30,000 principal amount of 1
Year 12% Convertible Debentures (the "New 12% Debentures") to Robert Corvino and
Lance Murdock, respectively, for face value. The New 12% Debentures are
convertible, at any time prior to maturity, into Common Stock at a conversion
price of $3.00 per share. On April 5, 1999, the Company issued an aggregate of 8
million shares of Common Stock to the former security holders of Navis,
including to the holders of certain notes and debentures that were converted
into Common Stock in accordance with their terms, in connection with the Navis
Transaction. On April 6, 1999, the Company issued 5 million shares of Preferred
Stock and Warrants to purchase an aggregate of 2 million shares of Common Stock
to Friedlander for an aggregate of $5 million. The Preferred Stock and the
Warrant are convertible into and exerciseable for shares of Common Stock,
respectively, at a price of $1.00 per share. The New 12% Debentures, Common
Stock, Preferred Stock and Warrants were issued in transactions exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Maters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
-15-
<PAGE>
Item 6. Exhibits and Reports on form 8-K
(a) Exhibits:
EXHIBIT TABLE
Exhibit Description
No.
4.1 Certificate of Powers, Designations, Preferences and Rights of the
Convertible Preferred Stock, par value $.01 per share, of the
Company.*
4.2 Common Stock Purchase Warrant dated April 6, 1999 between the
Company and Friedlander International Limited.*
4.3 1-Year 12 Percent Convertible Debenture due May 3, 2000 of Navis in
principal amount of $30,000.
4.4 1-Year 12 Percent Convertible Debenture due May 3, 2000 of Navis in
principal amount of $50,000.
10.1 Reorganization Agreement, dated April 5, 1999, between and among the
Company, Navis Technologies Limited, and the stockholders of Navis
Technologies Limited.*
10.2 Purchase and Sale Agreement, dated April 6, 1999, between the
Company and Friedlander International Limited.*
27 Financial Data Schedule
99 "Certain Trends and Uncertainties" excerpt from the Company's Annual
Report on Form 10-KSB for the fiscal year ended March 31, 1999.
----------------
* Previously filed with, and incorporated by reference to, the
Company's Current Report on Form 8-K filed April 20, 1999.
(b) Reports on Form 8-K.
1) On April 5, 1999, the Company filed a Report on Form 8-K dated as of
March 31, 1999 reporting under Items 5 and 7 that the Company changed its name,
executed a reverse stock split and increased its authorized capital.
2) On April 20, 1999, the Company filed a Report on Form 8-K dated as
of April 5, 1999 reporting under Items 1,2,5,6 and7 that the Company consummated
the Navis Transaction and the Friedlander Transaction.
-16-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
November 12, 1999 eNOTE.COM INC.
By: John R. Varsames
------------------------------
Name: John R. Varsames, President
and Chief Executive Officer
-17-
No. 07 $30,000.00
Navis Technologies, Ltd.
One Lawson Lane
Burlington, VT 05401
May 3, 1999
1-Year 12 Percent Convertible Debenture
Due May 3, 2000
Navis Technologies, Ltd., a Delaware corporation, (the "Corporation"),
for value received, promises to pay to Lance Murdock or assigns, the sum of
$30,000.000 on May 3, 2000 (the "due date"), together with interest accrued
thereon at the rate of 12 percent per annum, computed from May 3. 1999 (the
"issue date"). Payment of principal and interest shall be made in lawful money
of the United States of America and shall be mailed to the owner or owners
hereof at the address appearing below, unless the conversion option is exercised
as set forth below in Paragraph 2.
This Debenture is one of a duly authorized issue of the Corporation's
debentures issued in varying denominations, all of like tenor and maturity,
except variations necessary to express the number, principal amount and payee of
each debenture.
1. Equal rank. All debentures of this issue rank equally and ratably
without priority over one another.
2. Conversion. The holder or holders of this Debenture may prior to the
maturity hereof (except that, if the Corporation has called this Debenture for
redemption, the right to convert shall terminate at the close of business on the
second business day prior to the date fixed as the date for such redemption),
convert the principal amount hereof into common stock of eNote.com, Inc., a
Delaware corporation and the sole shareholder of the Corporation, upon
registration of such stock by eNote.com, Inc. The conversion shall be at the
rate of three dollars ($3.00) per share of common stock. To convert this
Debenture, the holder or holders hereof must surrender the same at the office of
the Corporation, properly completed and executed and with a written notice of
conversion.
