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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(AMENDMENT NO. 2)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Earliest event reported): October 5, 2000
EBIZ ENTERPRISES, INC.
(Exact Name of Registrant as Specified in its Charter)
NEVADA 0-27721 84-1075269
(State of incorporation) (Commission File Number) (I.R.S. Employer
Identification No.)
15695 NORTH 83RD WAY
SCOTTSDALE, ARIZONA 85260
(Address of Principal/Executive Offices)
(480) 778-1000
(Registrant's telephone number including area code)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On October 5, 2000, Ebiz Enterprises, Inc. completed the acquisition of
LinuxMall.com, Inc. by merger of LinuxMall into a newly formed wholly owned
subsidiary of Ebiz. Under the terms of the final transaction, Ebiz agreed to
issue approximately 7.2 million shares of its common stock in exchange for
cancellation of all outstanding common stock and certain preferred securities of
LinuxMall. An additional approximate 2.5 million shares will be issued in
January 2001 upon conversion of the remaining outstanding preferred securities.
The fair market value of all shares to be issued to acquire LinuxMall equals
approximately $9.2 million or $1.25 per share. The transaction will be accounted
for under the purchase method of accounting.
The exchange ratios are 1.8 shares of Ebiz's common stock for all common
stock of LinuxMall and 2 shares of its common stock for the preferred securities
of LinuxMall. Ebiz also assumed obligations of LinuxMall to issue Ebiz's common
stock upon exercise1113046.4of certain outstanding options and warrants of
LinuxMall upon exercise by the holders of these securities.
Ebiz common stock issued in the transaction is to be issued to the holders
of LinuxMall's outstanding common stock and preferred securities. No
pre-existing relationship between these holders and Ebiz exists. Southwest
Securities, Inc. advised Ebiz in connection with the acquisition and rendered
its opinion that the transaction was economically fair to the shareholders of
Ebiz.
Under the terms of the acquisition, Jeffery I. Rassas is to be appointed as
the Chairman and Chief Strategic Officer of the combined company, David Shaw as
the Chief Executive Officer, Stephen Herman as the Chief Operations Officer and
Ray Goshorn as the Chief Financial Officer. Mr. Shaw and Mark Bolzern are to be
appointed as members of Ebiz's Board of Directors and additional directors are
to be determined. Chuck Mead will also be appointed as the Chief Technical
Officer of the combined company.
2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
FINANCIAL STATEMENTS
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
INDEX TO LINUXMALL.COM, INC. FINANCIAL STATEMENTS
Independent Auditors' Report................................................F-1
Balance Sheets
as of September 30, 1999 and June 30, 2000 (unaudited)....................F-2
Statements of Operations
for the Years Ended September 30, 1998 and 1999, and for the
Nine Months Ended June 30, 1999 and 2000 (unaudited)......................F-3
Statements of Stockholders' Deficit
for the Years Ended September 30, 1998 and 1999
and for the Nine Months Ended June 30, 2000 (unaudited)...................F-4
Statements of Cash Flows for the Years Ended September 30, 1998 and 1999
and for the Nine Months Ended June 30, 1999 and 2000 (unaudited)..........F-5
Note to Financial Statements................................................F-6
(b) PRO FORMA FINANCIAL INFORMATION
INDEX TO EBIZ ENTERPRISES, INC. PRO FORMA FINANCIAL INFORMATION
Pro Forma Financial Statements (unaudited)..................................F-17
Pro Forma Condensed Combined Balance Sheet (unaudited)
September 30, 2000........................................................F-18
Pro Forma Condensed Combined Statements of Operations (unaudited)
Three Months Ended September 30, 2000.....................................F-19
Pro Forma Condensed Combined Statements of Operations (unaudited)
Year Ended June 30, 2000..................................................F-20
Notes to Unaudited Pro Forma Condensed Combined Financial Statements........F-21
3
(c) EXHIBITS
10.14* Agreement and Plan of Merger, dated August 7, 2000, between Ebiz,
LinuxMall.com, Inc. ("LINUXMALL") and LinuxMall Acquisition, Inc.
("MERGER SUB")
10.15* First Amendment to Agreement and Plan of Merger, dated October 3,
2000, between Ebiz, LinuxMall and Merger Sub
10.16* Registration Rights Agreement, dated October 5, 2000 between Ebiz,
LinuxMall and Merger Sub
10.17* Shareholder Voting Agreement and Proxy, dated October 5, 2000 by
Jeffrey I. Rassas
10.18* Shareholder Voting Agreement and Proxy, dated October 5, 2000 by
Stephen C. Herman
10.19* Compensation Agreement, dated October 5, 2000, between Ebiz and
LinuxMall
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* Incorporated by reference from Ebiz's Form 10-KSB for the fiscal year ended
June 30, 2000 filed with the Securities and Exchange Commission on October
13, 2000.
4
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
LinuxMall.com, Inc.
We have audited the accompanying balance sheet of LinuxMall.com, Inc. (the
"COMPANY") as of September 30, 1999, and the related statements of operations,
stockholders' deficit, and cash flows for the years ended September 30, 1999 and
1998. 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at September 30, 1999, and the
results of its operations and its cash flows for the years ended September 30,
1999 and 1998 in conformity with accounting principles generally accepted in the
United States of America.
