1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 1999
REGISTRATION NO. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
EBIZ ENTERPRISES, INC.
(Name of Small Business Issuer in Its Charter)
NEVADA 3571 84-1075269
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or organization) Classification Code Number) Identification No.)
15695 NORTH 83RD WAY
SCOTTSDALE, ARIZONA 85260
(480) 778-1000
(Address and Telephone Number of Principal
Executive Offices and Principal Place of Business)
JEFFREY I. RASSAS WITH COPIES TO:
CHIEF EXECUTIVE OFFICER THOMAS J. MORGAN, ESQ.
EBIZ ENTERPRISES, INC. QUENTIN D. VAUGHAN, ESQ.
15695 NORTH 83RD WAY LEWIS AND ROCA LLP
SCOTTSDALE, ARIZONA 85260 40 NORTH CENTRAL AVENUE
TELEPHONE: (480) 778-1000 PHOENIX, ARIZONA 85004-4429
FACSIMILE: (480) 778-1001 TELEPHONE: (602) 262-5712
FACSIMILE: (602) 262-5747
(Name, Address and Telephone Number of Agent For Service)
Approximate Date of Proposed Sale to the Public: As soon as practicable, from
time to time, after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. /X/
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of earlier effective registration
statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
Title of Each Class of Proposed Maximum Proposed Maximum Amount of
Security to be Amount to be Offering Price Aggregate Registration
Registered Registered Per Share(1) (2) Offering Price (1) (2) Fee
======================== ================== ================= ====================== ==============
Common Stock, $.001 par
value 3,900,000 $3.50 $13,650,000 $3,795
- ------------------------ ------------------ ---------------- --------------------- --------------
(1) Estimated solely for purposes of calculating the registration fee.
(2) Per share price determined pursuant to Rule 457(c) as of October 20, 1999.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
2
CROSS REFERENCE SHEET
ITEM
NO. CAPTION IN FORM SB-2 CAPTION IN PROSPECTUS
- ------------ ---------------------------------------------------------- ---------------------------------------------------------
1. Front of Registration Statement and Outside Front Cover Front Cover Page; Front Cover of Prospectus
of Prospectus
2. Inside Front and Outside Back Cover Pages of Prospectus Inside Front Cover of Prospectus; Outside Book Cover of
Prospectus
3. Summary of Information and Risk Factors Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Plan of Distribution
6. Dilution Not Applicable
7. Selling Securityholders Selling Securityholders
8. Plan of Distribution Plan of Distribution
9. Legal Proceedings The Company - Litigation
10. Directors, Executive Officers, Promoters and Control Management
Persons
11. Security Ownership of Certain Beneficial Owners and Principal Shareholders
Management
12. Description of Securities Description of Ebiz's Securities
13. Interest of Named Experts and Counsel Not Applicable
14. Disclosure of Commission Position on Indemnification for Management-Limitation of Liability and Indemnification
Securities Act Liabilities Matters
15. Organization Within Last Five Years Certain Transactions
16. Description of Business Management's Discussion and Analysis of Financial
Condition and Results of Operations; The Business
17. Management's Discussion and Analysis or Plan of Operation Management's Discussion and Analysis of Financial
Condition and Results of Operations
18. Description of Property The Business-Facilities
19. Certain Relationships and Related Transactions Certain Transactions
20. Market for Common Equity and Related Stockholder Matters Market for Common Stock
21. Executive Compensation Management - Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Accountants on Not Applicable
Accounting and Financial Disclosure
3
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED OCTOBER 25, 1999
EBIZ ENTERPRISES, INC.
This offering relates to the possible sale, from time to time, by
certain securityholders of Ebiz Enterprises, Inc. ("Ebiz") of shares of our
common stock. Ebiz will not receive any of the proceeds from the sale of these
shares but will receive certain amounts upon exercise of outstanding warrants.
Ebiz's common stock is traded on the OTC Bulletin Board under the
symbol "EBIZ." On October __, 1999, the last reported sale price of the common
stock on the OTC Bulletin Board was $____ per share.
The shares of common stock described in this prospectus are for resale
and are to be or have been issued to certain Ebiz securityholders. The shares
offered are being registered due to Ebiz's obligations to these selling
securityholders. The selling securityholders may elect to sell all, a portion or
none of the shares of common stock described in this prospectus through brokers
at the price prevailing at the time of such sales or at other prices as may be
negotiated. The selling securityholders will pay regular commissions to brokers
effecting sales. The common stock also may be offered in block trades, private
transactions or otherwise at prices to be negotiated. All expenses of
registration of these shares are being borne by Ebiz, but the selling
securityholders will pay any brokerage and other expenses of sale incurred by
them.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 TO READ ABOUT THE FACTORS YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK.
Each selling securityholder and any broker executing selling orders on
behalf of a selling securityholder may be deemed to be an "underwriter."
Commissions received by any broker may be deemed to be underwriting commissions.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is ___________, 1999.
4
SUMMARY
You should read the following summary together with the more detailed
statements appearing elsewhere in this prospectus. References to Ebiz throughout
this prospectus may also refer to its predecessors which include Genras, Inc.
("Genras") and Vinculum Incorporated ("Vinculum").
EBIZ ENTERPRISES, INC.
Ebiz develops and operates Internet e-commerce Web sites and designs,
manufactures and distributes high-value, low-cost computer systems intended to
capture leadership positions within specific, rapidly-growing segments of the
computer industry, including the business, small-office/home-office ("SOHO") and
value priced consumer markets.
We target these high-growth markets through an integrated business
strategy that brings together virtual communities with content, services and
product offerings utilizing our unique Vertical Service Portals ("VSPs"). Our
VSPs are Web sites that provide information and services and offer innovative
product solutions. Our VSPs provide meaningful content, value-added free
services, resources, communication links, training, support and information,
combined with commercial products specifically targeted to the needs of that
community's interests.
We distribute our Element-L(TM) and M2 Systems(TM) PC brands, as well
as many other vendor's products through our e-commerce VSPs. The Element-L(TM)
and M2 Systems(TM) lines are also distributed through authorized resellers such
as Onsale.com, egghead.com and Fred Meyer Food Stores. We anticipate
distributing our newly developed PIA(TM) line through PlanetPIA.com, a VSP we
are developing, as well as other distribution lines. We also distribute third
party products including systems, components, peripherals and software from
leading industry manufacturers and developers through our VSPs.
The vision of Ebiz is to "accelerate the alternatives"(TM) in personal
and business computing. We are focusing primarily on the benefits and
opportunities provided by utilizing the Linux Operating System. Linux is the
fastest growing operating system in the world and now accounts for 17% of all
server operating systems sold, but only 2.1% of the desktop market.
We believe we are ideally positioned to develop and deploy our VSPs and
branded computer products that will capture a leadership position in the
business, SOHO and value priced consumer market. In developing our VSPs, we are
focusing on building our brand recognition, increasing customer satisfaction and
providing numerous competitive advantages. We believe that virtual Internet
firms without true merchant qualities and capabilities, such as conducting their
own purchasing, merchandising, order fulfillment, supply-chain management,
vendor marketing opportunities and product technical support functions, will not
be able to differentiate themselves moving forward in the e-commerce
marketplace. Our strategic plan encompasses providing our virtual communities
with a comprehensive Internet site, offering relevant content, free services and
a quality shopping experience, with expert customer service.
Our VSPs currently operating and under development include:
- THELINUXSTORE.COM. Launched in April, 1999, we were the first to
develop, launch and operate a Web site to distribute "Everything
Linux." This VSP offers the largest selection of Linux compatible
technical products and related merchandise, including our
Element-L(TM) line of computer systems and servers, components
and peripheral hardware, software, documentation apparel and
other merchandise. This VSP also contains a significant amount of
community-related content, support
2
5
and free services, including daily Linux news, software
downloads, message boards, registry of jobs, people and projects,
search engine, database of Linux information, and links to over
5,000 other Linux Internet sites and resources.
- EBIZMART.COM. Launched in January 1999, EBIZmart.com is believed
to be one of the first business-to-business clearinghouse portals
for computer liquidation inventory. The site provides a
business-to-business auction site, a clearinghouse for surplus
merchandise and a liquidation site for inventory purchased and
inventoried by Ebiz. Products listed on this site range from
computer hardware (including our M2 Systems(TM) branded PCs)
and software products to office supplies offered at wholesale
pricing direct to the buyer. Services offered include access to
MyEtool, our e-commerce site development software, Web hosting,
auction development and management, travel services and an
e-commerce search engine. The target users for EBIZmart.com are
small to medium size businesses, resellers, including value added
resellers ("VARs") and systems integrators.
- PLANETPIA.COM. PlanetPIA.com is anticipated to be launched in
conjunction with the release of our new product line, the PIA(TM)
(Personal Internet Appliance) and will serve as a VSP for our
PIA(TM) customers. This site is anticipated to offer content and
services as well as a PIA(TM) line, similar to TheLinuxStore.com
concept. PlanetPIA.com will also provide interactive games,
education and family resources, free services and other content
targeted specifically at the youth (10-17 year-old) market. This
site will be the destination point for providing online support
and peripheral (add-on) product sales to PIA(TM) customers.
In support of our e-commerce initiatives, we design, manufacture and
distribute three high-value, low-cost computer system brands, each targeting a
unique market:
- ELEMENT-L(TM). Introduced in April 1999, our Element-L(TM) line
offers one of the most comprehensive families of Linux-based
systems on the market. The product line consists of Linux-based,
Internet-ready multimedia desktop and notebook PCs, workstations,
servers and high performance Alpha Systems. The entry-level
Element-L(TM) "Ion" system is believed to be the lowest priced
Linux-based computer system on the market.
- M2 SYSTEMS (TM). M2 Systems(TM), introduced in April, 1998, was
the first Internet-marketed sub-$1,000 Windows-based multimedia
PC. These systems, priced from $399-$899, provide an alternative
to expensive, brand-name computer systems.
- PIA(TM). We are developing and preparing to launch (anticipated
by year-end 1999), a third product line, the PIA(TM) (Personal
Internet Appliance), which targets consumers and cost-conscious
institutions (such as schools and libraries) seeking a
full-service Internet access device. The PIA(TM) will be a
highly-stylized desktop computer that utilizes the Linux
operating system. The PIA(TM) is designed to enable users to surf
the Web quickly, easily and affordably, exchange e-mail, play
games, chat online and do basic computing functions, such as word
processing and spreadsheets. Because of the flexibility of the
Linux operating system, the software pre-loaded on the PIA(TM)
provides compatibility with Microsoft Word, Excel and PowerPoint
documents. The targeted retail price is $400, placing the device
well within the reach of most consumers and institutions
3
6
Our strategic business objectives are to:
- Develop comprehensive VSPs that combine product marketing with
community interests such as news, resources, links, services and
other incentives intended to build customer loyalty and promote
repeat visits;
- Leverage our product development expertise to continue product
extensions within our Linux-based Element-L(TM) and PIA(TM)
product lines;
- Generate significant revenue opportunities through product sales
as well as through technical support, training opportunities,
customer services, Internet advertising, marketing and Web links;
- Expand sales, marketing, production and distribution of our
branded product lines until they are internationally recognized
leading PC brands;
- Become a nationally recognized leader in e-commerce marketing and
distribution of computer hardware and software products in the
market niches we target.
Ebiz was incorporated in Nevada in June 1998 as a wholly-owned
subsidiary of Vinculum and commenced business operations as a result of a merger
of Vinculum into Ebiz in August 1998. Vinculum had acquired the assets and
operations of Genras in June 1998. Genras had operations since May 1995. Our
administrative offices and warehouse and production facilities are located at
15695 North 83rd Way, Scottsdale, Arizona 85260, and our telephone number is
(480) 778-1000.
THE OFFERING
SECURITIES OFFERED.................. Shares of Ebiz common stock. The
shares registered with this
prospectus include 386,500
outstanding shares of common stock,
947,260(1) shares issuable upon
conversion of an outstanding 9%
Subordinated Convertible Debenture
("Debenture"), 245,000 shares
issuable upon exercise of a Warrant
to Purchase Common Stock
("Warrant"), 181,583 shares issuable
upon the conversion of our Series A
10% Convertible Preferred Stock
("Series A Preferred"), and 10,000
shares issuable upon the exercise of
another outstanding warrant.
COMMON STOCK OUTSTANDING
AFTER OFFERING...................... After the offering, 8,805,040 shares
of common stock will be outstanding,
assuming that the Debenture is
converted into 947,260(1) shares,
the Warrant is exercised in full,
all shares of Series A Preferred are
converted and the other warrant is
exercised.
SYMBOL.............................. EBIZ
(1) The number of shares into which the Debenture is convertible is estimated
using a conversion price of $7.4953 per share. The conversion price is
subject to decrease which will result in more shares being issued upon
conversion of the Debenture and more total shares outstanding. See
"DESCRIPTION OF EBIZ'S SECURITIES - Debenture and Warrants" for a
description of the conversion rights of the Debenture.
4
7
SUMMARY FINANCIAL DATA
(in thousands except per share data)
The following summary financial information is derived from our
Financial Statements included in this prospectus. This data should be read with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and related notes included herein.
Years Ending June 30,
1998 1999
---- ----
STATEMENT OF OPERATIONS DATA:
- -----------------------------
Net Revenue $ 6,825 $ 15,290
Cost of Sales 6,158 14,359
Gross Profit 667 931
Operating Loss (393) (1,649)
Net Loss Attributable to Common
Shareholders (422) (1,954)
Loss Per Share (.08) (0.29)
Weighted Average Shares 5,620 6,821
June 30,
1998 1999
---- ----
BALANCE SHEET DATA:
- -------------------
Cash and Cash Equivalents $ 469 $ 76
Current Assets 1,165 3,443
Total Assets 1,218 3,917
Current Liabilities 525 2,852
Convertible Preferred Stock -- 869
Accumulated Deficit (172) (2,126)
Shareholders' Equity 693 1,066
5
8
RISK FACTORS
Investment in the shares offered by this prospectus involves a high
degree of risk. You should carefully consider the risks and uncertainties
described below and the other information in this prospectus before deciding to
invest in the shares. If any of the following risks actually occur, our
business, results of operations and financial condition could be materially,
adversely affected. This could cause the trading price of the common stock to
decline and a loss of part or all of any investment in the common stock.
WE HAVE A LIMITED OPERATING HISTORY MAKING IT DIFFICULT TO EVALUATE OUR BUSINESS
AND YOUR INVESTMENT.
We essentially re-engineered our operations through acquisition of
Genras' assets and rights to the "CPU MicroMart" name and operations in 1998. We
recently shifted our focus away from the Web auction channel, which comprised
over 90% of fiscal 1998 revenues, to our current business format. We have also
just recently entered the computer manufacturing industry and have limited
results of operations from this segment of our business. We have even more
recently focused on development of our Element-L(TM) brand of system and are
developing our new PIA(TM) brand, each utilizing the Linux operating systems,
and are devoting considerable resources to the development of these lines and
our TheLinuxStore.com and PlanetPIA.com VSPs.
We will encounter numerous risks and difficulties encountered by early
stage companies in the rapidly developing e-commerce markets as well as risks
associated with manufacturing and distributing PC computer systems. We may not
be successful in addressing these risks and there can be no assurance that our
business strategy will be successful.
WE HAVE A HISTORY OF LOSSES AND ANTICIPATE FUTURE LOSSES COULD OCCUR.