3. Fractional shares. In lieu of issuing any fraction of a share upon
the conversion of this Debenture, the Corporation shall pay to the holder hereof
for any fraction of a share otherwise issuable upon the conversion, cash equal
to the same fraction of the then current per unit market price of the equity.
4. Redemption. The Corporation may at any time prepay in whole or in
part, the principal amount, plus accrued interest to the date of prepayment, of
all outstanding debentures of this issue.
<PAGE>
5. Default. If any of the following events occur ("Event of Default"),
the entire unpaid principal amount of, and accrued or unpaid interest on, this
debenture shall immediately be due and payable, and the Corporation shall pay
all costs of collection, including, but not limited to, reasonable attorneys'
fees and expenses incurred by the owner(s) or its assigns on account of such
collection, whether or not suit is brought:
a. The Corporation fails to pay the principal of this Debenture
at its maturity;
b. The Corporation commence any voluntary proceeding under any
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
receivership, dissolution, or liquidation law or statute, or any jurisdiction,
whether now or subsequently in effect; or the Corporation is adjudicated a
bankrupt by a court of competent jurisdiction; or the Corporation petitions or
applies for, acquiesces in, or consents to, the appointment of any receiver or
trustee of the Corporation for all of its property or assets; or the Corporation
makes an assignment for the benefit of all its creditors; or the corporation
admits in writing its inability to pay its debts as they mature; or
c. here is commenced against the Corporation any proceedings
relating to the Corporation under any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, receivership, dissolution, or liquidation law
or statue, of any jurisdiction, whether now or subsequently in effect, and the
proceeding remains undismissed for a period of 60 days or the Corporation by any
act indicates its consent, approval of, or acquiescence in, the proceedings; or
a receiver or trustee in appointed for the corporation or for all or
substantially all of its property or assets, and the receivership or trusteeship
remains undischarged for a period of 60 days; or a warrant of attachment
execution or similar process is issued against any substantial part of the
property or assets of the Corporation, and the warrant or similar process is not
dismissed or bonded within 60 days after the levy.
6. Registered owner. The Corporation shall treat the person or persons
whose name or names appear on this Debenture as the absolute owner or owners
hereof for the purpose of receiving payment of, or on account of, the principal
and interest due on this Debenture and for all other purposes, unless and until
written notice satisfactory to the Corporation is provided by the registered
owner of assignment hereof.
7. Assignment. The owner(s) hereof may assign its rights hereunder to
any person or entity. No assignment of rights or obligations shall be effective
until delivery of written notice of such assignment is made by the assigning
party to the other party hereto.
8. Release of shareholders, officers and directors. This Debenture is
the obligation of the Corporation only, and no recourse shall be had for the
payment of any principal or interest hereon against any shareholder, officer or
director of the Corporation, either directly or through the Corporation, by
virtue of any statute for the enforcement of any assessment or otherwise. The
holder or holders of this Debenture, by the acceptance hereof, and as part of
the consideration for this Debenture, release all claims and waive all
liabilities against the foregoing persons in connecting with this Debenture.
- 2 -
<PAGE>
IN WITNESS WHEREOF, the Corporation has assigned this Debenture this 3rd
day of May, 1999.
Navis Technologies, Ltd.
/s/ John R. Varsames
---------------------------
John R. Varsames, President
REGISTERED OWNER:
Lance Murdock
- -------------------
- -------------------
- -------------------
- 3 -
No. 08 $50,000.00
Navis Technologies, Ltd.
One Lawson Lane
Burlington, VT 05401
May 3, 1999
1-Year 12 Percent Convertible Debenture
Due May 3, 2000
Navis Technologies, Ltd., a Delaware corporation, (the "Corporation"),
for value received, promises to pay to Lance Murdock or assigns, the sum of
$50,000.000 on May 3, 2000 (the "due date"), together with interest accrued
thereon at the rate of 12 percent per annum, computed from May 3. 1999 (the
"issue date"). Payment of principal and interest shall be made in lawful money
of the United States of America and shall be mailed to the owner or owners
hereof at the address appearing below, unless the conversion option is exercised
as set forth below in Paragraph 2.