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's recurring losses from operations and
stockholders' capital deficiency raise substantial doubt about its ability to
continue as a going concern. Management's plans concerning 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.
DELOITTE & TOUCHE LLP
Denver, Colorado
March 14, 2000
F-1
LINUXMALL.COM, INC.
BALANCE SHEETS
SEPTEMBER 30, 1999 AND JUNE 30, 2000 (UNAUDITED)
- --------------------------------------------------------------------------------
SEPTEMBER 30, JUNE 30,
1999 2000
----------- -----------
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 6,765 $ 221,115
Accounts receivable - net of an allowance of
$5,238 and $73,670 (unaudited), respectively 40,057 483,364
Inventory 159,595 1,260,413
Other -- 43,121
----------- -----------
Total current assets 206,417 2,008,013
PROPERTY AND EQUIPMENT - net 132,704 546,247
INTANGIBLE ASSETS - net -- 1,009,253
OTHER ASSETS 383 99,210
----------- -----------
TOTAL $ 339,504 $ 3,662,723
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 506,571 $ 2,227,920
Accrued expenses 62,557 374,614
Demand note - related party 218,596 205,346
Note payable - current 7,167 5,943
----------- -----------
Total current liabilities 794,891 2,813,823
NOTE PAYABLE - net 10,601 7,839
CONVERTIBLE DEBENTURES - net (Note 9) -- 4,567,363
----------- -----------
Total liabilities 805,492 7,389,025
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' DEFICIT:
Preferred stock, $0.001 par value; 2,000,000 shares
authorized and none issued and outstanding at
September 30, 1999 and June 30, 2000 (unaudited)
Preferred warrants (unaudited) (Note 9) -- 524,008
Common stock, $0.01 par value; 10,000,000 shares authorized
and 1,980,000 and 2,676,662 issued and outstanding at
September 30, 1999 and June 30, 2000 (unaudited) 1,980 2,677
Additional paid-in-capital 17,820 1,236,282
Deferred compensation (Note 9) (47,906)
Accumulated deficit (485,788) (5,441,363)
----------- -----------
Total stockholders' deficit (465,988) (3,726,302)
----------- -----------
TOTAL $ 339,504 $ 3,662,723
=========== ===========
See accompanying notes to financial statements.
F-2
LINUXMALL.COM, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1998 AND 1999, AND
NINE MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)
- --------------------------------------------------------------------------------
YEARS ENDED NINE MONTHS ENDED
SEPTEMBER 30, JUNE 30,
-------------------------- --------------------------
1998 1999 1999 2000
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
REVENUES:
Retail $ 761,401 $ 1,374,658 $ 984,486 $ 2,266,059
Other 237,781 423,668 303,418 524,955
----------- ----------- ----------- -----------
Total revenues 999,182 1,798,326 1,287,904 2,791,014
COST OF REVENUES:
Retail 517,175 882,546 564,557 1,718,256
Other 170,581 331,977 241,908 366,326
----------- ----------- ----------- -----------
Total cost of revenues 687,756 1,214,523 806,465 2,084,582
----------- ----------- ----------- -----------
GROSS PROFIT 311,426 583,803 481,439 706,432
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Sales and marketing 50,030 169,478 148,260 2,101,657
General and administrative 220,244 378,817 168,948 3,225,410
Depreciation and amortization 12,388 22,160 11,922 160,993
----------- ----------- ----------- -----------
Total operating expenses 282,662 570,455 329,130 5,488,060
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 28,764 13,348 152,309 (4,781,628)
INTEREST EXPENSE - net 51,652 37,602 28,417 172,802
OTHER INCOME (LOSS) -- 1,534 (1,866) (1,145)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (22,888) $ (22,720) $ 122,026 $(4,955,575)
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE:
Basic $ (0.01) $ (0.01) $ 0.06 $ (2.19)
=========== =========== =========== ===========
Diluted $ (0.01) $ (0.01) $ 0.06 $ (2.19)
=========== =========== =========== ===========
SHARES USED IN COMPUTATION; Basic and Diluted 1,980,000 1,980,000 1,980,000 2,258,940
See accompanying notes to financial statements.
F-3
LINUXMALL.COM, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED 1998 AND 1999 AND
NINE MONTHS ENDED JUNE 30, 2000 (unaudited)
- --------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL TOTAL
------------------------ PAID-IN PREFERRED DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL WARRANTS COMPENSATION DEFICIT DEFICIT
----------- ---------- ----------- ---------- ---------- ----------- -----------
BALANCES, OCTOBER 1, 1997 1,980,000 $ 1,980 $ 17,820 $ -- $ -- $ (440,180) $ (420,380)
Net loss -- -- -- -- -- (22,888) (22,888)
----------- ---------- ----------- ---------- ---------- ----------- -----------
BALANCES, SEPTEMBER 30, 1998 1,980,000 1,980 17,820 (463,068) (443,268)
Net loss -- -- -- -- -- (22,720) (22,720)
----------- ---------- ----------- ---------- ---------- ----------- -----------
BALANCES, SEPTEMBER 30, 1999 1,980,000 1,980 17,820 -- -- (485,788) (465,988)
Stock based compensation
arrangements (unaudited) 36,500 37 63,839 267,239 (63,875) -- 267,240
Issuance of warrants
with debt (unaudited) -- -- -- 256,769 -- -- 256,769
Equity issued for business
acquisitions (unaudited) 660,162 660 1,154,623 -- -- -- 1,155,283
Amortization of deferred
compensation (unaudited) -- -- -- -- 15,969 -- 15,969
Net loss (unaudited) -- -- -- -- -- (4,955,575) (4,955,575)
----------- ---------- ----------- ---------- ---------- ----------- -----------
BALANCES, JUNE 30, 2000 (UNAUDITED) 2,676,662 $ 2,677 $ 1,236,282 $ 524,008 $ (47,906) $(5,441,363) $(3,726,302)
=========== ========== =========== ========== ========== =========== ===========
See accompanying notes to financial statements.