For the fiscal years ended June 30, 1998 and 1999, we sustained net
losses attributable to common shareholders of approximately $422,000 and
$1,954,000, respectively. Future losses are likely to occur. Our independent
auditors have noted that our success in obtaining additional capital funding
will determine our ability to continue as a going concern. While we have
demonstrated the ability to grow revenue, we have yet to generate and maintain
sufficient profitability to sustain or grow operations without additional
external funding. No assurances can be given that we will be successful in
reaching or maintaining profitable operations.
WE DEPEND ON THE EVOLUTION OF E-COMMERCE AND GROWTH OF WEB USERS FOR OUR FUTURE
SUCCESS.
We expect to derive significant revenues from our VSP "virtual stores"
and from the sales of our computer systems. This strategy anticipates continued
growth in consumer acceptance of on-line shopping and in the demand for our
value priced computer systems. While the trend appears to be toward rapid
expansion of e-commerce and for increased demand for value priced computer
systems, this market has not existed long enough to establish broad acceptance
or generate significant revenue. If this market fails to develop or develops
more slowly than we anticipate, our anticipated revenues could be adversely
affected.
WE WILL BE DEPENDENT UPON CONSUMER ACCEPTANCE OF THE LINUX SYSTEM IN GENERAL AND
OUR PC SYSTEMS IN PARTICULAR.
Our entry into the computer system manufacturing industry is a new line
of business in which we have no prior experience. While we believe the prior
experience of our management team will allow us to operate in this business,
there can be no assurance that we will be successful. Our Element-L(TM) line has
just been developed and utilizes the Linux operating system. Acceptance of the
Linux system will be critical to the success of this product line and to our PIA
product line. Our M2 Systems(TM) line is relatively new and does not
6
9
have brand recognition to the same extent of most of our competitors. There can
be no assurance that our computer systems will meet with consumer acceptance,
which could adversely affect our profitability.
WE ARE IN A HIGHLY COMPETITIVE BUSINESS.
The computer hardware and software distribution business is an
intensely competitive industry, and we will face increasing competition in every
aspect of this business. E-commerce distribution is relatively new in the
industry and is anticipated to attract significantly more competition. We
recently entered the PC manufacturing market, which is also highly competitive.
We plan to create a growing presence in e-commerce distribution of product
categories and will face intense barriers to entry as the business of selling
products via the Internet experiences growth. This industry is characterized by
rapid technological and consumer preference change, massive capital infusions,
and the emergence of a large number of new and well established companies
aspiring to control market share in the Internet distribution process. A
relatively small number of these companies, including America Online, Yahoo!,
MSN, Excite and Lycos, currently control primary and secondary access to a
significant percentage of all Internet users and have a competitive advantage in
marketing to those users. Other large and established companies, such as major
computer manufacturers and distributors, have established relationships with
large customer databases and are rapidly expanding into Internet distribution.
Substantially all of these companies have financial, technological, promotional
and other resources much greater than ours. There can be no assurances that we
will be able to compete effectively in these marketplaces. See "THE BUSINESS -
Competition."
IF WE ARE NOT ABLE TO ADEQUATELY MANAGE OUR GROWTH AND EXPANSION, OUR BUSINESS
WILL BE ADVERSELY AFFECTED.
We have recently experienced rapid growth in employees, sales,
customers and operations. This growth has brought many challenges and placed
additional pressure on our already limited resources and infrastructure. No
assurances can be given that we will be able to effectively manage this or
future growth. Our future growth may place a significant strain on our
managerial, operational, financial and other resources. Our success will depend
upon our ability to manage growth effectively which will require that we
continue to implement and improve our operational, administrative and financial
and accounting systems and controls and continue to expand, train and manage our
employee base. Our systems, procedures and controls may not be adequate to
support operations and we may not be able to achieve the rapid execution
necessary to exploit the market for our business model. If we are unable to
manage internal or acquisition-based growth effectively, our business, results
of operations and financial condition will be materially adversely affected.
WE FACE SIGNIFICANT INVENTORY RISK DUE TO THE NATURE OF OUR INVENTORY AND
BECAUSE CONSUMER DEMAND MAY CHANGE RAPIDLY.
We carry a significant level of inventory, which by its nature may
become quickly outdated. While we obtain this inventory at competitive prices,
if we are unable to dispose of this inventory for a profit due to a shift in
consumer demand or product advances or, if we liquidate this inventory at low
margins or below costs, our profitability will be adversely affected. It is also
critical to our success that we stock sufficient inventory to meet customer
demand for both third party products and our PC systems. Our inability to
adequately stock inventory, due to capital constraints or procurement
difficulties would adversely affect our operating results both on a quarterly
and annual basis.
OUR LIMITED OPERATING HISTORY MAKES FUTURE FORECASTING DIFFICULT.
As a result of our limited operating history, it is difficult to
accurately forecast our net sales and we have limited meaningful historical
financial data upon which to base planned operating expenses. We base our
7
10
current and future expense levels on our operating plans and estimates of future
net sales, and our expenses are to a large extent fixed. Sales and operating
results are difficult to forecast because they generally depend on the volume
and timing of the orders we receive. As a result, we may be unable to adjust our
spending in a timely manner to compensate for any unexpected revenue shortfall.
This inability could cause our net losses in a given quarter to be greater than
expected.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS AND DIFFICULT TO
PREDICT.
As a result of our limited operating history, rapid growth and change
in business focus, and because of the emerging nature of the markets in which we
compete, our historical financial data is of limited value in planning future
operating expenses. Our expense levels will be based in part on expectations
concerning future revenues. Our revenue is derived primarily from product sales,
which are difficult to forecast accurately. We may be unable to adjust spending
in a timely manner to compensate for any unexpected shortfall in revenues. A
significant shortfall in demand for our products could have an immediate and
material adverse effect on our business, results of operations and financial
condition. Our business development and marketing expenses may increase
significantly as we expand our operations. To the extent that such expenses
precede or are not rapidly followed by increased revenue, our business, results
of operations and financial condition may be materially adversely affected.
Our quarterly operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside our
control. These factors include:
- the level of demand for our products;
- the level of demand for conventional and e-commerce marketing;
- the introduction of new products or services by us or our
competitors;
- our ability to attract and retain personnel with the necessary
strategic, technical and creative skills required for effective
operations;
- the amount and timing of expenditures by customers;
- customer budgetary cycles;
- the amount and timing of capital expenditures and other costs
relating to the expansion of operations;
- our success in finding and acquiring suitable acquisition
candidates;
- pricing changes in the industry;
- technical difficulties with respect to the use of the Internet;
- economic conditions specific to Internet technology usage;
- government regulation and legal developments regarding the use of
the Internet; and
- general economic conditions.
8
11
As a strategic response to changes in the competitive environment, we
may from time to time make certain pricing, service, technology or marketing
decisions or business or technology acquisitions that could have a material
adverse effect on our quarterly results. We may also experience seasonality in
our business in the future, resulting in diminished revenues as a consequence of
decreased demand during certain periods of the year. Due to all of these
factors, our operating results may fall below the expectations of securities
analysts and investors in any future quarter. In such event, the trading price
of our common stock will likely be materially and adversely affected.
CAPITAL CONSTRAINTS MAY AFFECT OUR RESOURCES.
Since inception we have funded operations with debt and equity capital.
Our ability to operate profitably under our current business plan is largely
contingent upon success in obtaining additional sources of debt and equity
capital. There can be no assurance that sources of capital will be available on
satisfactory terms or at all. Under the terms of the Debenture and related
agreements, we are able to access limited capital upon conversions of the
Debenture into common stock. However, the timing of the access to or amount of
this capital is not assured because the Debenture is convertible solely at the
discretion of the holder of the Debenture. Without additional capital we may not
be able to fully implement our business, operating and development plans. No
assurance can be given that any such financing, if obtained, will be adequate to
meet our ultimate capital needs. If adequate capital can not be obtained or
obtained on satisfactory terms, our operations could be negatively impacted.
OUR NET SALES WOULD BE HARMED IF OUR ONLINE SECURITY MEASURES FAIL.
Our relationship with our customers may be adversely affected if the
security measures that we use to protect their personal information, such as
credit card numbers, are ineffective. If, as a result, we lose many customers,
our net sales and results of operations would be harmed. We cannot predict
whether events or developments will result in a compromise or breach of the
technology we use to protect a customer's personal information.
Furthermore, our servers may be vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions. We may need to expend
significant additional capital and other resources to protect against a security
breach or to alleviate problems caused by any breaches. We cannot give assurance
that we can prevent all security breaches.
OUR NET SALES WOULD BE HARMED IF WE EXPERIENCE SIGNIFICANT CREDIT CARD FRAUD.
A failure to adequately control fraudulent credit card transactions
would harm our net sales and results of operations because we do not carry
insurance against this risk.
WE HAVE HAD DIFFICULTY IN COLLECTING SOME ACCOUNTS RECEIVABLE.
Our greatest difficulty in collections have historically been from the
auction Web site organizations. While we have reduced this line of distribution,
gained significant expertise in dealing with Internet distribution and
collection issues and instituted new credit review and approval procedures, no
assurances can be given that future unexpected problems and collection risks
will not develop from these and other customers which could materially adversely
affect our profitability.
WE HAVE RISKS ASSOCIATED WITH MANUFACTURING COMPUTER SYSTEMS.
We are increasingly generating revenues from manufacturing our own
brand of computers. This activity creates a wide variety of risks associated
with manufacturing, including but not limited to defects and warranty
9
12
costs exceeding expectations. Also, customer service and technical support
requirements could exceed expectations and have severe adverse effects on
operations. No assurances can be given that we will be able to handle production
and quality control issues as we increase manufacturing activity. While we
perform a substantial amount of pre-delivery testing of our systems and believe
we have a lower than industry average return of our manufactured products, we
may experience significant returns in the future that could adversely affect our
profitability.
WE RELY ON SUPPLIERS OF COMPUTER COMPONENTS IN OUR MANUFACTURING.
We purchase components utilized in our computer manufacturing operations
from various suppliers. If we are unable to obtain sufficient quantities of
components our net sales would be adversely affected. We are also subject to
risks of fluctuations in our component prices. If prices charged by our vendors
escalate, our cost of goods sold and net income would be adversely affected.
INTELLECTUAL PROPERTY CLAIMS COULD BE EXPENSIVE AND RESULT IN LOSS OF RIGHTS.
We deal in technically complex products and multi-layered supply and
distribution sources. We have limited proprietary property, and are relying
heavily on copyright, trademark, trade secret, nondisclosure and confidentiality
measures to protect these limited rights. Such protections may not preclude
competitors from developing similar technologies or services competitive with
ours. While we do not believe that any of our proprietary property infringes on
proprietary rights of third parties, no assurance can be given that infringement
claims may not be asserted. Litigation resulting from assertion of our rights or
from defense of a third party claim could be expensive and adversely affect our
operations even if we were ultimately successful. There is no assurance that we
will have sufficient resources to sustain or defend protracted legal actions
related to our proprietary rights.
THE COMPUTER PRODUCT SALES INDUSTRY IS SUBJECT TO RAPID CHANGE.
The computer industry is characterized by rapid change, frequent new
product introductions, changing customer demands, evolving standards, and many
other uncontrollable and unforeseeable trends and changes. Our future success
will greatly depend upon our ability to timely and effectively address changes
in this industry. No assurances can be given that we will be able to effectively
deal with these changes which could have a materially adverse effect on our
operations.
WE MAY BE ADVERSELY AFFECTED IF OUR PRODUCTS, SOFTWARE AND TECHNOLOGY ARE NOT
YEAR 2000 COMPLIANT.
We have taken steps to ensure that we will not be adversely affected by
the Year 2000 equipment and software failures that may arise in software
applications and equipment with embedded logic where two-year digits are used to
define the applicable year. A review has been conducted in all of our computer
hardware, software and equipment with embedded logic to identify those areas.
The vendors for our software packages have indicated that our software is Year
2000 compliant. We do not believe the cost of any necessary upgrades will be
material. Contingency plans are being developed in the event that systems fail.
We have also communicated with our material suppliers, service providers and
customers regarding their compliance with Year 2000 requirements. As a result of
such inquiries, no significant deficiencies have been identified. We will
continue to monitor these third parties for Year 2000 compliance. There can be
no assurance that all non-complying equipment and software will be identified
and upgraded on a timely basis. In addition, there can be no assurance that our
customers and suppliers will not be adversely affected by their own Year 2000
issues, which may indirectly adversely affect our business.
10
13
IN THE PAST, WE HAVE RELIED UPON A LIMITED NUMBER OF CUSTOMERS AND THE LOSS OF A
MAJOR CUSTOMER COULD ADVERSELY AFFECT OUR REVENUE.
We have historically had a concentration of both customers and
suppliers. In fiscal years 1997 and 1998 two customers represented over 50% of
our sales. In the first quarter of 1999, one customer represented over 50% of
our sales and in the second quarter a different customer accounted for
approximately 35% of our sales in that quarter. This condition may continue or
re-occur in the future, exposing our operations to material adverse consequences
should disruptions or problems be encountered with a major customer or supplier.
ACQUISITIONS COULD RESULT IN RISKS TO OUR OPERATIONS.
We have been approached by entities that have proposed acquiring our
operations and by entities desiring to sell businesses to us. One or more
mergers or acquisitions may occur in the future which could have material
adverse consequences to our operations or to our stock value. A component of our
future growth strategy is possible acquisition of other companies that meet our
criteria for strategic fit, geographic location, revenues, profitability, growth
potential and operating strategy. Successful implementation of this strategy
depends on our ability to identify suitable acquisition candidates, acquire such
companies on acceptable terms and integrate their operations successfully with
ours. Moreover, in pursuing acquisition opportunities we may compete with other
companies with similar growth strategies, certain of which may be larger and
have financial and other resources greater than ours. Competition for
acquisition targets likely could also result in increased prices of acquisition
targets and a diminished pool of companies available for acquisition.
Acquisitions also involve a number of other risks, including adverse
effects on reported operating results from increases in goodwill amortization,
the risks of acquiring undisclosed or undesired liabilities, acquired in-process
technology, stock compensation expense and increased compensation expense
resulting from newly hired employees, the diversion of management attention,
potential disputes with the seller of one or more acquired entities and the
possible failure to retain key acquired personnel. Any acquired entity or assets
could significantly under-perform relative to our expectations. Our ability to
meet these challenges has not been established.
THE LOSS OF SERVICES OF ONE OR MORE OF OUR KEY PERSONNEL COULD HARM OUR
OPERATIONS.
While no assurances can be given that our current management resources
will enable Ebiz to succeed as planned, a loss of one or more of our current
officers or key employees could severely and negatively impact our operations.
We do not have employment contracts with any of our key employees. No assurances
can be given that we will not suffer the loss of key human resources for one
reason or another.
Our future success also depends on our continuing ability to attract,
retain and motivate highly skilled employees. Competition for employees in the
industry is intense. We may be unable to retain our key employees or to attract,
assimilate or retain other highly qualified employees in the future. We have
experienced difficulty from time to time in attracting the personnel necessary
to support the growth of our business and we may experience similar difficulties
in the future.
WE MAY SEPARATE OUR OPERATIONS IN THE FUTURE.