This Debenture is one of a duly authorized issue of the Corporation's
debentures issued in varying denominations, all of like tenor and maturity,
except variations necessary to express the number, principal amount and payee of
each debenture.
1. Equal rank. All debentures of this issue rank equally and ratably
without priority over one another.
2. Conversion. The holder or holders of this Debenture may prior to the
maturity hereof (except that, if the Corporation has called this Debenture for
redemption, the right to convert shall terminate at the close of business on the
second business day prior to the date fixed as the date for such redemption),
convert the principal amount hereof into common stock of eNote.com, Inc., a
Delaware corporation and the sole shareholder of the Corporation, upon
registration of such stock by eNote.com, Inc. The conversion shall be at the
rate of three dollars ($3.00) per share of common stock. To convert this
Debenture, the holder or holders hereof must surrender the same at the office of
the Corporation, properly completed and executed and with a written notice of
conversion.
3. Fractional shares. In lieu of issuing any fraction of a share upon
the conversion of this Debenture, the Corporation shall pay to the holder hereof
for any fraction of a share otherwise issuable upon the conversion, cash equal
to the same fraction of the then current per unit market price of the equity.
4. Redemption. The Corporation may at any time prepay in whole or in
part, the principal amount, plus accrued interest to the date of prepayment, of
all outstanding debentures of this issue.
<PAGE>
5. Default. If any of the following events occur ("Event of Default"),
the entire unpaid principal amount of, and accrued or unpaid interest on, this
debenture shall immediately be due and payable, and the Corporation shall pay
all costs of collection, including, but not limited to, reasonable attorneys'
fees and expenses incurred by the owner(s) or its assigns on account of such
collection, whether or not suit is brought:
a. The Corporation fails to pay the principal of this Debenture
at its maturity;
b. The Corporation commence any voluntary proceeding under any
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
receivership, dissolution, or liquidation law or statute, or any jurisdiction,
whether now or subsequently in effect; or the Corporation is adjudicated a
bankrupt by a court of competent jurisdiction; or the Corporation petitions or
applies for, acquiesces in, or consents to, the appointment of any receiver or
trustee of the Corporation for all of its property or assets; or the Corporation
makes an assignment for the benefit of all its creditors; or the corporation
admits in writing its inability to pay its debts as they mature; or
c. here is commenced against the Corporation any proceedings
relating to the Corporation under any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, receivership, dissolution, or liquidation law
or statue, of any jurisdiction, whether now or subsequently in effect, and the
proceeding remains undismissed for a period of 60 days or the Corporation by any
act indicates its consent, approval of, or acquiescence in, the proceedings; or
a receiver or trustee in appointed for the corporation or for all or
substantially all of its property or assets, and the receivership or trusteeship
remains undischarged for a period of 60 days; or a warrant of attachment
execution or similar process is issued against any substantial part of the
property or assets of the Corporation, and the warrant or similar process is not
dismissed or bonded within 60 days after the levy.
6. Registered owner. The Corporation shall treat the person or persons
whose name or names appear on this Debenture as the absolute owner or owners
hereof for the propose of receiving payment of, or on account of, the principal
and interest due on this Debenture and for all other purposes, unless and until
written notice satisfactory to the Corporation is provided by the registered
owner of assignment hereof.
7. Assignment. The owner(s) hereof may assign its rights hereunder to
any person or entity. No assignment of rights or obligations shall be effective
until delivery of written notice of such assignment is made by the assigning
party to the other party hereto.
8. Release of shareholders, officers and directors. This Debenture is
the obligation of the Corporation only, and no recourse shall be had for the
payment of any principal or interest hereon against any shareholder, officer or
director of the Corporation, either directly or through the Corporation, by
virtue of any statute for the enforcement of any assessment or otherwise. The
holder or holders of this Debenture, by the acceptance hereof, and as part of
the consideration for this Debenture, release all claims and waive all
liabilities against the foregoing persons in connecting with this Debenture.