F-4
LINUXMALL.COM, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998 AND 1999 AND
NINE MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)
- --------------------------------------------------------------------------------
YEARS ENDED NINE MONTHS ENDED
SEPTEMBER 30, JUNE 30,
-------------------------- --------------------------
1998 1999 1999 2000
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (22,888) $ (22,720) $ 122,026 $(4,955,575)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 12,388 22,160 11,922 160,993
Stock-based compensation expense -- -- -- 15,969
Imputed interest expense -- 179 -- 53,016
Non-cash consulting expense -- -- -- 267,239
Changes in operating assets and liabilities
(net of effect of business acquisitions):
Accounts receivable (4,009) (27,274) (36,640) 37,060
Inventory (37,894) (3,202) (123,266) (386,302)
Other assets 387 (8) (8) (134,184)
Accounts payable and accrued expenses 31,424 117,818 40,466 753,604
----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities (20,592) 86,953 14,500 (4,188,180)
----------- ----------- ----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES -
(net of effect of business acquisitions):
Cash acquired in business acquisition
net of cash acquisition costs -- -- -- 84,664
Purchases of property and equipment (11,559) (138,730) (45,360) (435,985)
----------- ----------- ----------- -----------
Net cash used in investing activities (11,559) (138,730) (45,360) (351,321)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 30,852 48,346 20,664 6,465
Payments on note payable -- -- -- (25,119)
Proceeds from convertible debentures -- -- -- 4,772,505
----------- ----------- ----------- -----------
Net cash provided by financing activities 30,852 48,346 20,664 4,753,851
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,299) (3,431) (10,196) 214,350
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,495 10,196 10,196 6,765
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,196 $ 6,765 $ -- $ 221,115
=========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 51,652 $ 37,423 $ 28,417 $ 14,245
Common stock issued for services -- -- -- 63,875
Preferred warrants issued for services -- -- -- 267,239
Common stock issued for business acquisition -- -- -- 1,155,284
See accompanying notes to financial statements.
F-5
LINUXMALL.COM, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998, 1999 AND FOR THE
NINE MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - LinuxMall.com, Inc. (the "COMPANY" or "LINUXMALL"), formerly a
subsidiary of Workgroup Solutions, Inc., was organized and incorporated in
Colorado in August 1995, and is currently incorporated in the State of
Delaware. LinuxMall is a reseller of Linux software and other Linux related
products. Substantially all sales are made to United States customers and
are denominated in United States dollars.
UNAUDITED INTERIM FINANCIAL INFORMATION - The balance sheet at June 30,
2000, the statements of operations and cash flows for the nine months ended
June 30, 1999 and 2000 and the statement of stockholders' deficit for the
nine months ended June 30, 2000 are unaudited and have been prepared in
accordance with generally accepted accounting principles applicable to
interim financial reporting. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, considered necessary to
fairly present the interim financial information, have been made. The
results of operations for interim periods are not necessarily indicative of
the operating results of a full year or of future years.
PRINCIPLES OF CONSOLIDATION - The Company's balance sheet as of September
30, 1999 and the related statements of operations, stockholders' deficit,
and cash flows for the years ended September 30, 1998 and 1999 and for the
nine months ended June 30, 1999, include the Company's accounts for such
periods. The Company's balance sheet as of June 30, 2000 and the related
statement of operations, stockholders' deficit and cash flows for the nine
months ended June 30, 2000 include the Company's accounts and the accounts
of Frank Kasper & Associates from the date of its acquisition (see Note 9).
All material intercompany accounts and balances have been eliminated as of
and for the nine months ended June 30, 2000.
RISKS AND UNCERTAINTIES - LinuxMall operates principally in the Internet
industry and, accordingly, is subject to various risks and uncertainties
frequently encountered by companies in the early stages of development,
particularly companies in the new and rapidly evolving market for
Internet-based products and services. Such risks and uncertainties include,
but are not limited to, a limited operating history, an evolving and
unpredictable business model and the management of rapid growth. To address
these risks, the Company must, among other things, maintain and increase
its customer base, implement and successfully execute its business and
marketing strategy, continue to develop and upgrade its technology, provide
F-6
superior customer service and attract and retain qualified personnel. There
can be no guarantee that LinuxMall will be successful in addressing such
risks.