We have organized a wholly owned subsidiary, PIA, Inc., and may
transfer our PC manufacturing and marketing operations to this entity. We
believe that the organization of PIA will be a strategic move to bifurcate and
more clearly define our two areas of focus, e-commerce marketing of third party
products, and value price PC system manufacturing and distribution. We intend to
explore possibilities of capital raising through PIA directly. These efforts may
lead to PIA being owned by us with other shareholders, which would
11
14
result in indirect dilution of ownership of PIA by our shareholders. While we
believe bifurcation and eventual separation of our two areas of focus may be in
the best interest of our company and its shareholders, this strategy involves
risks including potential diversion of management resources, conflicts of
interest with the business relationship between the entities and increased costs
of operations as the two entities separate their operations. No assurance can be
given that separation of these operations will ultimately enhance the total
probability or value of Ebiz.
FAILURE TO OBTAIN ADEQUATE INSURANCE COVERAGE COULD ADVERSELY AFFECT OUR
BUSINESS.
We anticipate the need to procure additional insurance coverage related
to product liability, officer and directors liability, key man insurance and
other risks currently not adequately covered. Failure to timely receive
additional insurance coverage could have an adverse effect on our business.
EXISTING MANAGEMENT EXERCISES SIGNIFICANT CONTROL OVER EBIZ.
Control of Ebiz is concentrated within a small number of stockholders,
who compromise our executive management. Such management, when acting in
concert, can elect or otherwise designate all members of our Board of Directors.
As a practical matter, current management will continue to control Ebiz into the
foreseeable future. See "MANAGEMENT" and "PRINCIPAL SHAREHOLDER."
OUR STOCK MAY BE DELISTED FROM THE OTC BULLETIN BOARD.
Our common stock is currently traded on the OTC Bulletin Board under
the symbol "EBIZ." Our common stock is subject to delisting on November 4, 1999
if our Form 10-SB which we filed on October 19, 1999 has not been declared
effective by such date. In this event, we would anticipate that our common stock
would be traded in the "pink sheets" and relisted on the OTC Bulletin Board
after the Form 10-SB becomes effective.
THE CONVERSION PRICE OF THE DEBENTURE IS NOT FIXED.
The conversion price of the Debenture is at the lesser of (a) $7.4953
or (b) the average of the three lowest closing bid prices of Ebiz's common stock
for the 15 consecutive trading days immediately preceding the holders election
to convert. However, if the closing bid price of the stock is less than $7.4953
at any time during the five trading days preceding the date any portion of the
Debenture is convertible, Ebiz has the right to redeem for cash such conversion
amount at a premium ranging from 105% to 108%. See "DESCRIPTION OF EBIZ'S
SECURITIES - Debenture and Warrant." We believe that the right to redeem the
Debenture for cash will allow Ebiz to prevent excessive dilution of its shares
through issuance of shares at prices we do not believe to be adequate. While we
intend to exercise the redemption for cash feature as deemed appropriate to
prevent what we consider to be excessive dilution, there is no assurance that
Ebiz will have sufficient cash reserves to redeem the Debenture at any given
time of conversion or at all.
OUR COMMON STOCK MAY BE SUBJECT TO PRICE VOLATILITY.
Our common stock is currently traded on the OTC Bulletin Board under
the symbol "EBIZ." The stock market in general and stocks of small-cap companies
such as Ebiz, in particular have experienced volatility which often have been
unrelated to results of operations. Our stock is thinly traded. Any
broker/dealer that makes a market in our stock or other person that buys or
sells our stock could have a significant influence over its price at any given
time. There can be no assurance that the market in our common stock will be
sustained. As a result, holders of our common stock may be unable to readily
sell the stock they hold or may not be able to sell such stock at all.
12
15
FUTURE SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK TO DECLINE IN PRICE.
The sale of a substantial number of shares of our common stock under
this offering, or the perception of such sales could make it more difficult for
Ebiz to sell equity or equity related securities in the future at a time and
price we deem appropriate. After this offering is completed, 8,805,040 shares of
our common stock will be outstanding, assuming the Debenture is converted into a
total of 947,260 shares and a total of 947,260 shares are sold in this offering.
If our stock price decreases to less than $7.4953 in any 15 day period prior to
a conversion of the Debenture, more shares may be issuable resulting in more
shares being outstanding. All shares registered in this offering will be freely
tradable. It is anticipated that shares registered under this offering will be
sold over a period of up to two years. In addition to the shares to be sold
under this offering, Ebiz has outstanding 3,662,424 shares of "restricted
securities" held by the officers and directors of Ebiz and 2,079,617 held by
others. A significant portion, if not all, of the shares held by persons other
than the officers and directors are currently, or will be by July 4, 2000,
available for sale under Rule 144(k). Under Rule 144(k), restricted securities
may be sold by non-affiliates of Ebiz without restrictions on volume limits. A
significant amount of common stock coming on the market at any given time could
result in the price of such stock to decline and to be highly volatile. See
"SHARES ELIGIBLE FOR FUTURE SALE."
DIVIDEND POLICY
Holders of our common stock are entitled to receive dividends, if any,
on a per share held basis as declared by our Board of Directors. We have never
declared or paid a dividend on our common stock and we do not intend to pay
dividends in the foreseeable future. We are required to accrue a 10% ($10 per
share) cumulative annual dividend for each share of Series A Preferred
outstanding. This dividend is payable as and when declared by our Board of
Directors before payment of any dividends on common stock may be made. Dividends
on the shares of Series A Preferred may be payable in whole or in part, at our
discretion, in cash or in-kind with our common stock.
MARKET FOR COMMON STOCK
Our common stock is traded on the OTC Bulletin Board under the symbol
"EBIZ," but is subject to being delisted if our Form 10-SB as filed on October
19, 1999 has not been declared effective by November 3, 1999. The following
table sets forth the high and low bid prices for Ebiz's common stock as reported
by the OTC Bulletin Board in the periods indicated. The quotations set forth
below reflect inter-dealer prices, without retail mark-up, markdown or
commission, and may not reflect actual transactions. Ebiz commenced its current
line of business in June 1998 with the acquisition of Genras. The stock prices
for periods before June 1998 are of our predecessor, Vinculum, which had no
business operations during these periods.
13
16
Fiscal 1997 High Low
- ----------- ---- ---
First Quarter ended September 30, 1996 $6.2500 $1.2500
Second Quarter ended December 31, 1996 5.0000 5.0000
Third Quarter ended March 31, 1997 5.0000 5.0000
Fourth Quarter ended June 30, 1997 5.0000 0.6250
Fiscal 1998 High Low
- ----------- ---- ---
First Quarter ended September 30, 1997 $3.5000 $0.1000
Second Quarter ended December 31, 1997 2.5000 0.1000
Third Quarter ended March 31, 1998 3.1250 0.3125
Fourth Quarter ended June 30, 1998 3.4375 0.3125
Fiscal 1999 High Low
- ----------- ---- ---
First Quarter ended September 30, 1998 $ 2.1250 $0.7500
Second Quarter ended December 31, 1998 11.6250 0.5000
Third Quarter ended March 31, 1999 10.5000 4.5000
Fourth Quarter ended June 30, 1999 9.9375 3.3125
As of September 30, 1999, there were an estimated 700 beneficial owners
of Ebiz's common stock.
USE OF PROCEEDS
Ebiz will not receive any proceeds from the sale of the common stock in
this offering but may receive up to $1,785,990 upon the exercise of warrants if
all warrants are exercised. There can be no assurance that any warrants will be
exercised. Ebiz utilized the proceeds from the sale of the Debenture and the
Series A Preferred for debt repayment, general corporate and working capital
purposes and expects to utilize the proceeds, if any, from exercise of the
warrants for general corporate and working capital purposes.
SELLING SECURITYHOLDERS
This prospectus relates to the proposed resale by the selling
securityholders of 386,500 shares of outstanding common stock, up to 181,583
shares to be issued upon conversion of our outstanding Series A Preferred, at
least 947,260 shares to be issued upon conversion of the Debenture, up to
245,000 shares to be issued upon exercise of the Warrant and 10,000 shares to be
issued upon exercise of another outstanding warrant. The following tables set
forth as of the date of this prospectus certain information concerning the
persons for whom Ebiz is registering the shares for resale to the public.
14
17
COMMON STOCK
The outstanding shares of common stock of Ebiz being registered for
resale are held by the following persons:
Security Holder Shares Registered
--------------- -----------------
Aztore Holdings, Inc.(1) 50,000
Houlihan Smith & Company, Inc. (2) 57,500
Parcel 14, LLC 129,000
Scott Bishins 120,000
Lawrence A. Underwood 30,000
(1) Aztore is a substantial shareholder of Ebiz and the president of
Aztore, Michael S. Williams, served as a director of Ebiz until July,
1999. Assuming all shares registered are sold by Aztore, it would hold
341,700 shares or 3.88% of the outstanding shares after the offering,
assuming a total of 8,805,040 shares are then outstanding.
(2) The only other securities held by this securityholder known to Ebiz is
a warrant to purchase 10,000 shares at $3.00 per share.
SERIES A PREFERRED
The holders of the Series A Preferred and the number of shares of
common stock registered on behalf of these securityholders upon conversion are
as follows:
Security Holder Shares Registered
- --------------- -----------------
Outback Investments Ltd. 5,000
Steve and Celina Calderon, JTWROS 1,000
Joseph A. Rodriguez 1,667
Ann E. Randt 1,667
Vladimir A. Gasic 1,667
Douglas and Pauline Hecker, JTWROS 1,000
Douglas and Patricia Bruhn, JTWROS 8,333
Rodgers Charitable Remainder Trust 16,667
Meyer Charitable Remainder Trust 16,667
James Minder and Susan Davis Family Trust 1,667
Kochert-Okun Dentistry PC EPP 8,333
Sawyer Family Trust 4,167
Magary Family Trust 3,000
Leonard Small 1,667
Paul Winer 12,500
James A. Turner 833
Grant Family Trust 3,333
15
18
Security Holder Shares Registered
- --------------- -----------------
LVAH, Inc. SRPSP 4,167
Okun Family Trust 1,000
M. Susan Olson Revocable Trust 2,000
J.A. and Beverly Schweikert JTWROS 4,167
Woodstock Trust 2,500
Michael Buekers 5,000
Pathology Associates MPPP fbo Charles Evans, M.D. 4,167
Ronald and Gladene Clarke JTWROS 417
Stephen McBride 833
Dean Purdy 1,667
Andrie 1,000
Lana Dee Master Revocable Trust 3,333
John Sterzinar 1,667
Tempe Family Practice 4,167
Dennis Kilpatrick and Gay Kilpatrick 3,333
Susan McNamara 1,000
Richard Barrett 1,000
Luca and Rose Aprea, JTWROS 1,667
Alan Hoffman and Barbara Wiggin, CP 1,000
Alston Revocable Family Trust 4,167
Dar-C RPSP 3,333
Robert Ciancola and Veronica Ciancola 1,667
Thomas Klein 1,667
Kochert Family Trust 8,333
Leslie Fish and Maria Fish JTWROS 4,167
Neal Gimbel, M.D., P.C. MPPP 5,000
Dwayne Steinle and BettySteinle JTWROS 3,333
R&M Enterprises LP 4,167
First Trust Custodian Louis Cowart IRA 8,333
Tony Palumbo, Ltd. DBPP 4,167
We are unaware of any of the above securityholders holding more than 1%
of the outstanding Ebiz shares.
DEBENTURE AND WARRANT
The Debenture and Warrant is held by JEM Ventures EBIZ, LLC.
16
19
OTHER WARRANT
Houlihan Smith & Company, Inc. holds a warrant to purchase 10,000
shares of common stock which are being registered for resale upon exercise of
the warrant.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information that we believe is
relevant to an assessment and understanding of Ebiz's results of operations and
financial condition for the fiscal years ended June 30, 1999, 1998 and 1997. The
following discussion should be read in conjunction with the Financial Statements
and related notes. See "Financial Statements." The following discussion as well
as sections of the discussions elsewhere in this prospectus, and "the Factors
Affecting Future Performance," and "Description of The Business" sections,
contain forward-looking statements. While we believe that the forward-looking
statements contained in Form 10-SB are reasonable and are based on assumptions
which we believe are reasonable, our actual results may differ significantly
from those anticipated. Factors that might cause future results to differ
materially from those projected in forward-looking statements include, but are
not limited to, those discussed in "ITEM 1. DESCRIPTION OF THE BUSINESS --
FACTORS AFFECTING FUTURE PERFORMANCE" and elsewhere in this Form 10-SB.
BACKGROUND
Our predecessor, Genras, was incorporated in Arizona in May 1995. On June 1,
1998, Vinculum, a non-operating company with an estimated 700 shareholders,
acquired all the operating assets and liabilities of Genras for 5,000,000 shares
of Vinculum common stock. Vinculum was incorporated in Colorado in May, 1984 as
VDG Capital Corporation and changed its name to Vinculum Incorporated in
December, 1994. Vinculum filed for bankruptcy protection under Chapter 11 of the
Bankruptcy Code in August, 1991 and was discharged when its plan of
reorganization was approved in July, 1994. Immediately following the acquisition
of the Genras assets, the former Genras stockholders held approximately 87% of
the outstanding shares of Vinculum's common stock. For financial accounting
purposes, the acquisition was treated as a recapitalization with Genras as the
acquirer. In June 1998, Ebiz was incorporated as a Nevada corporation and a
wholly owed subsidiary of Vinculum. In August 1998 Vinculum merged into Ebiz,
which was the surviving entity. All information below prior to June 1998
reflects the operations of Ebiz's predecessor, Genras.
Ebiz is an early stage operating company with limited operating history
in its current business line upon which an evaluation of its prospects can be
based. Until September of 1998 our Internet sales orders were generated from
third party "virtual store" Web sites such as Zauction.com and OnSale.com where
e-commerce shoppers purchased listed products on-line and orders were
electronically transmitted to us daily. We then directly shipped to their
customers nationwide.
In September 1998 we launched our own Internet e-commerce Web site,
cpumicromart.com, and deployed our own sales staff to generate sales directly
and through third party resellers. In January 1999 we launched another
e-commerce VSP site, EBIZmart.com, which we believe was the first
business-to-business e-commerce clearinghouse portal creating a centralized
procurement location for large quantity liquidation of surplus products. In
April 1998 we began manufacturing our own "white box" PC systems under the brand
name of M(2) Systems(TM) In April 1999 we began manufacturing a second brand of
PCs, Element-L(TM), which features the Linux operating system. Also in April,
1999, we launched a new type of Internet e-commerce Web site, our VSP or
Vertical Service Portal, TheLinuxStore.com which provides services and content
as well as products to a vertically targeted market.
Our objective is to become a leader in e-commerce marketing,
merchandising and distribution of specialized products to fast growing vertical
markets, as well as a nationally recognized manufacturer of value priced
computer products. We anticipate the continued expansion of production and
distribution of our Element-L(TM) and M2 Systems(TM) brands as well as our to be
released PIA(TM) brand line. We believe our
17
20
major competitive advantages include our proven customer databases, the depth
and expertise of our management team and our internal programming and Web
development staff. We expect to utilize these strengths with our extensive
contacts and expertise in computer component and surplus merchandise procurement
and in e-commerce development, distribution and marketing.
RESULTS OF OPERATIONS
Year Ended June 30, 1999 Compared to Year Ended June 30, 1998. Net
revenue was $15,290,202 for the year ended June 30, 1999 compared to $6,824,967
for the year ended June 30, 1998. The $8,465,235 increase, approximately 124%
over the prior year, was due to the introduction of our Element-L(TM) and the
growth in sales of our M2Systems(TM) brands, the opening of our VSPs and the
development of our own sales force.
During fiscal 1999, we were able to substantially broaden our
distribution base and strategically position the company in the e-commerce
market with the launching of our VSP sites, EBIZmart.com and TheLinuxStore.com.