- 2 -
<PAGE>
IN WITNESS WHEREOF, the Corporation has assigned this Debenture this 3rd
day of May, 1999.
Navis Technologies, Ltd.
/s/ John R. Varsames
---------------------------
John R. Varsames, President
REGISTERED OWNER:
Robert Francis Corvino
333 South Elm Street
Hindsdale, IL 60521
(630) 654-1697
- 3 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of operations contained
in the Company's Quarterly Report on Form 10-QSB for the period ended June 30,
1999 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000058636
<NAME> eNote.com, Inc.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,658,070
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 6,637
<CURRENT-ASSETS> 107,646
<PP&E> 258,084
<DEPRECIATION> 6,368
<TOTAL-ASSETS> 4,190,049
<CURRENT-LIABILITIES> 420,481
<BONDS> 0
0
50,000
<COMMON> 100,495
<OTHER-SE> 3,619,073
<TOTAL-LIABILITY-AND-EQUITY> 4,190,049
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 704,729
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,325
<INCOME-PRETAX> (722,593)
<INCOME-TAX> 0
<INCOME-CONTINUING> (722,593)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (722,593)
<EPS-BASIC> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
Excerpt from the Company's Annual Report on Form 10-KSB for the fiscal year
- --------------------------------------------------------------------------------
ended March 31, 1999.
- --------------------
Certain Trends and Uncertainties
In addition to the other information contained in this Annual Report on Form
10-KSB, the following factors should be considered carefully.
RISKS RELATING TO THE COMPANY'S CORPORATE STRUCTURE AND
FINANCIAL RESOURCES
Need for Additional Funds
The Company raised $5 million as of April 6, 1999, and otherwise has no
capital resources. The Company intends to use this capital to finalize its
development of the Client Hardware, to install ServerSystems to run the TVEmail
network, to complete the GUI, to perform marketing studies and to produce the
pilot production runs for TVEmail. The Company expects to complete such
endeavors in the third quarter of fiscal 2000 and believes that the $5 million
will satisfy its cash requirements to do so. However, in order for the Company
to begin mass production of the Client Hardware or to initiate sales and
marketing efforts relating to the TVEmail service, the Company anticipates it
will have to raise substantial additional funds. The Company intends to seek
additional funding through public or private financings, which may include debt
or equity financings. Adequate funds for these purposes, whether obtained
through financial markets or collaborative or other arrangements with corporate
partners or from other sources, may not be available when needed or on terms
acceptable to the Company. Insufficient funds may require the Company: to delay,
scale back or eliminate some or all of its research and product development
programs; to license third parties to commercialize products or technologies
that the Company would otherwise seek to develop itself; to sell itself to a
third party; to cease operations; or to declare bankruptcy.
If the Company raises additional funds through the issuance of debt
securities, the holders of the debt securities will have a claim to the
Company's assets that will be prior to any claim of the stockholders. Interest
on any debt securities could increase the Company's costs and negatively impact
its operating results. If the Company raises additional funds through the
issuance of preferred stock, the terms of such preferred stock may provide that
the holders of such preferred stock are entitled to receive dividends and/or
distributions upon liquidation prior to the holders of Common Stock.
Furthermore, any such preferred stock may have class voting rights, conversion
features and/or antidilution protections of which the Common Stock does not have
the benefit. If the Company raises additional funds through the issuance of
Common Stock or securities convertible into or exchangeable for Common Stock,
the percentage ownership of the Company's then-existing stockholders will
decrease. In addition, any such convertible or exchangeable securities may have
rights, preferences and privileges more favorable to the holders than those of
the Common Stock.
- 8 -
<PAGE>
Lack of Operational Continuity
Because of the Company's Bankruptcy, the nature of the Revival and the plan
of reorganization approved by the Company's shareholders, there has not been
continuity in the Company's operations. As a result, relevant records may be
unavailable to management and this may adversely affect the Company's ability to
document its prior operations and corporate proceedings.
Subordination of Common Stock to Preferred Stock; Risk of Dilution;
Anti-Dilution Adjustments.