LIQUIDITY - The Company incurred net losses of $22,888, $22,720, and
4,955,575 for the years ended September 30, 1998, 1999 and for the nine
months ended June 30, 2000 (unaudited), respectively. The Company has a
stockholders' deficiency of $465,988 and $3,726,302 at September 30, 1999
and June 30, 2000 (unaudited), respectively. In December 1999, March 2000,
and April 2000, the Company secured $4,772,505 in additional convertible
debt financing (see Note 9). Management believes that the existing cash on
hand will be sufficient to meet the Company's minimum obligations through
September 30, 2000.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions. These estimates may affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
REVENUE RECOGNITION - Revenues are generated principally from the sale of
products via the Company's Internet website. Merchandise is generally
shipped from the Company's warehouses directly to the customer. The Company
recognizes revenues when merchandise is shipped and provides allowances for
uncollectible amounts and product returns.
CASH AND CASH EQUIVALENTS - LinuxMall considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
CONCENTRATIONS OF CREDIT RISK - Financial instruments which potentially
subject LinuxMall to concentrations of credit risk are primarily accounts
receivable. However, LinuxMall generally requires customers to pay with a
credit card, for which authorization is obtained prior to shipment of
product.
INVENTORY - Various third-party warehousing agents hold inventory on behalf
of LinuxMall. Inventories are reported at the lower of cost or market,
using the average cost method of accounting.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation and amortization of property and equipment is computed using
the straight-line method based on estimated useful lives of three to five
years.
Expenditures for maintenance and repairs are expensed as incurred.
Expenditures for major renewals and betterments that extend the useful
lives of property and equipment are capitalized.
F-7
INTANGIBLE ASSETS - In connection with the business acquisition (see Note
9), the Company has recorded certain intangible assets. These assets are
being amortized using the straight-line method over their estimated useful
lives ranging from three to five years.
LOSS PER COMMON SHARE - Basic loss per common share excludes potentially
dilutive securities and is computed by dividing loss applicable to common
stockholders by the weighted average number of common shares outstanding,
less the weighted average number of common shares subject to repurchase by
the Company. Diluted loss per common share reflects the potential dilution
that could occur if securities or other contracts to issue common stock
(convertible preferred stock, warrants and common stock options) were
exercised or converted into common stock, unless their effect would be
antidilutive.
TECHNOLOGY DEVELOPMENT COSTS - Technology development costs are charged to
operations as incurred and are included in general and administrative
expenses. Technology development costs include costs incurred in the
development and enhancement of software used in connection with services
provided by the Company that do not otherwise qualify as internally
developed software costs. The cost of internally developed software is
capitalized and included in property and equipment. The costs to develop
such software are capitalized in accordance with Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." Capitalization begins when management authorizes and
commits to funding a project it believes will be completed and used to
perform the functions intended and the conceptual formulation, design and
testing of possible software project alternatives have been completed.
Pilot projects and projects where expected future economic benefits are
less than probable are not capitalized. Internally developed software costs
include the cost of software tools and licenses used in the development of
the Company's systems, as well as consulting costs. Capitalized costs
totaled $42,775 for the year ended September 30, 1999. There were no costs
capitalized in prior periods, or for the nine months ended June 30, 2000
(unaudited).
Completed projects are transferred to property and equipment and are
reported at the lower of unamortized cost less any provision for
impairment. Amortization is based on the straight-line method over the
estimated useful life, generally two to three years. Amortization expense
for the year ended September 30, 1999, was $7,130; and $3,565 and $10,695
for the nine months ended June 30, 1999 and 2000 (unaudited), respectively.
There was no amortization expense for the year ended September 30, 1998.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF -
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to the estimated future undiscounted net cash flows
F-8
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the
assets. The Company has identified no such impairment losses.
INCOME TAXES - The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes," which requires the recognition
of deferred tax liabilities and assets at tax rates expected to be in
effect when these balances reverse. Future tax benefits attributable to
temporary differences are recognized to the extent that realization of such
benefits is more likely than not.
ADVERTISING COSTS - Advertising costs are expensed when the initial
advertisement is run.
COMPREHENSIVE INCOME - From its inception, LinuxMall has no items of other
comprehensive income.
NEW ACCOUNTING PRONOUNCEMENT - In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that all
derivative instruments (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in
the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. The accounting provisions for
qualifying hedges allow gains and losses related to a hedged item
recognized in the income statement to be offset by the related derivative's
gains and losses, and requires the Company to formally document, designate,
and assess the effectiveness of transactions that qualify for hedge
accounting. The Company is not required to adopt this statement until
October 1, 2000. The Company has concluded that as of June 30, 2000, it
does not have derivatives as defined by SFAS No. 133 and, therefore,
adoption of this standard is expected to have no effect as of October 1,
2000.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," providing guidance with respect to revenue recognition issues
and disclosures. As amended by SAB No. 101B, the Company is not required to
implement SAB No. 101 until the fourth quarter of calendar year 2000. The
Company believes that the implementation of SAB No. 101 will not have a
significant impact on its financial statements.
F-9
2. MANAGEMENT'S PLANS AND EXPECTED FUNDING SOURCES
The Company incurred net losses of $22,720 and $22,888 for the years ended
September 30, 1998 and 1999, respectively, and $4,955,575 for the nine
months ended June 30, 2000 (unaudited). As of September 30, 1999 and June
30, 2000, the Company had an accumulated deficit of $485,788 and $5,441,363
(unaudited), respectively, and a working capital deficit of $588,474 and
$805,812 (unaudited), respectively. Between December 1, 1999 and April 3,
2000, the Company raised $4,772,505 (unaudited) from the issuance of
convertible debentures to fund operations (see Note 9).