We have de-emphasized sales through third party auction Web sites, and increased
our sales directly to consumers, businesses and institutions through our own
sites. In addition, we developed our own sales capabilities to generate
substantial sales volume for M2Systems(TM) and Element-L(TM) directly to
corporate customers and through selected value added resellers, retailers and
major e-commerce Web sites such as egghead.com. The cost of sales was
$14,358,772 in 1999 compared to $6,157,794 in 1998. The increased sales volume
was the primary reason for the increase. Gross profit margins decreased from
9.8% to 6.1% due to the wind down of the auction business during the first
quarter of 1999 and the ramp-up costs associated with the tripling of system
manufacturing during the second half of 1999.
Selling, General and Administrative expense was $2,512,415 for fiscal
1999, an increase of $1,830,845 from 1998. This increase was due to the building
of our information technology, sales, marketing and administrative
infrastructure and the related expenses required to begin implementing the
company's strategies.
The preceding operational factors resulted in a net loss of $1,877,124
for the fiscal year ending June 30, 1999 as compared to a net loss of $422,457
for the year ended June 30, 1998.
Years Ended June 30, 1998 Compared to Year Ended June 30, 1997. Net
revenues were $6,824,967 for the year ended June 30, 1998 compared to $4,454,764
for the year ended June 30, 1997. The $2,370,203 increase, approximately 53%
over the prior year, was principally attributable to an acceleration of the
Internet auction revenue originated through the third party Web sites of
Zauction.com and OnSale.com. Substantially all of our sales in fiscal year 1998
were generated by small quantity direct ship activity to Internet auction
customers, while substantially all of our sales in fiscal year 1997 were derived
through bulk sales of computer component products.
Prior to establishing warehouse operations in July 1998, the majority
of our shipments in fiscal 1998 were related to the fulfillment of Internet
orders. Until September of 1998, all Internet orders were generated on third
party Web sites such as Zauction.com, OnSale.com and Sandbox.net, where
e-commerce shoppers purchased our products. The orders were electronically
transmitted daily, and we directly shipped the ordered products to e-commerce
shoppers nationwide. An increasing percentage of total sales in fiscal 1999 are
generated directly through our on-line "computer store" Web sites to end users,
as well as through our growing number of authorized resellers. Cost of sales was
$6,157,794 for the year ended June 1998 compared to $3,925,285 for the year
ended June 30, 1997. The increase in sales was
18
21
attributable to higher sales activity while gross margins decreased from 11.9%
to 9.8% due to an emphasis on auction sites which produced lower margins.
Selling and marketing expenses were minimal in both fiscal years as we
desired to conserve our working capital. We expect selling and marketing
expenses to increase substantially in the future as we secure additional
financial resources.
Research and development expenses approximated $100,000 in fiscal year
1998 compared to minimal expenses for the prior period. The costs to prototype
our Web site and Web site tools are expensed as incurred.
Acquisition advisory fees and costs of our capital raising efforts
approximated $373,000 in fiscal year 1998. These expenses were associated with
our emerging as a publicly traded entity in June 1998 after the reverse
acquisition of Vinculum and were principally comprised of an advisory fee. All
associated costs of this transaction were incurred during fiscal year 1998.
As a result of the factors described above, we experienced an operating
loss of $393,295 for the fiscal year ended June 30, 1998 as compared to
operating income of $156,473 in fiscal year 1997. Net income was $251,767 in
fiscal 1997 compared to a loss of $422,457 for fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES.
At June 30, 1999, the Company had cash and cash equivalents of
approximately $76,000, representing a decrease of approximately $393,000 from
approximately $469,000 at June 30, 1998. The decrease is primarily the result
of the Company's net loss and the growth of accounts receivable and inventory.
The Company's net cash used in operating activities was approximately
$2,940,000 for fiscal 1999 and approximately $9,300 for fiscal 1998. In fiscal
1999, the cash was used for the selling, general and administrative expenses
and increased inventory and accounts receivable that were the result of
substantially higher sales and the implementation of the Company's strategic
programs. In fiscal 1998, the net cash used in operating activities was
primarily for increased inventory.
The net cash used in the Company's investing activities was $473,000
and $58,000 for fiscal 1999 and 1998, respectively. In fiscal 1999, these
activities included the acquisition and development of software and equipment
for the Company's Web sites and administrative activities. In fiscal 1998,
investing activities were primarily for equipment to support operations.
From inception until the transaction with Vinculum, our predecessor
financed its operations almost entirely from internally generated working
capital. Concurrent with the Vinculum transaction, we obtained our first
significant equity capital of approximately $450,000, net of financing costs,
due to the exercise of previously issued Vinculum warrants. This equity capital,
obtained in June 1998, was primarily deployed during the quarter ended September
30, 1998 to pay the expenses of moving into our new facility, building our
manufacturing, technology and sales infrastructure and financing the net loss
from activity during that quarter, including the losses generated from the
auction business.
During fiscal 1999, the net cash provided by financing activities was
approximately $3,023,000, obtained from borrowings and common and preferred
stock issuances as discussed below.
In September 1998, we obtained our first credit facility, a $250,000
revolving line of credit, with a local banking institution. This facility was
later raised to $350,000. These funds were utilized to finance increased
purchasing requirements to meet demand for our M2 Systems(TM) PCs, finance the
general expansion of our working capital and for other development activity.
This credit facility was paid off on August 25, 1999.
In December 1998, we obtained additional equity capital of
approximately $1,195,000 after financing expenses, as a result of additional
shareholder warrant exercises and the sale of additional common stock. These
proceeds were used to pay down the bank line of credit and other indebtedness,
finance increased production requirements, meet other operational needs and
finance the net loss from activity during that quarter. A significant amount of
these net proceeds remained in cash at calendar year end.
In April 1999, we obtained approximately $869,000 of net equity funds
through the sale of 10,895 shares of Series A Preferred Stock. These proceeds
were primarily used for increased inventory and accounts receivable.
On April 19, 1999, we borrowed $500,000 from Aztore Holdings, Inc. for
a one-year term. The note was convertible into shares of common stock. We also
issued Aztore Holdings a warrant to purchase 250,000 shares of our common stock
as a condition to obtain the loan. We utilized the proceeds of this loan for
inventory financing and accounts payable. This loan was repaid in full on August
25, 1999. Under the terms of the repayment, the warrant was cancelled.
19
22
From time to time during fiscal 1999 we borrowed amounts from
individuals, including Jeffrey I. Rassas, our Chief Executive Officer, and
Stephen C. Herman, our President. The loans from Mr. Rassas and Mr. Herman were
used primarily for working capital.
On August 25, 1999, we issued the Debenture and Warrant for a total of
$7,100,000. The proceeds were used to secure a $5,000,000 letter of credit in
favor of the holder of the Debenture, debt repayment and working capital. As the
outstanding balance of the Debenture decreases, the amount of the letter of
credit and corresponding cash collateral required to secure the letter of credit
decrease, resulting in additional proceeds being available for working capital.
Our ability to decrease the cash collateral for the letter of credit and obtain
additional funds for working capital is contingent upon the holder converting
the Debenture, which may occur at the holder's discretion, or our ability to pay
down of the Debenture with cash from other sources.
Preferred Stock. We are authorized to issue up to 5,000,000 shares of
preferred stock. Our Board of Directors, at its sole discretion, may divide the
shares of preferred stock into series, and determine the dividend rate,
designations, preferences, privileges, ratify powers, if any, and determine the
restrictions and qualifications of the shares of each series of preferred stock
as established. As of June 30, 1999, 10,895 shares of Series A Preferred Stock
were issued and outstanding.
Net Operating Loss Carryforwards. We have a net operating loss carry
forward of approximately $3 million, over $2 million of which pertains to
operations of Vinculum prior to the acquisition via reverse merger with Ebiz in
June 1998. The utilization of the net operating loss incurred prior to June 1998
is subject to limitations, however, and the net operating loss may not be fully
usable prior to its expiration. No deferred tax asset has been recognized in the
Financial Statements due to the uncertainty of utilization.
YEAR 2000 "Y2K" CONSIDERATIONS
Ebiz has addressed possible remedial efforts in connection with
computer software that could be affected by the Year 2000 "Y2K" problem. The Y2K
problem is the result of computer programs being written using two digits rather
than four to define the applicable year. Any programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculations.
The Y2K problem can affect any modern technology used by a business in
the course of its day. Any machine that uses embedded computer technology is
susceptible to this problem, including for example, telephone systems, postage
meters and scales and of course, computers. The impact on a company is
determined to a large extent by the company's dependence on these technologies
to perform their day-to-day operations.
Internally, Ebiz has reviewed all such equipment and has determined
that many of our systems are Y2K compliant. This includes our telephone systems,
postage equipment and our software. We anticipate that all systems and software
will be fully reviewed and brought into compliance by November 1999. If certain
systems are not brought up to Y2K compliance by the end of November 1999, then
the non-compliant technology will be disabled so as not to have an impact on the
systems that are compliant. We would not anticipate that any such events would
have a serious impact on our day-to-day operations, or that any valuable
information would be lost. We back up all computer systems daily to protect
against data loss.
The costs of bringing our technology up to Y2K compliance is expected
to be less than $50,000. This is because the majority of the "patches" or
programs designed to make software Y2K compliant can be obtained over the
internet from manufacturers for little or no cost and we do not expect to rely
heavily on outside consultants to upgrade our systems as most of the work can be
performed in-house.
Externally, the Year 2000 problem may impact other entities with which
we transact business. We cannot predict the effect of the Year 2000 problem on
such entities or Ebiz. With regard to those companies with which we do business
on a daily basis, we cannot guarantee that they will be vigilant about their Y2K
plan of action. We have, however, begun mailing out a simple questionnaire to
these
20
23
companies, requesting that they advise us of their Y2K readiness. Should any of
our suppliers or customers experience a disruption due to the Y2K problem, the
most significant impact may be a delay in receiving inventory or a reduction of
purchases. In a worst case scenario, the former may ultimately cause us to incur
higher cost of goods sold, while the latter may cause us to have an interruption
in revenues for several months.
In these unlikely events, our plan of action is to have on hand a cash
reserve at December 31, 1999 to cover both the additional costs and the revenue
shortfall. We have not yet determined the amount or source of such funds. We are
contacting our insurance carriers to determine the extent of insurance coverage,
if any, in the event Y2K problems affect any of our operations.
In the event that Ebiz does experience Y2K problems, it could result in
a decrease of Ebiz's revenues. A decrease of revenues could result in material
losses from operations and a reduction in our working capital. Management is
unable at this time to quantify the impact that the Y2K problem could have on
our results of operations and financial condition.
21
24
THE BUSINESS
OVERVIEW
Ebiz develops and operates Internet e-commerce Web sites, and designs,
manufactures and distributes high-value, low-cost computer systems intended to
capture leadership positions within specific, rapidly-growing segments of the
computer industry, including the business, small-office/home-office ("SOHO") and
consumer markets.
Ebiz addresses these high-growth markets through an integrated business
strategy that brings together virtual communities, with content, services and
innovative product solutions through the development of Vertical Service Portals
("VSPs"). Our VSPs provide meaningful content, value-added free services,
resources, communication, links, training, support and information, combined
with commercial product sales specifically targeted to the needs of that
community's interests.
The vision of Ebiz is to "accelerate the alternatives"(TM) in personal
and business computing by focusing primarily on leveraging the benefits and
opportunities provided by utilizing the Linux Operating System. We are focused
on three fast-growing emerging markets, for which we believe Ebiz is ideally
positioned to develop and deploy e-commerce Internet VSPs and branded computer
products.
We distribute our Element-L(TM) and M2 Systems(TM) brands, as well as
many other vendors' products through our e-commerce VSPs. The Element-L(TM) and
M2 Systems(TM) lines are also distributed through authorized resellers such as
Onsale.com, egghead.com and Fred Meyer Food Stores. We anticipate distributing
our new PIA(TM) line through our newly developed VSP, PlanetPIA.com, and other
distribution channels. We also distribute third party products including
systems, components, peripherals and software from leading industry
manufacturers and developers through our VSPs.
22
25
THE MARKET AND INDUSTRY
E-Commerce Market
The Internet has emerged as the significant interactive medium for
communications, information and commerce. In its 1999 report, The Global Market
Forecast for Internet Usage and Commerce, International Data Corporation
("IDC"), a market research firm, estimates that the number of Internet users
worldwide exceeded 97 million in 1998 and will grow to over 502 million by the
end of 2003. According to IDC, the number of users who make purchases over the
Web will jump from 31 million in 1998 to more than 183 million in 2003 which
will represent only 36% of all Web users.
In 1998, 56% of Web users resided outside the United States; however,
these users accounted for only 26% of worldwide e-commerce spending. By 2003,
IDC estimates 65% of Web users will be international, and foreign countries will
account for just less than half of worldwide Internet commerce.
Business-to-business trade on the Internet in the United States is
predicted to increase from $43 billion in 1998 to $1.3 trillion in 2003,
according to a December 1998 report from Forrester Research, Inc., a leading
independent research firm. As intercompany e-commerce accelerates within
industry supply chains, Forrester expects on-line business trade to surpass 9%
of total U.S. business sales by 2003. Forrester Research estimates that by 2003,
consumers will spend $108 billion to buy goods online, while businesses will
spend $1.3 trillion. As expected, computing and electronic equipment will remain
one of the largest categories of goods traded between businesses, reaching $395
billion in revenue by 2003, while other industries, such as cars and
petrochemicals, will also top the $150 billion mark.
The Linux Market
Overview. Linux is a free Unix-type operating system originally created
by Linus Torvalds at the University of Helsinki in Finland. He began his work in
1991 when he released version 0.02 and worked steadily until 1994 when version
1.0 of the Linux Kernel was released. The current full-featured version is 2.2
(released January 25, 1999), and development continues.
Linux is developed under the GNU General Public License and its source
code is freely available to everyone. This, however, does not mean that the
Linux operating system and its assorted distributions are free - companies and
developers may charge for the system and adaptations as long as the source code
remains available. Linux may be used for a wide variety of purposes including
networking, software development, and as an end-user platform. Linux systems are
considered an excellent, low-cost alternative to other more expensive operating
systems. Due to the very nature of the Linux functionality and availability, it
has become quite popular worldwide and a vast number of software programmers
have taken the Linux source code and adapted it to meet their individual needs.
At this time, there are numerous ongoing projects for porting Linux to various
hardware configurations and purposes.
The Rapidly Growing Market. The Linux operating system is growing
beyond the early adopter phase and reaching the mainstream business market.
Active Linux users worldwide are estimated to be in excess of 10,000,000.
Numerous hardware and software manufacturers have announced and have deployed
Linux-based solutions, including IBM, Gateway, Dell, Intel, Corel and Sun
Microsystems among others. In addition, companies focused on Linux-based
initiatives have entered the public market arena. Red Hat, Inc.'s initial public
offering in August 1999 and its subsequent stock performance have validated the
market for Linux-based companies. Since that time, a number of other Linux-based
companies have filed for their own IPOs, including Andover.net and VA Linux,
Inc.
23
26
In a 1999 bulletin titled Linux Operating System Market Overview, IDC
presented its first-ever forecast for Linux. Through 2003, total Linux
commercial product shipments are predicted to grow faster than the total
shipments of all other client or server operating environments monitored by IDC.