In the event of the liquidation, dissolution or winding up of the Company,
the Common Stock is expressly subordinate to the $5 million preference of the 5
million outstanding shares of Preferred Stock. The conversion rate of the
Preferred Stock is subject to adjustment, among other things, upon issuances of
Common Stock or securities convertible into Common Stock or rights to purchase
Common Stock that have not been expressly approved in writing by a majority in
interest of the holders of Preferred Stock or their elected representatives. As
of June 30, 1999, each share of Preferred Stock is convertible into 1 share of
Common Stock.
Concentration of Ownership and Control.
Under the terms of the Reorganization Agreement, dated April 5, 1999,
between and among the Company, Navis and the stockholders of Navis, promptly
after compliance with Section 14(f) of the Exchange Act, the Board shall have a
meeting at which all of the then-directors shall resign and shall elect as
members of the Company's Board such individuals as the former stockholders of
Navis shall designate to the Company in writing. The right of the Navis
stockholders to so designate Board members is expressly subject to the
provisions of a Purchase and Sale Agreement between the Company and Friedlander,
dated April 6, 1999 (the "Friedlander Agreement"), which provides that: (A)
until the sooner of (i) the fifth anniversary of the date of the Friedlander
Agreement and (ii) such time as Friedlander is the beneficial owner of less than
10% of the issued and outstanding voting securities of the Company, Friedlander
shall be entitled to appoint two members of the Board; and (B) the Company shall
promptly take such action as may be required to amend its By-laws to provide
that, for so long as Friedlander has a right to appoint two members of the
Board, the total number of members constituting the entire Board shall not
exceed seven. Furthermore, Mr. Varsames and Friedlander each hold a substantial
portion of the Company's voting securities. Accordingly, Mr. Varsames and
Friedlander each have the ability to exert significant influence over the
election of the Company's Board of Directors and other matters submitted to the
Company's stockholders for approval. These arrangements may discourage or
prevent any proposed takeover of the Company, including transactions in which
stockholders might otherwise receive a premium for their shares over the then
current market prices. See also "Certain Trends and Uncertainties--Anti-Takeover
Provisions and Delaware Law May Have Adverse Effects on the Company's Stock
Price" below.
The Company's Anti-Takeover Provisions and Delaware Law May Have Adverse Effects
on the Market Price of the Common Stock.
There are provisions in the Company's certificate of incorporation, its
bylaws and Delaware law that make it more difficult for a third party to obtain
control of the Company, even if doing so would be beneficial to the holders of
Common Stock. These anti-takeover provisions, which could depress the market
price of the Common Stock, include: (a) the division of the Board of Directors
into three classes so that only one-third of our directors are elected each year
and are elected for terms of three years; and (b) the authority of the Board of
Directors to amend or repeal bylaws without the consent or vote of the holders
of Common Stock.
Volatility of Stock Price; Market Overhang from Outstanding Convertible
Securities and Warrants.
The market price of the Company's Common Stock, like that of the common
stock of many other technology companies, has been highly volatile and may be so
in the future. In the past, companies that have experienced volatility in the
market price of their stock have been subject to securities class action
litigation. If the Company were subject to a securities class action lawsuit, it
could result in substantial costs and a significant diversion of resources,
including management time and attention.
- 9 -
<PAGE>
No predictions can be made of the effect that future market sales of the
shares of Common Stock underlying the Preferred Stock and Warrants, or the
availability of such securities for sale, will have on the market price of the
Common Stock prevailing from time to time. Sales of substantial amounts of
Common Stock, or the perception that such sales might occur, could adversely
affect prevailing market prices.
The Market For the Common Stock May Be Illiquid.
The Common Stock is currently trading on the NASD Over the Counter Bulletin
Board. The trading market for the Common Stock may be "thin" and "illiquid",
which can result in increased volatility in the trading prices for the Common
Stock. See "Certain Trends and Uncertainties--The Company's Stock Price May Be
Extremely Volatile." There can be no assurance that an active trading market for
the Common Stock will develop or be sustained. If there is no active trading
market for the Common Stock, holders may not be able to resell their shares at a
satisfactory price, if at all. The prices at which the Common Stock may trade in
the future cannot be predicted and will be determined by the market.
Dividends.