On August 7, 2000, the Company entered into an Agreement and Plan of Merger
with Ebiz Enterprises, Inc. ("EBIZ"). The agreement was amended on October
3, 2000 and effective October 5, 2000. Under the terms of the agreement,
Ebiz acquired all of the outstanding stock and assumed the outstanding
convertible debentures of the Company. Ebiz Enterprises, Inc. current
stockholders will own approximately 56% of the resulting company,
("NEWCO").
In addition to anticipated strategic and operating synergies, management
believes that the business logic of the combination will help attract new
investor interest to help generate the funding required to implement the
Company's strategies. The first such investment was a $3.0 million Ebiz
equity purchase by Caldera Systems, Inc. ("CALDERA"), that was announced by
Ebiz on September 19, 2000. Management believes that the resulting
agreement between Newco and Caldera will strengthen Newco's overall
marketing program.
Management believes that additional funding will likely be available to
meet Newco's growth needs through 2001. Without additional capital, Newco
will not be able to fully implement its business or operating and
development plans. No assurance can be given that any such financing, if
obtained, will be adequate to meet its ultimate capital needs. If adequate
capital cannot be obtained on satisfactory terms, operations could be
negatively impacted.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Both the Company, and Ebiz have
incurred losses and had negative cash flows from operations in 2000 and
1999 and do not have sufficient capital needed to support its operations.
The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts
or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
F-10
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of September 30, 1999
and June 30, 2000:
SEPTEMBER 30, JUNE 30,
1999 2000
-------- --------
(UNAUDITED)
Computer equipment $119,128 $395,367
Internal use software 42,775 42,775
Vehicles 21,916 21,916
Furniture and fixtures 5,805 209,248
Leasehold improvements -- 23,145
-------- --------
189,624 692,451
Less: accumulated depreciation and amortization 56,920 146,204
-------- --------
Property and equipment, net $132,704 $546,247
======== ========
4. NOTE PAYABLE
The Company has a note payable to a finance company. Payments are due
monthly through 2002. The note is collateralized by the Company's vehicles.
The stated interest rate is 0%. Interest was imputed at 10%, and interest
charges of $179 and $1,385 were expensed for the periods ended September
30, 1999 and June 30, 2000, (unaudited), respectively. As of September 30,
1999 and June 30, 2000, annual maturities of LinuxMall's outstanding note
payable were as follows:
SEPTEMBER 30, JUNE 30,
YEAR ENDING SEPTEMBER 30: 1999 2000
-------- --------
(UNAUDITED)
2000 $ 7,167 $ 1,792
2001 7,167 7,168
2002 6,569 6,569
-------- --------
Total 20,903 15,529
Less: imputed interest (3,135) (1,747)
Less: current portion (7,167) (5,943)
-------- --------
Notes payable $ 10,601 $ 7,839
======== ========
5. RELATED - PARTY TRANSACTIONS
The Company has an on-demand, non-interest-bearing note payable to its
Chief Executive Officer, in the aggregate principal amounts of $60,152 and
$66,617 as of September 30, 1999 and June 30, 2000 (unaudited),
respectively. The proceeds of this loan were used to fund Company
operations. As the note is due on demand, no interest has been incurred or
imputed.
F-11
The Company had an on-demand, non-interest-bearing note payable to General
Computer Services, Inc., an entity controlled by its Chief Executive
Officer, in the aggregate principal amounts of $158,444 and $138,729 as of
September 30, 1999 and June 30, 2000 (unaudited), respectively. The
proceeds of this loan were used to fund Company operations during the
periods presented. As the note is due on demand, no interest has been
incurred or imputed.
The Company leased office space from its Chief Executive Officer and paid
$12,000 and $10,000 for the years ended September 30, 1999 and 1998,
respectively, and $9,000 and $4,000 for the nine months ended June 30, 1999
(unaudited) and June 30, 2000 (unaudited), respectively.
6. STOCK OPTION PLAN (UNAUDITED)
On February 9, 2000, the Company instituted the 2000 Stock Option Plan (the
"PLAN"). Pursuant to the Plan, the Company may grant incentive and
nonstatutory stock options to employees, directors and consultants to
acquire up to 1,400,000 shares of the Company's common stock. Options
granted vest over four years and expire no more than ten years from the
date of the grant.
The following table summarizes stock option activity during the period from
September 30, 1999 through June 30, 2000:
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
------- -------
Balances, October 1, 1998 -- $ --
Granted -- --
Exercised -- --
Canceled -- --
------- -------
Balances, September 30, 1999 -- $ --
Granted (weighted average stock option
fair value of $0.37) (unaudited) 475,250 1.75
Exercised (unaudited) -- --
Canceled (unaudited) -- --
------- -------
Balances, June 30, 2000 (unaudited) 475,250 $ 1.75
======= =======
At September 30, 1999 and June 30, 2000, options for 0 and 924,750
(unaudited) shares were available under the Plan for future grant,
respectively.