Linux license shipments grew at a dramatic rate of 212.5 percent from 1997 to
1998, now accounting for more than 17 percent of all server operating
environments shipped. IDC estimates Linux commercial shipments will increase at
a compound annual growth rate ("CAGR") of 25% from 1999 through 2003, compared
with a 10% CAGR for all other operating environments combined and a 12% CAGR for
all other server operating environments combined. IDC reports on only commercial
shipments of Linux and is unable to track systems downloaded from the Internet
at no charge.
Linux has been used in academic and research environments since its
inception for applications such as e-mail, Web servers, bulletin boards and
research projects. In 1999, IDC expects more application vendors to port their
offerings to Linux and hardware vendors to continue to expand their available
product lines running Linux for server-side endeavors. Further, IDC believes
that some desktop initiatives including an improved graphical user interface and
increased desktop application availability have the ability to trigger interest
in Linux as a desktop operating system toward 2003.
Linux servers are expected to have a larger impact on the worldwide
server appliance market, according to Dataquest Inc., a unit of Gartner Group,
Inc. in a July 1999 report. Dataquest estimates that by 2003, Linux servers will
account for approximately 24 percent of worldwide server appliance revenue, or
$3.8 billion, and 14 percent of server appliance shipments, or 1.1 million
units. Linux servers are projected to represent 3.4 percent of worldwide
traditional server revenue, or $1.9 billion and 8.1% of traditional server
shipments, or 450,000 units by 2003.
The Home Computer Market
Lower-priced personal computers and the demand to connect to the
Internet had a strong impact on the U.S. consumer segment, as 6.4 million
American households acquired PCs in 1998 resulting in a total of 52 million
households, or 50 percent of U.S. households, having a PC in 1998, according to
Dataquest Inc. In 1995, just 27 percent of U.S. households had a PC. These
percentages increased to 36% in 1996 and 43% in 1997.
In a related study, according to a 1999 research report by Cahners
In-Stat Group, the Residential Gateway market is expected to grow from a market
that barely exists today to one that exceeds $2.4 billion by 2003. Cahners
reports that digital TV, Web-based interactive TV and the emergence of non-PC
based Internet appliances will help drive this market. A Residential Gateway is
the device that connects a home computer system or network to the Internet. With
the deployment of high-speed Internet connections and the push by service
providers to offer integrated voice, data and video services over the same
high-speed pipe to different nodes throughout the home, the Residential Gateway
is expected to become an integral component in the network.
BUSINESS OBJECTIVES AND STRATEGIES
Our strategic business objectives are to:
- Develop comprehensive VSPs that combine product marketing with
community interests such as news, resources, links and other
incentives intended to build customer loyalty and promote
repeat visits;
- Leverage our Linux product development expertise to continue
product extensions within the Element-L(TM) and PIA(TM)
product lines;
24
27
- Generate significant revenue to achieve financial targets
through product sales as well as through technical support,
service and training opportunities, customer services,
Internet advertising, marketing and Web links;
- Expand sales, marketing, production and distribution of our
branded product lines until they are until they are
internationally recognized leading PC brands; and
- Become a nationally recognized leader in e-commerce marketing
and distribution of computer hardware and software products in
the market niches we target.
In developing our online market position, our goal is to be the
definitive Internet destination for information, services and e-commerce for the
vertical markets we target. We are focusing on building our brand recognition,
increasing customer satisfaction and providing numerous competitive advantages.
We believe that virtual Internet firms without true merchant qualities and
capabilities, such as conducting their own purchasing, merchandising, order
fulfillment, supply-chain management, vendor marketing opportunities and product
technical support functions, will not be able to differentiate themselves moving
forward in the e-commerce marketplace. Our e-commerce plan encompasses the need
to provide our virtual communities with a comprehensive Internet site, offering
relevant content, free services and a quality shopping experience, backed-up by
expert customer service. Key elements of this strategy include:
- Providing a meaningful virtual community destination on the
Internet. By providing the broadest spectrum of resource
information, links and content to serve the needs of the
virtual community, we will provide a critical destination
point for people with common interests to go for news and
information as well as to buy products.
- Offering free value-added services. By providing free services
with real value to the community of customers, we will develop
goodwill and enhance both our VSP traffic and usefulness.
Capturing customer information gleaned from providing these
services in our database enables us to manage and track
customer trends and preferences, ensuring our ability to
respond quickly.
- Ensuring a secure and convenient shopping experience. Our
e-commerce sites feature secure shopping facilities that are
open 24 hours a day, seven days a week, may be reached from
the customer's home or office and feature extensive browsing
and search capabilities
- Supplying an extensive selection of high quality products. We
intend for customers to have a positive experience, by
ensuring that they find the product of their choice, backed up
by warranty and support services as required.
- Providing efficiently priced products. We are committed to
providing products that are priced very competitively. We are
continually looking for innovative ways to drive cost out of
our products and processes, and passing those cost savings on
to customers, without sacrificing quality service.
- Delivering excellent customer service. We are committed to
providing the highest level of customer service from ordering
to shipping, and offer pre-and post-sales support via the
telephone, e-mail or online, and also offer online order
tracking capabilities.
- Developing customer loyalty. We are focused on developing and
promoting customer loyalty, building repeat purchase
relationships with our customers, leveraging our customer
acquisition costs and maximizing the number of return visits
by our customers.
25
28
- Building brand leadership positioning. We are using aggressive
online and offline integrated marketing strategies to enhance
our brand recognition within each vertical market, which
includes advertising, direct online marketing, trade shows and
public relations activities.
OUR VERTICAL SERVICE PORTALS (VSPS)
As an e-commerce company, our primary asset is our ability to
effectively develop, market and manage our Web sites and develop our e-commerce
initiatives, in addition to the manufacturing of the corresponding branded
computer systems marketed on our sites. We have developed and are operating VSP
sites and are continually developing and updating these sites, as well as
developing new sites as market opportunities are identified. Our VSPs include:
TheLinuxStore.com
The vision for TheLinuxStore.com is to be the definitive source for
"Everything Linux," offering a large selection of Linux compatible technical
products and related items, including Linux computer systems and servers,
hardware components and peripherals, software, books, resource material,
apparel, training and support services. Through this VSP, we distribute products
from industry leaders such as Lucent, Hewlett Packard, AMD, 3COM, Intel,
Toshiba, Mitsumi, Seagate, Western Digital, Quantum, Compaq, Corel, Caldera, Red
Hat, Cyclades and others.
As a VSP, we provide free services and content that is relevant,
dynamic and timely, designed to engage our customers and facilitate an ongoing
relationship with them. We provide a site where customers can get whatever they
want (obtain news and information, purchase products, download software or
graphics, participate in messaging forums and other community-related
interaction) and motivate them to return often to see what is new and different.
This includes up-to-the-minute Linux Headline News, Linux software downloads, a
message board, job postings, search engine, knowledgebase, TheLinuxLab test
center, a registry of people, jobs and projects, events and links to over 5,000
Web sites and resources available on the Internet.
Our goal is to combine the best of the community interests with
commercial business opportunities of Linux. We intend to enhance and develop our
Linux product offerings, but focus our near-term efforts on developing
partnerships and relationships with manufacturers and suppliers of other Linux
products and distribute them on our site. As a VSP, we also provide additional
services, which will ultimately generate revenue, but more importantly today
provide a valuable customer profile database and trend data.
With site traffic exceeding one million hits per month, there are also
significant opportunities to generate advertising revenue on the site, primarily
from vendors whose products are sold on the site. Near-term revenue
opportunities also include charging a nominal fee for some of the services, such
as dynamic DNS, e-mail forwarding and Web hosting, which are now provided at no
charge.
TheLinuxStore.com has consistently increased traffic since its
inception in April 1999. We have received an average of over one million page
views per month and recently have had as many as one million in one week. Our
audience is comprised of IT and Web development professionals, software
programmers, hardware engineers and Linux enthusiasts, resellers, systems
integrators and VARs.
We are preparing to launch an aggressive marketing and promotion
campaign to increase awareness and traffic to our web site. This includes online
and print media advertising in all key Linux media, online direct marketing,
public relations and trade show promotional activities. We have also implemented
a series of sales promotions, which will continue on an ongoing basis to develop
our
26
29
customer database for marketing purposes. We will implement customer loyalty
programs offering additional benefits and incentives to frequent customers.
We provide customers of TheLinuxStore.com with a positive online
shopping experience, backed up by professional customer support. Our
professional tele-sales team offers pre-sale configuration and engineering
support. First-tier, post-sale technical support and return services are
provided online and toll-free over the telephone. More extensive technical
support may be referred to a specific vendor, although TheLinux Store.com can
provide this service for vendors if desired.
It is one of our fundamental values to participate as an active member
of the Linux community and support open source development projects. Therefore,
since our founding, TheLinuxStore.com has supported the Linux community, both
locally and nationally. We are corporate sponsors of Linux International and
have key staff members who are vital contributors to various open source
projects, most notably, the Stampede Linux Development project. We support the
Debian Linux development efforts, as well as local Linux user groups, the
Arizona Software & Internet Association, Arizona Internet Professionals
Association and Linux expositions and conferences.
Revenue from TheLinuxStore.com is generated from product sales as well
as additional services that include marketing fees paid by vendors, advertising,
service, support and training.
EBIZmart.com
The vision for EBIZmart.com is to provide "Everything for Business"
over the Internet. It is a business-to-business e-commerce portal dedicated to
facilitating the sale of products and services specifically for the business
customer. This includes computer systems, equipment and merchandise. The site
provides content, business news, travel services, stock quotes, weather, a
search engine, resources, links, events, calendar, education and training. This
site is unique and operates as a business-to-business clearinghouse, allowing
vendors to sell their product inventory direct to buyers over the Internet,
without disrupting their existing distribution channels or retail pricing
structures. This site encompasses three primary sales methodologies:
- Auctions - for suppliers to offer products and prospective
buyers to bid (place non-cancelable offers) for the
merchandise;
- Clearinghouse - for vendors to sell listed product inventory
directly to buyers at a specified, below-market price;
- Express Lane - for the sale of products that Ebiz has
purchased, inventoried and resells as in-stock items.
Products are indexed and categorized, promoted and highlighted in
various ways to keep the content dynamic. Currently, there are over 3,000
individual items listed on EBIZmart.com ranging from computer hardware and
software to office supplies, all at wholesale pricing direct to the business
buyer. Other areas of this VSP include distribution of our M2 Systems(TM)
products, e-commerce start-up services, Web development and hosting for start-up
e-commerce companies through the use of MyETool, an e-commerce site development
software kit, and EBIZ Travel, an in-house full service travel agency.
A key asset of this VSP is the membership registration, whereby users
of the site register and receive frequent site updates from us in the form of a
newsletter. They also receive various product and service incentives as rewards
for varying levels of purchases. We currently have a developed database of over
100,000 e-commerce/auction buyers.
27
30
Revenue is generated from the sale of products that we purchase and
resell, as well as from sales of our M2 Systems(TM) product line. We generate
fees for product listings for Auction and Clearinghouse items, as well as the
Web hosting service through MyETool and travel-related commissions from EBIZ
Travel. We also generate advertising revenue from banner ads and links.
This VSP is being marketed to both vendors to list products as well as
potential purchasers through an integrated sales and marketing program, heavily
dependent upon our sales department's interaction with our current customer
base. To generate customer traffic, we promote the site through public
relations, online advertising on business-to-business Web sites (some via
reciprocal advertising and affiliate agreements), professional purchasing
associations, industry-related sites and through direct e-mail marketing.
PlanetPIA.com
This VSP is under development with expected launch prior to year-end.
It is designed as the premier portal for PIA(TM) users, bringing the Internet to
everyone. We anticipate providing complete support for our PIA(TM) brand,
additional PIA(TM) upgrades and products at below conventional market prices
through this VSP. This VSP will be able to be set up as a start-up screen for
PIA(TM) users and will be customizable to access particular interests of the
user.
PlanetPIA.com will provide the PIA(TM) user community with special
services and offers of interest to them. It will provide an interactive Internet
experience, including providing games, educational and family resources, chat,
entertainment, sports and shopping.
We anticipate that this VSP will be a key marketing component of our
PIA(TM) systems. We intend to market this VSP extensively in online and offline
media.
OUR VALUE PRICED PC BRANDS
We believe we have certain advantages over our competitors in the value
price PC market, particularly:
- strict quality controls which assure fewer problems for the
end-user;
- competitive pricing below the $1,000 level; and
- technically proficient help desk for after sales service.
We currently manufacture and distribute two lines, the Element-L(TM)
and the M2 Systems(TM) brands and are currently developing the Personal Internet
Appliance or PIA(TM) brand.
- Element-L(TM) Introduced in April 1998, our Element-L(TM) line
offers one of the most comprehensive families of Linux-based
systems on the market. The product line consists of
Linux-based, Internet-ready multimedia desktop and notebook
PCs, workstations, servers and high performance Alpha Systems.
The entry-level Element-L(TM) "Ion" system is believed to be
the lowest priced Linux-based computer system on the market.
- M2 Systems(TM) M2 Systems(TM), introduced in April, 1998, was
the first Internet-marketed sub-$1,000 Windows-based
multimedia PC. These systems, priced from $399-$899, provide
an alternative to expensive, brand-name computer systems and
continue to re-define the low-cost pricing landscape. In
addition to marketing M2 Systems(TM) on our EBIZmart.com and
cpumicromart.com e-commerce Web sites, we have received
production orders from several
28
31
resellers including egghead.com, Fred Meyer Food Stores,
Computer Renaissance Stores and BJ's. In December 1998, we
signed a distribution agreement with dealdeal.com for an
exclusive "front page" listing on its Web portal site and are
negotiating similar strategic relationships with other
e-commerce organizations. We recently received distinction for
our M2 Systems(TM) as being among the top 100 PC manufacturers
as determined by Microsoft and we are in Microsoft's elite
Member '99 program, which honors the top 1% of the system
builders in North America.
- PIA(TM) Ebiz is developing and preparing to launch before
year-end a third product line, the PIA(TM) (Personal Internet
Appliance), which targets consumers and cost-conscious
institutions such as schools and libraries seeking a
full-service Internet access device. The PIA(TM) will be a
highly-stylized fully-configured desktop computer that will
utilize the Linux operating system. The PIA(TM) is designed to
enable users to surf the Web quickly, easily and affordably,
exchange e-mail, play games, chat online and do basic
computing functions, such as word processing and spreadsheets.
Because of the flexibility of the Linux operating system, the
software pre-loaded on the PIA(TM) provides compatibility with
Microsoft Word, Excel and PowerPoint documents. The targeted
retail price is under $400, placing the device well within the
reach of most consumers and institutions. The PIA(TM) product
line extensions will include additional configurations,
upgrades and peripherals.
MARKETING
We accept sales orders directly via a secure shopping cart located on
each of our VSPs. In addition, we employ a dedicated direct sales force who
manage direct corporate and reseller sales opportunities. We also have a
complete inhouse tele-sales department that takes incoming customer calls,
referrals and inquiries generated by our various marketing activities or Web
sites.
Our marketing and promotion strategy is intended to:
- Create, merchandise and manage comprehensive VSPs.
- Build brand recognition and become market leaders with our VSP
sites.
- Generate significant market awareness for our products, our
sites and Ebiz through integrated marketing programs.
- Effectively position and promote our products and our VSP
sites to their target audiences to increase consumer traffic
to our sites, add new customers, stimulate demand and generate
revenue.
- Develop e-commerce and Internet service revenue from technical
support, service and training, advertising fees, links and
content providers.