The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. The Company currently intends to retain its
earnings, if any, for the development of its business.
Need for and Dependence on Qualified Personnel.
The Company's success is highly dependent on the hiring and retention of key
personnel and technical staff. The loss of key personnel or the failure to
recruit necessary additional personnel or both could impede the achievement of
development objectives. There is intense competition for qualified personnel in
the areas of the Company's activities, and there can be no assurance that the
Company will be able to attract and retain the qualified personnel necessary for
the development of its business. Many of the Company's competitors have
significantly greater financial and other resources than it does and may be able
to offer more lucrative compensation packages which include stock options and
other stock-based compensation and higher-profile employment opportunities than
the Company can.
The Company's Certificate of Incorporation Provides Officer and Director
Indemnification and Limits Their Liability.
The Company may have to spend significant resources indemnifying its
officers and directors or paying for damages caused by their conduct. The
Delaware General Corporation Law provides for broad indemnification by
corporations of their officers and directors and permits a corporation to
exculpate its directors from liability for their actions. The Company's
certificate of incorporation implements this indemnification and exculpation to
the fullest extent permitted under this law as it currently exists or as it may
be amended in the future. Consequently, except as otherwise provided by law,
none of the Company's officers or directors will be liable to the Company or to
its stockholders for monetary damages resulting from conduct in such capacities.
RISKS RELATING TO THE COMPANY'S OPERATIONS AND TECHNOLOGIES
Limited Operating History; Recent Shift in Business Strategy.
Immediately prior to the Company's acquisition of Navis on April 5, 1999,
the Company had no business operations. Navis itself was founded in June 1996
and, since then, has supplied infrared protocol and advanced input devices to NC
manufacturers, and has provided contract engineering and consulting services.
However, Navis' revenues from operations never exceeded $703,000 in any given
year. In 1998, Navis shifted its business emphasis to focus entirely on the
development of the TVEmail service but has yet to launch such service
commercially or to receive any revenue from such service. As a result, the
Company has only a limited operating history and there is little historical
information on which to evaluate its business and prospects. The Company's
revenue, if any, for the foreseeable future is almost entirely dependent on
successfully bringing its TVEmail service to market and on the number of
customers, if any, who subscribe to the TVEmail service. There can be no
assurance that the Company will be successful in implementing any of its
business strategies.
Once the basic TVEmail service is marketed, if ever, the Company intends to
attempt to expand its operations by developing and marketing new or
complementary services or systems. However, there can be no assurance that the
Company will be able to do so effectively. Although the Company believes that,
in the future, it will be able to use the TVEmail service as a platform to
provide e-mail and certain additional services, there can be no assurance
thereof.
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The Company Depends on its Intellectual Property, Which May Be Difficult and
Costly to Protect.
The Company's intellectual property consists of proprietary or confidential
information that is not currently subject to patent, trademark or similar
protection. Although the Company has applied for trademark protection for the
eNote and TVEmail names, the Company may not be able to secure significant
protection for these trademarks. If the Company's competitors or others adopt
product or service names similar to eNote or TVEmail, it may impede the
Company's ability to build brand identity and customer loyalty. The Company
relies primarily on secrecy to protect technology, especially where patent
protection is not believed to be appropriate or obtainable. No assurance can be
given that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
trade secrets, or that the Company can effectively protect its rights to its
unpatented trade secrets.
The validity, enforceability and scope of protection of certain proprietary
rights in internet-related businesses are uncertain and still evolving. If
unauthorized third parties are able to copy the Company's service or its
business model or to use its confidential information to develop competing
services, the Company may lose customers and its business could suffer. The
Company may not be able to effectively police unauthorized use of its technology
because such policing is difficult and expensive. In particular, the global
nature of the internet makes it difficult to control the ultimate destination or
security of software or other data transmitted. Furthermore, the laws of other
countries may not adequately protect the Company's intellectual property.