F-12
Additional information regarding options outstanding as of June 30, 2000 is
as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED
RANGE OF REMAINING EXERCISABLE AT AVERAGE
EXERCISE NUMBER CONTRACTUAL JUNE 30, EXERCISE
PRICES OUTSTANDING LIFE (YEARS) 2000 PRICE
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
$ 1.75 475,250 9.75 29,703 $ 1.75
ADDITIONAL STOCK PLAN INFORMATION - Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, (SFAS No. 123)
requires the disclosure of pro forma net income and earnings per share had
the Company adopted the fair value method of accounting for stock-based
awards. Under SFAS No. 123, the fair value of the stock-based awards to
employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models
also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the
Black-Scholes option pricing model under the minimum value method with the
following weighted average assumptions for the nine months ended June 30,
2000; expected life, four years (unaudited); risk free interest rate of
6.0% (unaudited); and no dividends during the expected term. The Company's
calculations are based on a single option valuation approach and
forfeitures are recognized as they occur. If the computed fair values of
the stock-based awards had been amortized over the vesting period of the
awards, pro forma net loss applicable to common stockholders would have
been approximately $4,966,565 (unaudited), ($2.20 per basic and diluted
share (unaudited)).
STOCK-BASED COMPENSATION - In connection with options granted to employees
to purchase common stock, the Company did not record deferred compensation
expense as it was determined that there was no difference between the
exercise price and the deemed fair value of the Company's common stock at
the date of grant.
7. INCOME TAXES
At September 30, 1999, the Company had cumulative NOL carryforwards of
$278,170 for income tax purposes. If not offset against taxable income, the
tax loss carryforwards will expire between 2009 and 2019. There was no
income tax provision/benefit for the years ended September 30, 1999 and
1998 as a result of valuation allowances against the net deferred tax
assets generated principally by the net operating losses.
F-13
Deferred income taxes are recorded when revenues and expenses are
recognized in different periods for financial statement and tax return
purposes. The temporary differences and tax carryforwards that created
deferred tax assets (liabilities) are as follows:
SEPTEMBER 30,
1999
---------
Deferred tax assets:
Reserves and allowances $ 1,954
Net operating loss carryforwards 103,757
Depreciation and amortization 11,290
---------
Total deferred tax assets 117,001
Deferred tax liabilities:
Depreciation and amortization (12,030)
Valuation allowance (104,971)
---------
Net deferred tax asset (liability) $ --
=========
The tax provision differed from the amount expected using federal statutory
rates as follows:
YEARS ENDED
SEPTEMBER 30,
----------------------
1999 1998
-------- --------
Income tax expense (benefit) at
federal statutory rate $(41,392) $ (7,782)
Nondeductible meals and
entertainment expenses 440 266
Change in valuation allowance 44,926 8,246
State income tax benefit, net of
federal tax benefit (3,974) (730)
Tax provision $ 0 $ 0
8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - LinuxMall leases administrative offices and certain
equipment under noncancelable operating lease agreements.
Rent expense under these leases for the years ended September 30, 1998, and
1999 and for the nine months ended June 30, 1999 (unaudited) and June 30,
2000 (unaudited) was $17,398, $23,250, $9,467, and $87,135, respectively.
The following is a schedule of future minimum lease payments:
F-14
2000 $ 66,123
2001 85,482
2002 85,482
2003 79,776
2004 81,734
Thereafter 20,600
--------
Total $419,197
========
LEGAL MATTERS - LinuxMall is subject to various claims and business
disputes in the ordinary course of business. While the outcome of these
matters cannot be predicted with certainty, management anticipates that the
ultimate outcome of these issues will not have a material impact on
LinuxMall's financial position, results of operations or cash flows.
9. SUBSEQUENT EVENTS AND ACQUISITIONS (UNAUDITED AS TO MATTERS AFTER MARCH 14,
2000)
On December 1, 1999, December 20, 1999 and March 10, 2000 the Company
issued at total of $3,000,000 of convertible debt to private investors. The
debentures accrue interest at 7% annually, and are convertible, at the
option of the holder, into shares of the Company's Series A Preferred
Stock. Conversion rates range from $1.00 to $2.00 per share. The debentures
will be automatically converted into preferred shares at the established
conversion rate immediately prior to (1) any consolidation or merger of the
Company into any other corporation or other entity, or any other corporate
reorganization of the Company in which in excess of 50% of the Company's
voting power is transferred, or (2) the closing of a firmly underwritten
public offering pursuant to a registration statement filed by the Company
under the Securities Act of 1933, as amended, with aggregate gross proceeds
in excess of $10,000,000 and at a price of not less than $10.00 per share
of common stock. In conjunction with this issuance, the Company issued
warrants to purchase 600,000 shares of Series A Preferred Stock at a price
of $5.00 per share. In September 2000, the total number of warrants issued
to purchase Series A Preferred Stock was increased to $1,181,818, and the
exercise price was reduced to $2.20 per warrant. The warrants expire five
years from issuance.
On March 7, 2000, the Company acquired all of the outstanding capital stock
of Frank Kasper & Associates ("KASPER"), a Minnesota based software
distributorship. The purchase price, $1,204,699, was comprised of 660,162
shares of the Company's common stock, and cash transaction costs of
approximately $49,415. Kasper had revenues of $7,487,201 and $7,929,676,
for the years ended December 31, 1999, and 1998, respectively. Net income
(loss) for the years then ended was $(93,761), and $406,917, respectively.
Total assets as of December 31, 1999, totaled $2,013,495.
F-15
During March 2000, the Company issued 300,000 warrants to purchase Series A
Preferred Stock at $1.75 per share to a shareholder for consulting
services. The Company recognized $267,239 in compensation expense related
to this transaction based upon a valuation derived from an option pricing
model.