- Leverage our strategic partnerships with vendors, industry
experts and distribution partners to effectively merchandise,
market and promote our initiatives.
- Establish a comprehensive database in excess of 1,000,000
customers, and build strong customer loyalty to maximize
repeat purchases.
- Establish evaluation and accountability processes to manage
our VSP sites and measure the results of marketing programs
and sales support activities.
29
32
Establish Corporate and Brand Positioning. With our business interests
serving three diverse markets, we believe that it is necessary to quickly
establish and maintain a strong brand presence and communicate corporate and
brand positioning for each of our initiatives. Therefore, we are implementing a
comprehensive sales and marketing program to promote Ebiz and our brand names.
Advertising in online and offline media will be utilized to support all
of our e-commerce initiatives and to build brand recognition. Print media
advertising campaigns are used in targeted trade, business and consumer
publications based on the specific needs of each business unit.
Public and media relations activities have been used extensively,
targeting key online, print and broadcast media to generate visibility and
awareness of our VSP sites, our products and our brands. We distribute
newsworthy information on a timely, consistent basis and produce professional
electronic and printed press materials and manage an accurate media contact
database in-house.
Trade shows are used throughout our marketing program where appropriate
to create brand awareness, primarily among specific vertical market groups or
Internet industry associations. To enhance our corporate positioning and
perception, we intend to expand our presence at the select shows we attend,
providing a multimedia presentation theater format and individual demonstrations
and to interact extensively with the press and sales promotions to generate
traffic and consumer excitement. To ensure consistency of message, all trade
shows revolve around a central theme or concept that is key to the positioning
of our new and featured products.
Direct Marketing and Sales Promotion Programs. We intend to develop
targeted customer retention and promotion programs designed to reward frequent
customers. A Database/Direct Marketing Program has been established for each VSP
site to enable us to develop community databases, which can be marketed to
cross-sell, re-sell and up-sell our products. This will be accomplished through
product registrations, Web customer registrations and newsletter lists. Customer
information will be captured into an enterprise-wide customer database system,
which will then be able to be accessed by the sales team for follow-up and
reporting.
From this database, we intend to address many marketing activities,
including lead management and database marketing. Our goal will be to segment
this database and communicate with key segments on a weekly or bi-weekly basis
at a minimum. We will promote new products and enhancements, promotions,
training opportunities, sales events and other activities, through direct mail,
with a strong, compelling call to action that motivates a direct response that
can be effectively tracked.
Internet Marketing. To direct traffic to our VSP sites, we have created
inbound links that connect directly to our Web sites from search engines and
other sites. Potential customers can simply click on these links to become
connected to our VSPs from search engines and community and affinity sites. In
addition, in order to increase exposure on the Internet and directly generate
sales, we intend to develop an affiliates program, whereby we compensate our
registered affiliates for any sales generated via their link to our Web site.
CUSTOMER SERVICE
Our customer service department includes customer service and technical
support representatives. Our customer service representatives are available from
8:00 a.m. to 6:00 p.m. Mountain Standard Time, Monday through Friday to assist
customers in placing orders, finding desired products and registering credit
card information. Technical support representatives assist customers in setting
up, configuring and troubleshooting our branded products, and provide return
material authorizations for defective products. We provide technical support
over the telephone, via e-mail and online. We also provide comprehensive user
documentation, online tutorials and a detailed database of product-related
problems and solutions.
30
33
Both customer service groups are a valuable source of feedback
regarding user satisfaction. Our VSP sites also contain customer service pages
that outline store policies and provide answers to frequently asked product
questions.
INFORMATION TECHNOLOGY
The market in which we compete is characterized by rapidly changing
technology, evolving industry standards, frequent service and new product
announcements, product enhancements and changing customer demands. Accordingly,
our success depends upon our ability to adapt to rapidly changing technologies,
to adapt our services to evolving industry standards, and to continually improve
the performance, reliability and features of our products and service. We have
implemented a broad array of scaleable site management, search, customer
interaction and distribution services systems that we use to process customers'
orders and payments. These systems use a combination of our own proprietary
technologies and commercially available licensed technologies. The systems that
we use to process customers' orders and payments are integrated with our
accounting and financial reporting systems. We focus our internal development
efforts on creating and enhancing the specialized, proprietary software that is
unique to our business.
Our systems have been designed on industry standard architectures and
have been designed to reduce downtime in the event of outages or catastrophic
occurrences. Our systems provide 24-hour-a-day, seven-day-a-week availability.
Our system hardware is located in our Scottsdale, Arizona facility and is
provided with redundant communications lines and emergency backup located in
Kansas City, Missouri.
COMPETITION
The online commerce market is new, rapidly evolving and intensely
competitive. We expect competition to intensify in the future. We currently or
potentially compete with a variety of other companies in each of our targeted
market niches. Although we believe there may be opportunities for several
providers of products and services similar to ours, a single provider may
dominate any of our markets. We expect that additional companies will offer
competing e-commerce solutions in the future.
The Emergence of Linux Portals. Several Linux based Web site portals
which offer technical news, software downloads, Web site tools, resources, links
and services, as well as product marketing, have been recently developed. The
sites highlight the growing competition in the open-source world, and among
Linux operating system developers in particular. Our research indicates there
are currently 137 companies that have Linux-based Web sites, 49 of which
assemble and/or resell Linux computers, with only 9 offering desktop solutions.
There are numerous Linux portals offering information, software, services and
resources. Each serves a specific purpose, but none have been truly successful
in combining and balancing the community and commercial interests. The sites
that offer some of the same content or services as TheLinuxStore.com include
justlinux.com, LinuxLinks.com, LinuxStart.com, Linux.org, linux.com,
Linuxmall.com, RedHat.com, FirstLinux.com; LinuxToday.com, Slashdot.org,
Freshmeat.com and linuxbandwagon.com.
Now considered a legitimate challenger to Windows and Unix,
particularly as dedicated thin-servers (such as a Web server), Linux itself is
both free of charge and free to modify as any user desires. Several companies
are building business models around Linux by selling customer service, technical
support and applications with the system. Red Hat has dominated this market by
entering into distribution agreements with large hardware makers such as IBM and
Dell resulting in it accounting for approximately 56 percent of operating
systems of all Linux servers shipped last year, according to IDC.
31
34
Low-cost PC/Appliances. In the emerging low-end PC and "appliance"
market, new competitors are emerging with frequency, primarily due to the
bundling and strategic partnerships with online service providers marketing
"free PC's" with a multi-year service commitment. Current market entrants
include Netpliance, E-Machines, Free PC, Free iMac and Microworkz. Major
competitors in the PC manufacturing segment include Dell Computers, Gateway
Computers, IBM, NEC, Compaq and others. Ebiz intends to compete in the value
priced range of PCs and believes it can be successful by offering uniquely
styled, quality products and effective technical support at competitive prices.
Business-to-Business Auctions, Clearinghouse/Wholesalers. In the
business-to-business clearinghouse market in which EBIZmart.com engages,
numerous sites offer products available for auction and numerous
business-to-business product reselling and resource Web sites are available.
Currently, there is no known e-commerce portal dedicated to providing content,
links, services and business-to-business sales of merchandise through all three
purchasing methods we provide, although we believe additional companies will
offer these solutions in the future. We believe that we are uniquely positioned
to make this VSP successful. Indirect competitors of EBIZmart.com in addition to
those above include a growing list of e-commerce content and merchant sites.
There is a growing number of purchasing utility and assistant programs and sites
attempting to establish themselves as procurement and distribution utilities.
These sites and programs are anticipated to compete with our VSP features and
tools.
We will also compete with several large computer product distributors
including CDW, Gateway Computers, Dell Computers and, to some degree, our
customers and suppliers such as Insight, Hamilton Avnet and others. We intend to
focus on our niche of procuring and merchandising surplus computer products and
believe that we can successfully compete with other distributors in this
segment.
INTELLECTUAL PROPERTY
We rely primarily on trademark and copyright laws to protect our
intellectual property. We also enter into confidentiality and nondisclosure
agreements with our employees and others, and generally control access to our
proprietary information.
We have filed with the United States Patent and Trademark Office for
trademark/service mark registration of "EbizMart," "M2 Systems," "CPU
MicroMart," and others. We are in the process filing registrations for
"Element-L Systems," "TheLinuxStore.com," "PIA," "PlanetPIA.com," "Accelerating
the Alternatives," "Performance to the Next Power" and other trademarks/service
marks used or anticipated to be used in our business. We have registered
Internet domain names for each of our current VSP sites as well as numerous
others. Additional filings and domain registrations are anticipated, including
variations of the above marks and names.
32
35
FACILITIES
We currently lease 30,000 square feet of office and warehouse
facilities located in Scottsdale, Arizona. Approximately 10,000 square feet of
the facility are utilized for administrative and sales offices and the remaining
20,000 square feet are utilized for warehouse and manufacturing. The lease on
the facility is for a term through July 2001, with a current annual rental
payment of approximately $175,000.
EMPLOYEES
As of September 30, 1999, we had a total of 71 employees, including 34
administrative, 14 sales and 23 manufacturing employees. Our employees are not
covered by any collective bargaining agreements, and we consider our
relationship with our employees to be good.
LITIGATION
Certain unresolved disputes remain with miscellaneous product
manufacturers or supply vendors involved previously with Genras, and with a
prior Internet auction site partner which are currently being negotiated.
Management believes that all such matters are within ordinary levels for an
organization of our size and nature, and that these disputes will be resolved
without a materially adverse consequence to Ebiz.
33
36
MANAGEMENT
The directors and executive officers of Ebiz are:
NAME AGE POSITION
Jeffrey I. Rassas 36 Director and Chief Executive Officer
Stephen C. Herman 45 Director and President
Donald B. Altvater 54 Vice President and Controller
Elizabeth Perrine 35 Vice President, Marketing
Larry Phillips 33 Vice President, Sales
DIRECTORS AND EXECUTIVE OFFICERS
Jeffrey I. Rassas, Director and Chief Executive Officer, is the founder
of Ebiz and has been its Chief Executive Officer since its inception in 1995.
Between 1989 and 1995, Mr. Rassas owned and operated The Wilsaac Group, Inc.,
d/b/a DLC Consulting, an employee leasing and office services outsourcing firm
with offices in Phoenix, Tucson, Los Angeles, Century City and Irvine. He
arranged the sale of the Arizona offices to Dynamex, a division of Air Canada,
in 1993 and the California offices to another buyer in 1995. Prior to DLC
Consulting, from 1985 to 1989, Mr. Rassas co-founded ITS Travel Group, Inc.,
which grew into the third largest travel agency in Arizona before it was sold in
1989. From 1982 to 1985, Mr. Rassas held the position of Magnetics Engineer at
CTM Magnetics. Mr. Rassas holds an Associates degree in electrical engineering.
Stephen C. Herman, Director and President, joined Ebiz in September of
1997. Mr. Herman has approximately 20 years of computer and electronics
distribution and sales experience. Between 1995 and 1997 he was a Vice President
and Divisional General Manager for Globelle Incorporated. From 1992 to 1995, he
was the Vice President of Sales for Insight Direct. His responsibilities
included three specialty divisions. Between 1989 and 1992, Mr. Herman was the
Director of Sales for Technology Marketing Group, a predecessor to Globelle.
Between 1987 and 1989, Mr. Herman also was President and founder of Computer
Solutions, Inc. ("CSI"), a five location corporate reseller servicing Fortune
1000 customers, which grew to $80 million in revenues by its second year. CSI
was sold to Valcom in 1989, and Mr. Herman became President of Valcom Southwest,
a wholly-owned subsidiary of Valcom.
Donald B. Altvater, Vice President and Controller, joined the Ebiz in
January 1999. Mr. Altvater has over 20 years of experience in financial,
operations and marketing management in the electronics and communications
industries with GTE and Fujitsu. He began his career with GTE International in
1971 and held a series of increasingly responsible positions with GTE companies
that culminated in his appointment in 1987 as Vice President - Finance of
Fujitsu GTE Business Systems, a joint venture between those two corporations. In
1989, Mr. Altvater was named Vice President and Chief Financial
34
37
Officer of Federal Business Systems, a Fujitsu subsidiary. After electing early
retirement in 1992, he managed two private companies in which he had an
ownership interest. In 1996, Mr. Altvater became Controller of Refrac Systems, a
privately held metallurgical engineering company and continued in that position
until joining Ebiz in 1999. He holds a Bachelor of Science degree in Mathematics
(magna cum laude) and Economics (cum laude) from Tufts University and an M.B.A.
from the University of Chicago Graduate School of Business.
Elizabeth Perrine, Vice President, Marketing, joined Ebiz in June 1999.
Ms. Perrine is a 17-year veteran in marketing for technology companies. Having
successfully launched nearly 50 products to the US and European markets, Ms.
Perrine's expertise is in driving strategic planning, product marketing,
marketing communications and public relations for companies at their start-up,
IPO and growth phases. Most recently she was Vice President, Marketing with
Vodavi Technology, Inc. where she led the positioning, marketing and branding
for that company's various divisions. Prior to that, from 1990 to 1993, she
served as Director of Marketing at Microtest, Inc., a provider of LAN
certification and connectivity products. In this capacity, she built and managed
worldwide marketing programs. She has also held marketing management positions
with other companies including Time Systems of America, Blue Chip Computers,
Inc., and Executone Information Systems, Inc.
Larry Phillips, Vice President, Sales, joined Ebiz in May 1999 and
brings over a decade of experience in developing sales teams as well as
lucrative business opportunities. He is responsible for developing and managing
sales and customer service operations. Mr. Phillips was the General Sales
Manager of PC Wholesale, Inc., a computer hardware and software distributor from
1997 until he joined Ebiz. Mr. Phillips was responsible for over $60 million in
revenue and recruited, hired and trained staff and ran the day-to-day
operations, including product sourcing and P & L, for the Minneapolis office.
From 1992 to 1997 he served as Director of Sales for Globelle Incorporated,
where he was responsible for nearly $170 million in sales and oversaw five
branch offices. Mr. Phillips began his career with Piper Jaffrey in 1989, where
he was responsible for corporate pension plans and individual investor
portfolios. He holds a Bachelors of Science Degree in Finance and Economics from
St. Cloud State University in Minnesota.
EXECUTIVE COMPENSATION
The following table is based upon compensation for the calendar years
ended December 31, 1998, 1997 and 1996.
ANNUAL
COMPENSATION(1) (2)
NAME
SALARY BONUS
Jeffrey Rassas,(2) 1998 $ 72,000 $ 10,000
Chief Executive 1997 1997 $ 72,000 $ 60,000
Officer 1996 $ 36,000 $ --
Stephen Herman,(3) 1998 $ 72,000 $ 10,000
President 1997 $ 12,000(3) --
1996 -- --
(1) Excludes distributions for payment of personal income taxes resulting
from Ebiz electing Subchapter S status, which election was terminated
in June, 1998.
(2) Mr. Rassas and Mr. Herman have received base annual salary of $96,000,
commencing January 1, 1999. Bonuses and other compensation incentives
are anticipated.
(3) Based on employment from September through December 1997.
35
38
STOCK OPTION PLAN
Ebiz's Board of Directors adopted, and its shareholders approved,
effective August 1998, the 1998 Equity Incentive Plan (the "Plan"). The purpose
of the Plan is to promote the interests of Ebiz and to motivate, attract and
retain the services of persons upon whose judgment, efforts and contributions
the success of Ebiz's business depends. A further purpose of the Plan is to
align the personal interests of such persons with the interests of shareholders
of Ebiz through equity participation in its growth and success. The Plan
provides for granting options, incentive stock options and restricted stock
awards, or any combination of the foregoing for up to 1,000,000 shares of Ebiz's
common stock. As of September 30, 1999, a total of 427,000 stock options were
outstanding under the Plan of which 145,500 were vested. A total of 100,000
options to purchase shares under the Plan have been exercised.