The Company's business activities and the TVEmail service may infringe upon
the proprietary rights of others. In addition, other parties may assert
infringement claims against the Company. Any such claims and any resulting
litigation could subject the Company to significant liability for damages and
could also result in invalidation of its proprietary rights. The Company could
be required to enter into costly and burdensome royalty and licensing
agreements. These agreements may not be available on terms acceptable to the
Company, or may not be available at all. The Company may also need to file
lawsuits to defend the validity of its intellectual property rights and trade
secrets, or to determine the validity and scope of the proprietary rights of
others. Litigation is expensive and time-consuming and could divert management's
attention away from the Company's business.
Technology Licensed From Third Parties.
The Company has entered into agreements with, and has licensed certain
technology from, third parties. The Company has relied on scientific, technical,
commercial and other data supplied and disclosed by others in entering into
these agreements and will rely on such data in support of development of certain
products. Furthermore, the Company believes that it will license additional
technologies from third parties in the future. Although the Company has no
reason to believe that this information contains errors of omission or fact,
there can be no assurance that there are no errors of omission or fact that
would materially affect the commercial viability of these products.
Rapid Technological Change, Customer Demands and Intense Competition.
The e-mail service market is characterized by rapidly changing technology,
customer demands and intense competition. If the Company cannot keep pace with
these changes, its TVEmail service could become uncompetitive and its business
could suffer. If the Company is not successful in developing and marketing
enhancements to the TVemail service or new services that respond to
technological change or customer demands, the Company's business may be
materially and adversely effected.
The competitive market for e-mail and online service access may limit demand
or pricing for the TVEmail system. The Company expects to experience intense
competition from established online service providers such as America Online,
Inc., Prodigy Communications Corporation and Microsoft Corporation's WebTV(TM).
Many companies provide e-mail and online service access and other services,
which provide functionality superior to those included in the TVEmail system. As
a result of this competition, demand for the TVEmail system may suffer, the
Company may be restricted in the service rates it can charge for the TVEmail
system and the Company's business, financial condition and results of operations
may be adversely affected. Many of the Company's competitors have significantly
greater financial, technical, marketing, distribution, customer support and
other resources than the Company does. Furthermore, many of the Company's
competitors have significantly greater experience, better name recognition, more
compelling content and easier access to consumers, advertisers and online
service providers than the Company does.
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Management of Growth.
The Company's ability to implement its business plan successfully in a new
and rapidly-evolving market will require effective planning and growth
management. If the Company cannot manage its anticipated growth effectively, its
business and financial results may suffer. The Company plans to extend its
existing operations substantially, particularly those relating to manufacturing,
sales and marketing and technical support. The Company expects that it will need
to manage and broaden multiple relationships with customers, internet service
providers and other third parties. The Company also expects that it will need to
expand its financial systems, procedures and controls and will need to augment,
train and manage its workforce, particularly its information technology staff.
As a result, the Company's management and operating systems may be strained by
any growth and the Company may be unable to timely complete necessary
improvements to its operating systems, procedures and controls to support any
future operations.
Capacity Constraints May Impede Revenue Growth and Profitability.
The Company believes that satisfactory performance, reliability and
availability of its TVEmail appliances and ServerSystem infrastructure will be
critical to the Company's reputation and ability to attract customers and
maintain adequate customer service levels. Any significant or prolonged capacity
constraints could delay or prevent customers from sending or gaining access to
their documents or other data or services. Such constraints could decrease the
Company's ability to acquire and retain customers and prevent the Company from
achieving the necessary growth in revenue to achieve profitability. If the
amount of traffic increases substantially and the Company experiences capacity
constraints, the Company may need to spend significant amounts to expand and
upgrade its technology and network infrastructure. Furthermore, the Company may
be unable to predict the rate or timing of any increases in the use of its
services in order to respond in a timely manner.
The Company May Suffer Systems Failures and Business Interruptions Which Would
Harm its Business.
The Company's success will depend in part on the efficient and reliable
operation of TVEmail service sufficient to accommodate a large number of
subscribers. The Company intends to locate its ServerSystems at multiple sites
with redundant functions in order to reduce the risks of system failure,
however, the ServerSystems are vulnerable to damage from fire, power loss,
telecommunications failures, break-ins and other events, which could lead to:
interruptions or delays in the Company's service; loss of data; or the inability
to accept, transmit and confirm customer documents and data. The Company's
business may be materially adversely effected if its service is interrupted.