On April 3, 2000, the Company issued a total of $1,772,505 of convertible
debt to private investors. The debentures, accrue interest at a rate of 7%
annually and are convertible, at the option of the lender, into shares of
the Company's Series B Preferred Stock. The initial conversion price of the
debentures was to be an amount equal to the price per share at which the
Company's securities would have been sold in the next equity financing
which results in gross proceeds to the Company of at least $3 million. As
no such equity financing was closed by August 31, 2000, the initial
conversion price will be $2.20 per share. The debentures are automatically
converted into preferred shares at the established conversion rate
immediately prior to (1) any consolidation or merger of the Company into
any other corporation or other entity, or any other corporate
reorganization of the Company in which in excess of 50% of the Company's
voting power is transferred, or (2) the closing of a firmly underwritten
public offering pursuant to a registration statement filed by the Company
under the Securities Act of 1933, as amended, with aggregate gross proceeds
in excess of $10,000,000 and at a price of not less than $10.00 per share
of common stock. In conjunction with this issuance, the Company issued
warrants to purchase 805,684 shares of Series B Preferred Stock at a price
of $5 per share. In September 2000, the exercise price was reduced to $2.20
per warrant. The warrants expire five years from issuance.
In June 2000, the Company issued certain employees 36,500 shares of the
Company's common stock in exchange for a temporary pay decrease. The shares
vest ratably over an eight week period which is equal to the period for the
agreed upon pay decrease. The Company recognized $63,875 in deferred
compensation expense related to these stock issuances.
On August 7, 2000, the Company entered into a letter of intent with Ebiz
Enterprises, Inc. ("EBIZ"), a Nevada corporation, to acquire all
outstanding common stock, preferred stock, convertible debt, and any
options, warrants, or other rights to purchase equity interests in the
Company. The transaction closed on October 5, 2000.
* * * * *
F-16
EBIZ ENTERPRISES, INC.
PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
Effective October 5, 2000, Ebiz Enterprises, Inc.(the "COMPANY") acquired all of
the outstanding capital stock of LinuxMall.com, Inc.("LINUXMALL"). The Company
paid $14.2 million for the acquisition comprised of 7.4 million shares of the
Company's common stock valued at $9.2 million, options for the purchase of 0.9
million shares of the Company's common stock valued at $0.8 million (calculated
using the Black-Scholes pricing model), warrants for the purchase of 4.6 million
shares of the Company's common stock valued at $4.1 million (calculated using
the Black-Scholes pricing model) and related transaction costs totaling $0.1
million. In addition, the Company assumed $6.1 million in net liabilities for
the total consideration of $20.3 million.
The following unaudited pro forma condensed combined balance sheet gives effect
to the acquisition of LinuxMall as if the transaction occurred on September 30,
2000. The following unaudited pro forma condensed combined statements of
operations for the year ended June 30, 2000 and the three months ended September
30, 2000, combine the historical results of operations of the Company and
LinuxMall and assume that the acquisition had been effective as of the beginning
of each respective period. The acquisition, which was a stock purchase, will be
accounted for as a purchase. The pro forma adjustments are based upon the
estimated fair value of the assets and liabilities of LinuxMall as of September
30, 2000, and are based on the preliminary estimates, evaluations and other data
which are currently available and may change as a result of information gained
subsequent to September 30, 2000.
The pro forma statements of operations are not necessarily indicative of the
actual results which would have occurred had the acquisition been consummated at
the beginning of such period or of future consolidated operations of the Company
and, accordingly, do not reflect results that would occur from a change in
management and planned restructuring of the operations of LinuxMall. The pro
forma financial information has been prepared by the Company and all
calculations have been made by the Company based upon assumptions deemed
appropriate by the Company. Certain of these assumptions are set forth under the
notes to the unaudited pro forma condensed combined financial statements. These
statements should be read in conjunction with the historical consolidated
financial statements and notes thereto of the Company and LinuxMall.