EMPLOYMENT AGREEMENTS
Ebiz has no employment agreements with its executive officers.
DIRECTOR COMPENSATION
All authorized out-of-pocket expenses incurred by a director on behalf
of Ebiz are subject to reimbursement. Ebiz is currently negotiating compensation
packages for additional non-management directors to join the Board.
36
39
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of September 30, 1999, the ownership
of each person known by Ebiz to be the beneficial owner of five percent or more
of Ebiz's Common Stock, each officer and director individually, and all officers
and directors as a group. Ebiz has been advised that each person has sole voting
and investment power over the shares listed below unless otherwise indicated.
PERCENT OF
NAME AND ADDRESS OF OWNER NUMBER OF SHARES BENEFICIAL OWNERSHIP(1)
Jeffrey I. Rassas(2) 1,828,212 24.65%
15695 North 83rd Way
Scottsdale, Arizona 85260
Stephen C. Herman(3) 1,834,212 24.73%
15695 North 83rd Way
Scottsdale, Arizona 85260
Michael S. Williams(4) 408,118 5.50%
3710 East Kent Drive
Tempe, Arizona 85044
Aztore Holdings, Inc. 391,700 5.28%
3710 East Kent Drive
Tempe, Arizona 85044
All Directors and Officers as a Group
(2 persons) 3,662,424(2) 49.72%
37
40
(1) Based upon 7,416,197 shares of common stock being issued and
outstanding or committed to be issued as of September 30,
1999.
(2) Mr. Rassas holds his shares beneficially through Hayjour
Family Limited Partnership.
(3) Mr. Herman holds his shares beneficially through Kona
Investments Limited Partnership.
(4) Mr. Williams holds 15,227 shares personally and, as its
president, controls the voting of 391,700 shares held by
Aztore Holdings, Inc. Barbara Williams, his wife, holds 1,191
shares. Mr. Williams disclaims beneficial ownership of the
shares held by Aztore in excess of his percentage ownership of
Aztore.
38
41
CERTAIN TRANSACTIONS
Effective as of June 1, 1998, Ebiz's predecessor, Vinculum, acquired
substantially all of the assets and assumed the liabilities of Genras in
exchange for 5,000,000 shares of its Common Stock. The 5,000,000 shares were
distributed by Genras to its shareholders as follows: Jeffrey I. Rassas -
2,250,000 shares, Stephen C. Herman - 2,250,000 shares and Thomas A. Cifelli -
500,000 shares. Ebiz also agreed to reimburse, on a net after-tax basis, any
income tax liability of the Genras shareholders related to the period of January
1, 1998 through the date of acquisition. Fox & Company Investments, Inc., a NASD
registered broker-dealer with which Mr. Cifelli was affiliated, received 187,500
shares of common stock in connection with this transaction for investment
banking advice and services related to the transaction. Aztore Holdings, Inc.,
the majority shareholder of Vinculum prior to the acquisition, entered into an
agreement with Ebiz to be compensated in the event Ebiz obtains benefit from a
prior net operating loss of Vinculum.
In November, 1998, Michael S. Williams, then a director of Ebiz, and
Lanny Lang were granted options to purchase 30,000 and 20,000 shares,
respectively, of Ebiz common stock at $1.00 per share. The grant was made under
the Ebiz 1998 Equity Incentive Plan for consulting services performed. The
consulting services were performed by the individuals in their capacities as
employees of Aztore and the options were assigned upon issuance to Aztore.
In April, 1999, Aztore, whose president, Michael S. Williams, was then
a director of Ebiz, loaned $500,000 to Ebiz, which was evidenced by a Secured
Convertible Subordinate Note ("Note"). The Note was issued at a 10% interest
rate, was secured by the grant of a security interest in certain of Ebiz's
assets and was convertible into shares of common stock at one share per $6.00
amount of principal obligation. Ebiz also issued Aztore a Warrant certificate
which entitled Aztore to purchase 250,000 shares of Ebiz's common stock at $6.00
per share. In August 1999, Ebiz and Aztore agreed to cancel the warrant and to
full payment of the Note with interest for total consideration of $629,165.
Aztore also exercised the option, as assigned to it by Messrs Williams and Lang,
to acquire 50,000 shares of Ebiz's common stock for $1.00 per share.
39
42
From time to time Ebiz has borrowed funds from Jeffrey I. Rassas and
Stephen C. Herman to meet working capital needs. These loans generally bear
interest of 10%.
Ebiz's general policy for entering into transactions with directors,
officers and affiliates of the company that have a financial interest in the
transaction is to adhere to Nevada corporate law regarding the approval of such
transactions. In general, a transaction between a Nevada corporation and a
director, officer or affiliate of the corporation in which such person has a
financial interest is not void or voidable if the interest is disclosed and
approved by disinterested directors or shareholders or if the transaction is
otherwise fair to the corporation.
40
43
DESCRIPTION OF EBIZ'S SECURITIES
Ebiz is a Nevada corporation and is authorized to issue 70,000,000
shares of common stock, $.001 par value, and 5,000,000 shares of preferred
stock, $.001 par value. As of September 30, 1999, 7,366,197 shares of common
stock were outstanding, 50,000 shares of common stock were pending issuance and
60,000 shares of preferred stock had been designated as Series A Preferred, of
which 10,895 shares were issued and outstanding and convertible into 181,583
shares of common stock. The rights, preferences, privileges and limitations of
the undesignated preferred stock may be determined by the Board of Directors,
and may be issued in more than one series. As of September 30, 1999, Ebiz had a
total of 427,000 options granted under the Plan outstanding, of which 145,500
were vested, each option and warrant entitling the holder thereof to acquire one
share of Ebiz's common stock. As of September 30, 1999, Ebiz had outstanding
warrants to purchase 461,711 shares of its common stock which were exercisable
at prices ranging from $2.10 to $8.6219 per share, and a debenture which is
convertible into a minimum of 947,260 shares.
COMMON STOCK
The holders of the common stock are entitled to one vote per share on
all matters submitted to a vote of shareholders of Ebiz. In addition, holders
are entitled to ratably receive dividends, if any, as declared from time to time
by the Board of Directors out of funds legally available for payment of
dividends. No dividends are payable on the common stock until all accrued but
unpaid dividends on the outstanding Series A Preferred shares have been paid. In
the event of the dissolution, liquidation or winding up of Ebiz, the holders of
common stock are entitled to share ratably in all assets remaining after payment
of all liabilities of Ebiz and the preference amount distributable to the
holders of the Series A Preferred Shares. All outstanding shares of common stock
are fully paid and non-assessable. The holders of common stock do not have any
subscription, redemption or conversion rights, nor do they have any preemptive
or other rights to acquire or subscribe for additional, unissued or treasury
shares.
Under the terms of Ebiz's bylaws, except for any matters which,
pursuant to Nevada law, require a greater percentage vote for approval, the
holders of a majority of the outstanding common stock, if present in person or
by proxy, are sufficient to constitute a quorum for the transaction of business
at meetings of Ebiz's shareholders. Except as to any matters which, pursuant to
Nevada law, require a greater percentage vote for approval, the affirmative vote
of the holders of a majority of the common stock present in person or by proxy
at any meeting (provided a quorum is present) is sufficient to authorize, affirm
or ratify any act or action, including the election of the Board of Directors.
The holders of the common stock do not have cumulative voting rights.
Accordingly, the holders of more than half of the outstanding shares of common
stock can elect all of the directors to be elected in any election, if they
choose to do so. In such event, the holders of the remaining shares of common
stock would not be able to elect any directors. The Board of Directors is
empowered to fill any vacancies on the Board created by the resignation, death
or removal of directors.
41
44
In addition to voting at duly called meetings at which a quorum is
present in person or by proxy, Nevada law and Ebiz's bylaws provide that
shareholders may take action without the holding of a meeting by written consent
or consents signed by the holders of a majority of the outstanding shares of the
capital stock of Ebiz entitled to vote on the action. Prompt notice of the
taking of any action without a meeting by less than unanimous consent of the
shareholders will be given to those shareholders who do not consent in writing
to the action. The purposes of this provision are to facilitate action by
shareholders and to reduce the corporate expense associated with special
meetings of shareholders.
PREFERRED STOCK
Under Ebiz's Articles of Incorporation, additional shares of preferred
stock may, without any action by the shareholders of Ebiz, be issued by the
Board of Directors from time to time in one or more series for such
consideration and with such relative rights, privileges and preferences as the
Board may determine. Accordingly, the Board of Directors has the power, without
shareholder approval, to fix the dividend rate and to establish the provisions,
if any, relating to voting rights, redemption rate, sinking fund, liquidation
preferences and conversion rights for any series of preferred stock (subject to
the preferences of the Series A Preferred shares discussed below) issued in the
future, which could adversely affect the voting power or other rights of the
holders of common stock.
The Board's authority to issue preferred stock provides a convenient
vehicle in connection with possible acquisitions and other corporate purposes,
but could have the effect of making it more difficult for a person or group to
gain control of Ebiz. Ebiz has no present plans to issue any shares of preferred
stock other than the Series A Preferred.
SERIES A 10% CONVERTIBLE PREFERRED STOCK
The holders of the Series A Preferred have preference in payment of
dividends and in liquidation distributions (to the extent of $100 per share)
over Ebiz's common stock.
Each share of Series A Preferred is convertible into shares of Ebiz's
common stock at a conversion ratio of one share of Series A Preferred to 16 2/3
shares of common stock. The conversion ratio of the Series A Preferred is to be
adjusted to prevent dilution in the event of any stock splits, stock dividends
(except dividends payable on the Series A Preferred) or other adjustments to
Ebiz's capital structure. Ebiz may redeem the shares of Series A Preferred at
$100 each, plus accrued and unpaid dividends, if the closing bid of Ebiz's
common stock is in excess of $9.00 for 20 out of 30 consecutive trading days. In
the event the closing bid of the common stock is at a price equal to or in
excess of $13.50 for 20 out of 30 consecutive trading days, the shares of Series
A Preferred shall automatically convert into common stock of Ebiz.
Each share of Series A Preferred has a $10 (10%) annual, cumulative
dividend accruing each January 1, April 1, July 1 and October 1, commencing on
April 1, 1999. Ebiz may, in its discretion, pay dividends in whole or in part in
common stock. If dividends are paid in Ebiz's common stock, the value is be
based on the five-day average closing bid price ending on the trading day
immediately preceding the accrual date.
In the event of any "Liquidation Event," the holders of the Series A
Preferred will be entitled to receive $100 per share, plus any cumulative but
unpaid dividends accrued thereon before the holders of common stock receive any
distributions. Ebiz may not establish a series of preferred superior to the
Series A Preferred. A "Liquidation Event" means any liquidation, dissolution or
winding-up of Ebiz and, unless approved by the holders of the Series A Preferred
as a class, any consolidation or merger of Ebiz where the holders of Ebiz's
common stock (on a fully diluted basis) own less than a majority of the
outstanding voting stock of the entity resulting from the merger or
consolidation.
42
45
Holders of shares of Series A Preferred will generally vote with the
holders of common stock as a class on all matters except for matters where vote
as a class is specified. The holders of the Series A Preferred are entitled to
16 2/3 votes per share when voting on matters as a class with the holders of the
common stock into which such shares are convertible.
Ebiz is prohibited, unless approval of the holders of a majority of the
Series A Preferred shares are obtained, from (a) entering into any sale, lease
or assignment of substantially all of Ebiz's assets, any consolidation or
merger, any reclassification or recapitalization of its capital stock or any
dissolution, liquidation or winding-up unless the holders receive value equal to
200% of the liquidation preference plus accrued dividends; (b) effectuating any
purchase or redemption of common stock other than purchases upon termination of
employment or affiliation with Ebiz; (c) issuing any shares superior to or on
parity with the Series A Preferred as to liquidation and dividend preferences;
(d) declaring or paying dividends or making any other distribution (other than a
dividend payable on shares of common stock) to holders of the common stock; or
(e) changing the authorized capital stock of Ebiz.
DEBENTURE AND WARRANT
Ebiz has outstanding a $7,100,000 9% Subordinated Convertible Debenture
("Debenture") and a Warrant to Purchase Common Stock ("Warrant").
The Debenture is due February 24, 2002. The Debenture is convertible
into a minimum of 947,260 shares of Ebiz's Common Stock . The holder may convert
up to $394,444 face amount of the Debenture upon issuance and up to $394,444 on
each monthly anniversary date thereafter (each, a "Due Date"). Any amount not
converted accumulates and may be converted thereafter. However, the holder is
prohibited from converting any amount of the Debenture which would cause the
holder's total ownership of common stock to equal five percent or more of the
total shares outstanding. The per share conversion price is equal to the lesser
of (a) $7.4953 or (b) the average of the three lowest closing bid prices of
Ebiz's Common Stock for the 15 consecutive trading days ending on the trading
day immediately preceding submission of a notice to convert by the holder. In
the event the closing bid price of Ebiz's Common Stock is less than $7.4953 per
share at any time during the five trading days preceding a Due Date, Ebiz has
the right to redeem for cash the monthly conversion amount of the Debenture (in
lieu of allowing the holder to convert such amount) at premiums ranging from
105% to 108%. The Debenture is secured by a letter of credit issued by Bank One
Arizona, NA in the initial amount of $5,000,000. The required amount of the
letter of credit decreases by $.7042 for every $1 of principal reduction of the
Debenture whether the reduction occurs by conversion or redemption.
The Warrant is exercisable for the purchase of 245,000 shares of Ebiz's
Common Stock, 60,000 at $7.4723 per share, 60,000 at $8.6219 per share and
125,000 at $6.3227 per share. The Warrant is exercisable at any time prior to
August 22, 2004.
Ebiz is obligated to register for resale all common stock issuable upon
conversion of the Debenture and exercise of the Warrant. Certain penalty
provisions apply if a registration statement covering the shares is not filed by
October 24, 1999 or is not declared effective by the SEC by February 6, 2000.
OPTIONS AND OTHER WARRANTS
As of September 30, 1999, 216,711 warrants in addition to the Warrant
described above were outstanding, which consist of 110,981 Series F Warrants
expiring December 1, 1999 with a $3.00 per share exercise price, and 10,000
warrants expiring on December 21, 2003 with a $3.00 per share exercise price,
86,644 warrants expiring December 10, 2000 with exercise prices ranging from
$2.10 to $3.00 per share, and 9,086 warrants expiring February 28, 2002
exercisable at $7.20 per share. As of September 30, 1999, Ebiz had outstanding
427,000 options granted to employees and consultants with exercise prices
43
46
ranging from $1.00 to $6.00 per share, of which 145,500 had vested. Each
outstanding warrant and option is exercisable for one share of Ebiz's common
stock.
TRANSFER AGENT
The transfer agent for Ebiz's common stock is American Securities
Transfer & Trust, Inc., 12039 West Alameda Parkway, Suite Z-2, Lakewood,
Colorado 80228.