Although the Company intends to implement network security measures, its systems
may be vulnerable to computer viruses, electronic break-ins, attempts by third
parties deliberately to exceed the capacity of the systems and similar
disruptions, any of which could have a material adverse effect on the Company's
business.
Year 2000 Issues Could Impact the Company's Performance.
Many currently installed computer systems and software products have been
coded to accept or recognize only two digit entries to define the applicable
year. These systems may erroneously recognize the year 2000 as the year 1900.
This could result in major failures of malfunctions.
The Company believes that its ServerSystems and Client Hardware are year
2000 compliant, and, since the Client Hardware does not interact with any other
systems controlled by the customer, the year 2000 readiness of the Company's
clients should not impact the operation of TVEmail. However, telephony providers
and electronic bill paying services with which the TVEmail system may interact
may not become year 2000 compliant in a timely fashion, or at all. The failure
of a such entities to become year 2000 compliant could result in customers
ceasing use of the TVEmail service, the Company receiving bad publicity, or
other factors that may cause material harm to the Company's business.
RISKS RELATING TO THE INTERNET AND ONLINE COMMERCE
Privacy Concerns May Discourage Customers From Using The Company's Services.
Concerns over the security of online transactions and the privacy of users
may inhibit the growth of the internet as a means of delivering documents and
data. The Company may need to incur significant expenses and use significant
resources to protect against the threat of security breaches or to alleviate
problems caused by such breaches. The Company plans to rely on encryption and
authentication technology to provide secure transmission of confidential
information. If the Company's security measures do not prevent security
breaches, the Company could suffer operating losses, damage to its reputation,
litigation and possible liability. Advances in computer capabilities, new
discoveries in the field of cryptography or other developments may result in a
compromise or breach of the Company's encryption
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and authentication technology and could enable an outside party to steal
proprietary information or interrupt its operations.
Government Regulation and Legal Uncertainties Relating to the Internet Could
Harm the Company's Business.
Changes in the regulatory environment could decrease the Company's revenues
and increase its costs. The internet is largely unregulated and the laws
governing the internet remain unsettled, even in areas where there has been some
legislative action. It may take years to determine whether and how existing laws
such as those governing intellectual property, privacy and taxation apply to the
internet. In addition, because of increasing popularity and use of the internet,
any number of laws and regulations may be adopted with respect to the internet
or other online services covering issues such as: user privacy; security;
pricing; content; copyrights; distribution; taxation; and characteristics and
quality of services. Such regulations could impose additional costs or
interdicts on activities of the Company, which could have a material adverse
effect.
If the Internet Infrastructure Fails, the Company's Business May Suffer.
The Company cannot be certain that the infrastructure or complementary
services necessary to maintain the internet as a useful, convenient or secure
means of transferring documents and data will continue to develop. The internet
infrastructure may not support the demands that growth may place on it, and the
performance and reliability of the internet may decline, which could have a
material adverse effect on the Company's business.
The Company Depends on Third-Party Providers of Internet and Telecommunications
Service.
The Company's operations depend on third parties for internet access and
telecommunications. Frequent or prolonged interruptions of these services could
result in significant losses of revenues. These types of occurrences could also
cause users to perceive the Company's products as not functioning properly and
therefore encourage them to use other methods to deliver and receive
information. The Company has limited control over these third parties and there
can be no assurance that the Company will be able to maintain relationships with
any of them on acceptable commercial terms. Nor can there be any assurance that
the quality of services that they provide will remain at the levels needed to
enable the Company to conduct its business effectively. Each of these third
parties has experienced outages in the past, and could experience outages,
delays and other difficulties due to system failures unrelated to the Company's
systems.
Costs of Transmitting Documents and Data Could Increase.
The cost of transmitting documents and data over the internet could
increase, and the Company may not be able to increase its prices to cover such
rising costs. Several telecommunications companies have petitioned the Federal
Communications Commission to regulate internet and on-line service providers in
a manner similar to long distance telephone carriers and to impose access fees
on such providers. Also, foreign laws and state tax laws and regulations
relating to the provision of services over the internet are still developing. If
individual states impose taxes on services provided over the internet, the
Company's cost of providing our TVEmail services may increase.