F-17
EBIZ ENTERPRISES, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 2000
PRO FORMA
COMPANY LINUXMALL ADJUSTMENTS PRO FORMA
------------ ------------ ------------ ------------
ASSETS:
Cash $ 75,010 $ 128,355 $ -- $ 203,365
Restricted cash 3,000,000 -- -- 3,000,000
Receivables, net 851,045 119,554 -- 970,599
Inventories 756,786 833,684 -- 1,590,470
Other 79,074 94,835 -- 173,909
------------ ------------ ------------ ------------
Total Current Assets 4,761,915 1,176,428 -- 5,938,343
Property and Equipment, net 572,569 477,576 -- 1,050,145
Goodwill and Other Intangibles 3,892,737 943,666 20,315,423 (b) 25,151,826
Other Noncurrent Assets 111,420 51,840 -- 163,260
Restricted Cash 4,253,132 -- -- 4,253,132
------------ ------------ ------------ ------------
Total Assets $ 13,591,773 $ 2,649,510 $ 20,315,423 $ 36,556,706
============ ============ ============ ============
LIABILITIES:
Accounts Payable $ 2,333,135 $ 2,216,818 $ -- $ 4,549,953
Accrued Expenses 1,598,766 1,211,557 -- 2,810,323
Related Party on Demand Note -- 248,596 -- 248,596
Current Portion of Note Payable 571,928 500,487 -- 1,072,415
Convertible Debentures 946,666 -- -- 946,666
Other 250,000 -- -- 250,000
------------ ------------ ------------ ------------
Total Current Liabilities 5,700,495 4,177,458 -- 9,877,953
Long-Term Debt -- -- -- --
Convertible Debentures 5,212,253 4,600,394 (2,076,803)(c) 7,735,844
Redeemable stock 1,200,000 -- -- 1,200,000
STOCKHOLDERS' EQUITY:
Preferred Stock 366,737 524,008 (524,008)(a) 366,737
Common Stock 12,565 26,402 (17,084)(a)(b)(c) 21,883
Additional Paid In Capital 12,683,679 1,225,534 15,029,032 (a)(b)(c) 28,938,245
Accumulated Deficit (11,583,956) (7,904,286) 7,904,286 (a) (11,583,956)
------------ ------------ ------------ ------------
Total Stockholders' Equity 1,479,025 (6,128,342) 22,392,226 17,742,909
------------ ------------ ------------ ------------
Total Liabilities and
Stockholders' Equity $ 13,591,773 $ 2,649,510 $ 20,315,423 $ 36,556,706
============ ============ ============ ============
The accompanying notes to the unaudited proforma combined financial statements
are an integral part of this unaudited combined balance sheet.
F-18
EBIZ ENTERPRISES, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 2000
PRO FORMA
COMPANY LINUXMALL ADJUSTMENTS PRO FORMA
------------ ------------ ------------ ------------
Net Revenues $ 2,429,807 $ 720,569 $ -- $ 3,150,376
Cost of Sales 2,061,908 795,140 -- 2,857,048
------------ ------------ ------------ ------------
Gross Profit 367,899 (74,571) -- 293,328
Selling, General &
Administrative Expenses 1,360,307 2,271,116 872,396 (d) 4,503,819
------------ ------------ ------------ ------------
Loss From Operations (992,408) (2,345,687) (872,396) (4,210,491)
Other Income (Expense), net (481,959) (117,237) 38,014 (c) (561,182)
------------ ------------ ------------ ------------
Net Loss (1,474,367) (2,462,924) (834,382) (4,771,673)
Dividends on Preferred Stock (18,975) -- -- (18,975)
------------ ------------ ------------ ------------
Net Loss Attributable to
Common Stockholders $ (1,493,342) $ (2,462,924) $ (834,382) $ (4,790,648)
============ ============ ============ ============
Basic and Diluted Loss Per
Common Share $ (0.16) $ (0.29)
============ ============
Weighted Average Number of
Common Shares 9,141,066 16,500,044
============ ============
The accompanying notes to the unaudited proforma combined financial statements
are an integral part of this unaudited combined statement.
F-19
EBIZ ENTERPRISES, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
YEAR ENDED JUNE 30, 2000
PRO FORMA
COMPANY LINUXMALL ADJUSTMENTS PRO FORMA
------------ ------------ ------------ ------------
Net Revenues 11,900,667 3,301,436 -- 15,202,103
Cost of Sales 11,087,068 2,492,640 -- 13,579,708
------------ ------------ ------------ ------------
Gross Profit 813,599 808,796 -- 1,622,395
Selling, General &
Administrative Expenses 7,877,833 5,729,385 3,489,584 (d) 17,096,802
------------ ------------ ------------ ------------
Loss From Operations (7,064,234) (4,920,589) (3,489,584) (15,474,407)
Other Income (Expense), net (796,163) (179,732) 69,769 (c) (906,126)
------------ ------------ ------------ ------------
Net Loss (7,860,397) (5,100,321) (3,419,815) (16,380,533)
Dividends on Preferred Stock (104,089) -- -- (104,089)
------------ ------------ ------------ ------------
Net Loss Attributable to
Common Stockholders $ (7,964,486) $ (5,100,321) $ (3,419,815) $(16,484,622)
============ ============ ============ ============
Basic and Diluted Loss Per
Common Share $ (1.04) $ (1.10)
============ ============
Weighted Average Number of
Common Shares 7,685,232 15,044,210
============ ============
The accompanying notes to the unaudited proforma combined financial statements
are an integral part of this unaudited combined statement.
F-20
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
The pro forma adjustments reflected in the pro forma combined financial
statements give effect to the following:
(a) Reflects the elimination of LinuxMall's' stockholders deficit.
Comprised of preferred stock of $524,008, common stock of $26,402, additional
paid in capital of $1,225,534, and accumulated deficit of $7,904,286.
(b) Reflects the excess of the purchase price over the estimated fair value
of the net assets of LinuxMall and other intangibles totaling $20,179,000 and
transaction costs related to the acquisition of LinuxMall by the Company
totaling $136,000.
(c) Reflects the conversion of $2,154,501 principal amount of the LinuxMall
debenture in exchange for 1,958,637 million shares of Ebiz's common stock and
decrease in related interest expense.
(d) Reflects pro forma amortization of the goodwill resulting from the
LinuxMall acquisition and other purchased intangibles over the estimated useful
lives of 2-7 years.
F-21
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SIGNATURES
Dated: December 20, 2000. EBIZ ENTERPRISES, INC.
By: /s/ Ray Goshorn
------------------------------------
Ray Goshorn
Chief Financial Officer