44
47
SHARES ELIGIBLE FOR FUTURE SALE
Ebiz will have 8,805,040 shares of common stock outstanding assuming
(a) conversion of the Debenture into 947,260 shares, (b) exercise in full of the
Warrants and other warrant exercisable for shares registered in the offering,
and (c) conversion of all outstanding Series A Preferred. All the shares being
registered under the registration statement, of which this prospectus is a part,
will be freely transferable by persons except "affiliates" of Ebiz, as that term
is defined under the Securities Act, without restriction or further
registration.
Ebiz is under no additional obligation to register any of its common
stock for resale. Ebiz currently has outstanding 5,742,041 shares of "restricted
securities" of which 2,079,617 are currently or by July 4, 2000 will be eligible
for resale under Rule 144(k). The remaining 3,662,424 shares of restricted
securities are held by Mr. Rassas, the Chief Executive Officer, and Mr. Herman,
the President of Ebiz. These shares are eligible for resale under Rule 144,
subject to applicable volume limitations.
Ebiz is unable to estimate the number of shares that may be sold in the
future by its existing securityholders or the effect, if any, that sales of
shares by such holders will have on the market price of the common stock
prevailing from time to time. Sales of substantial amounts of common stock by
existing shareholders could adversely affect prevailing market prices. See "RISK
FACTORS - Future sales of our common stock could cause our stock to decline in
price." for additional discussion concerning this risk.
PLAN OF DISTRIBUTION
Security holders whose shares of common stock are being registered
under the registration statement of which this prospectus is a part may sell or
distribute their common stock in transactions through such underwriters,
brokers, dealers or agents from time to time or through privately negotiated
transactions, including distributions to shareholders or partners or other
persons affiliated with the shareholders.
The distribution of the common stock may be effected from time to time
in one or more transactions (which may involve crosses or block transactions)
(i) in the over-the-counter market, (ii) in transactions otherwise than in the
over-the-counter market or (iii) through the granting of options on the common
stock (whether such options are listed on an options exchange or otherwise). Any
of these transactions may be effected at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, at negotiated prices
or at fixed prices. If the security holders effect any of these transactions by
selling common stock to or through underwriters, brokers, dealers or agents,
such underwriters, brokers, dealers or agents may receive compensation in the
form of discounts, concessions or commissions from the shareholders or
commissions from purchasers of common stock for whom they may act as agent
(which discounts, concessions or commissions as to particular underwriters,
brokers, dealers or agents might be in excess of those customary in the types of
transactions involved). The shareholders and any brokers, dealers or agents that
participate in the distribution of the common stock might be deemed to be
underwriters, and any profit on the sale of the common stock by them and any
discounts, concessions or commissions received by any such underwriters,
brokers, dealers or agents might be deemed to be underwriting discounts and
commissions under the Securities Act of 1933 ("Security Act"). A security holder
may pledge its common stock from time to time in connection with such security
holder's financing arrangements. To the extent any such pledgees exercise their
rights to foreclose on any such pledge, and sell the underlying common stock,
such pledgees may be deemed underwriters with respect to such common stock and
sales by them may be effected under this prospectus.
Under the Securities Exchange Act and applicable rules and regulations
promulgated thereunder, any person engaged in a distribution of any of the
common stock may not simultaneously engage in market making activities with
respect to the common stock for a period, depending upon certain circumstances,
of either two
45
48
days or nine days prior to the commencement of such distribution. In addition,
and without limiting the foregoing, the shareholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
promulgated thereunder, including without limitation Rules 10b-6 and 10b-7,
which provisions may limit the timing of purchases and sales of any of the
common stock by the security holders
Under the securities laws of certain states, the common stock may be
sold in such states only through registered or licensed brokers or dealers. In
addition, in certain states the common stock may not be sold unless the common
stock has been registered or qualifies for sale in such state or an exemption
from registration or qualification is available and is complied with.
EXPERTS
The financial statements of Ebiz as of June 30, 1998 and 1999 and for
each of the two years in the period ended June 30, 1999 included in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included in reliance upon the authority of
such firm as experts in accounting and auditing in rendering the reports.
LEGAL MATTERS
Certain legal matters with respect to the validity of the common stock
offered will be passed upon by Ebiz's legal counsel, Lewis and Roca LLP,
Phoenix, Arizona.
ADDITIONAL INFORMATION
Ebiz has filed with the Commission a registration statement on Form
SB-2 under the Securities Act, with respect to the common stock offered under
this prospectus. This prospectus does not contain all the information contained
in the registration statement. For further information, please refer to the
registration statement, including the exhibits filed or incorporated as part
thereof. The registration statement and exhibits are available for inspection
without charge at the Public Reference Section of the Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549. Statements contained in this
prospectus as to the contents of any contract or other document are not
necessarily complete and reference is made to the copy of such contract or other
document filed as an exhibit to the registration statement. All statements
contained in this prospectus are qualified in their entirety by such reference.
REPORTS TO SHAREHOLDERS
Ebiz will furnish holders of shares of common stock annual reports
containing audited financial statements and any such other periodic reports as
may be appropriate or as may be required by law. Ebiz has filed a Form 10-SB
with the Commission and anticipates that it will be subject to the periodic
reporting requirements of the Securities Exchange Act of 1934, as amended, upon
the commencement of this offering. In accordance with the Exchange Act, Ebiz
will file reports, proxy statements and other information with the Commission.
These reports, proxy statements and other information may be read and copied at
public reference facilities of the Commission at 450 Fifth Street N.W.,
Washington, D.C. 20549; and at the regional offices maintained by the Commission
at 500 West Madison Street , Suite 1400, Chicago, Illinois 60661; 7 World Trade
Center, 13th Floor, New York, New York 10048; and 5670 Wilshire Boulevard, Los
Angeles, California 90036. Copies of these materials can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street N.W., Washington,
D.C. 20549 at prescribed rates. Additionally, the Commission maintains a web
site at http://www.sec.gov that contains reports, proxy and information
statements and other information
46
49
regarding issuers that file electronically with the Commission. You may obtain
information on the operation of the SEC's public reference facilities by calling
the SEC at 1-800-SEC-0330
47
50
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report F-2
Balance Sheets at June 30, 1999 and 1998 F-3
Statements of Operations for the Years Ended F-4
June 30, 1999 and 1998
Statements of Stockholders' Equity for the Years F-5
Ended June 30, 1999 and 1998
Statements of Cash Flows for the Years Ended F-6
June 30, 1999 and 1998
Notes to the June 30, 1999 and 1998 F-7
Financial Statements
F-1
51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EBIZ Enterprises, Inc.:
We have audited the accompanying balance sheets of EBIZ Enterprises, Inc., a
Nevada corporation, (the Company) as of June 30, 1999 and 1998, and the related
statements of operations, stockholders' equity and cash flows for the years then
ended. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of EBIZ Enterprises, Inc. as of
June 30, 1999 and 1998, and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company incurred net losses and had negative cash flow
from operations in 1999 and 1998 and has not obtained sufficient funds to
achieve management's plans or support its operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from this
uncertainty.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
September 10, 1999
F-2
52
EBIZ ENTERPRISES, INC.
BALANCE SHEETS
JUNE 30, 1999 AND 1998
1999 1998
------------- -------------
ASSETS
CURRENT ASSETS:
Cash $ 76,366 $ 468,651
Accounts receivable, net of allowance for doubtful accounts
of $40,000 and $9,548 in 1999 and 1998, respectively 1,669,816 272,829
Inventory, net of allowance of $10,000 and $0 in 1999 and
1998, respectively 1,568,148 324,531
Prepaid expenses and other current assets 128,184 95,265
Due from officers -- 3,432
------------- -------------
Total current assets 3,442,514 1,164,708
FURNITURE AND EQUIPMENT, net 474,778 53,437
------------- -------------
$ 3,917,292 $ 1,218,145
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,423,178 $ 525,124
Accrued expenses 468,549 --
Line of credit 350,000 --
Notes payable 610,000 --
------------- -------------
Total current liabilities 2,851,727 525,124
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Convertible preferred stock; $.001 par value; 5,000,000 shares authorized;
10,895 and 0 shares issued and outstanding at June 30, 1999 and 1998,
respectively; liquidation value $100 per share 868,599 --
Common stock; $.001 par value; 70,000,000 shares authorized;
7,261,715 and 6,256,450 shares issued and outstanding at
June 30, 1999 and 1998, respectively 7,262 6,256
Additional paid-in capital 2,315,832 858,712
Accumulated deficit (2,126,128) (171,947)
------------- -------------
Total stockholders' equity 1,065,565 693,021
------------- -------------
$ 3,917,292 $ 1,218,145
============= =============
The accompanying notes are an integral part of these balance sheets.
F-3
53
EBIZ ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
1999 1998
-------------- -------------
NET REVENUE $ 15,290,202 $ 6,824,967
COST OF SALES 14,358,772 6,157,794
-------------- -------------
Gross profit 931,430 667,173
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 2,512,415 681,570
ACQUISITION ADVISORY FEES -- 372,805
DEPRECIATION AND AMORTIZATION 68,483 6,093
-------------- -------------
LOSS FROM OPERATIONS (1,649,468) (393,295)
OTHER INCOME (EXPENSE):
Interest expense (119,291) (32,702)
Interest income 2,538 1,263
Other (110,903) 2,277
-------------- -------------
NET LOSS (1,877,124) (422,457)
DIVIDENDS ON PREFERRED STOCK 77,057 --
-------------- -------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (1,954,181) $ (422,457)
============== =============
NET LOSS PER COMMON SHARE, BASIC AND DILUTED $ (0.29) $ (.08)
============== =============
WEIGHTED AVERAGE COMMON SHARES,
BASIC AND DILUTED 6,821,083 5,619,911
============== =============
The accompanying notes are an integral part of these financial statements.
F-4
54
EBIZ ENTERPRISES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
Preferred Stock Common Stock Additional Total
---------------- ----------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
------ -------- --------- ------ ---------- ----------- ------------
BALANCE, June 30,1997 -- $ -- 5,562,044 $5,562 $ -- $ 250,510 $ 256,072
Common stock issued for services rendered
in connection with reverse acquisition -- -- 187,500 187 352,313 -- 352,500
Common stock issued for warrants exercised -- -- 506,906 507 506,399 -- 506,906
Net loss -- -- -- -- -- (422,457) (422,457)
------ -------- --------- ------ ---------- ----------- -----------
BALANCE, June 30, 1998 -- -- 6,256,450 6,256 858,712 (171,947) 693,021
Sale of common stock, net of offering costs
of $80,000 -- -- 455,781 457 900,845 -- 901,302
Sale of preferred stock, net of offering
costs of $220,901 10,895 868,599 -- -- -- -- 868,599
Common stock issued for services and products
received -- -- 158,528 158 218,593 -- 218,751
Common stock issued for warrants exercised -- -- 390,956 391 293,057 -- 293,448
Deemed dividend on preferred stock for
beneficial conversion feature -- -- -- -- 44,625 (44,625) --
Accrued dividends on preferred stock -- -- -- -- -- (32,432) (32,432)
Net loss -- -- -- -- -- (1,877,124) (1,877,124)
------ -------- --------- ------ ---------- ----------- -----------
BALANCE, June 30, 1999 10,895 $868,599 7,261,715 $7,262 $2,315,832 $(2,126,128) $ 1,065,565
====== ======== ========= ====== ========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
55
EBIZ ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,877,124) $ (422,457)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 68,483 6,093
Common stock issued for services 80,599 352,500
Changes in assets and liabilities:
Accounts receivable (1,396,987) 52,113
Due from officers 3,432 (3,432)
Inventory (1,122,551) (324,531)
Prepaid expenses and other current assets (32,919) (90,440)
Accounts payable 898,054 420,893
Accrued expenses 436,117 --
----------- -----------
Net cash used in operating activities (2,942,896) (9,261)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (472,738) (57,721)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 350,000 --
Borrowings under notes payable 610,000 --
Issuance of common stock, net 1,194,750 506,906
Issuance of preferred stock, net 868,599 --
----------- -----------
Net cash provided by financing activities 3,023,349 506,906
----------- -----------
NET (DECREASE) INCREASE IN CASH (392,285) 439,924
CASH, beginning of year 468,651 28,727
----------- -----------
CASH, end of year $ 76,366 $ 468,651
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 108,765 $ 32,702
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES:
Issuance of common stock for services rendered in connection
with reverse acquisition $ -- $ 352,500
Dividends accrued on preferred stock 32,432 --
Deemed dividend on preferred stock for beneficial
conversion feature 44,625 --
Issuance of common stock for inventory, furniture and
equipment, and services rendered 218,751 --
The accompanying notes are an integral part of these financial statements.
F-6
56
EBIZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(1) ORGANIZATION AND OPERATIONS:
NATURE OF THE BUSINESS
Ebiz Enterprises, Inc. (the Company) is a developer and distributor of computer
systems, components and accessories for personal and business computing. The
systems include the Company's Element-L Systems, which are based on the Linux
operating system and M2 Systems which utilize the Windows operating system.
These products are sold directly to end users via the Company's own internet
sites www.EBIZmart.com and www.TheLinuxStore.com and to corporate customers by
the Company's own sales force. The Company also sells its systems through
retailers, resellers and major e-commerce web sites such as egghead.com and
onsale.com.
TheLinuxStore.com was opened in April 1999, and has become an e-commerce
distributor of Linux-based systems and accessories. Its products include the
Company's Element-L desk and laptop systems and products from other Linux
manufacturers. TheLinuxStore.com has become a primary focus of the Company as
the Linux operating system has emerged as the low-cost, high-performance
alternative to conventional computing systems.
The Company was originally incorporated in Colorado in May 1984, as VDG Capital
Corporation. Following a reorganization, the Company's name was changed to
Vinculum Incorporated (Vinculum) in August 1994. In June 1998, the Company
acquired the operating assets and liabilities of Genras, Inc. (an Arizona
corporation) and reincorporated in Nevada as CPU Micromart, Inc. In May 1999,
the Company changed its name to Ebiz Enterprises, Inc. The Company's stock is
listed on the Over the Counter Bulletin Board under the symbol EBIZ.
ACQUISITION OF ASSETS AND ASSUMPTION OF LIABILITIES
On June 1, 1998, Vinculum, a publicly-held shell company, acquired all of the
operating assets and liabilities of the Company for 5,000,000 shares of Vinculum
common stock. Immediately following the transaction, the stockholders of the
Company held approximately 87% of the outstanding shares of common stock of
Vinculum. For accounting purposes, the acquisition was treated as a
recapitalization of the Company with the Company as the acquirer (the Reverse
Acquisition). Accordingly, the historical financial statements prior to June 1,
1998, are those of the Company. The Reverse Acquisition is treated as an
issuance of shares for net assets by Vinculum and not as a business combination.
As a result, no pro forma information is presented for the Reverse Acquisition.
In connection with the Reverse Acquisition, the Company issued 187,500 shares of
its common stock, valued at $352,000, for acquisition advisory services. In
addition, the Company paid $20,305 in legal fees associated with the
transaction. The aggregate of $372,805 has been expensed and is included as
acquisition advisory fees in the accompanying statements of operations.
F-7
57
MANAGEMENT PLANS
The Company has directed its primary strategic thrust towards the Linux
operating system segment of the market. Management believes that Linux is a fast
growing operating system and that the demand for Linux-based products and
services represent a rapidly growing business opportunity for the Company. The
Company began its entry into the Linux market with the opening of
TheLinuxStore.com and the introduction of its Element-L Systems in 1999. The
Company also plans to continue the sales of its M(2) systems, and components and
accessories to strengthen and broaden its distribution capabilities.
During fiscal year 2000, the Company plans to position TheLinuxStore.com as a
vertical service portal. As such, it will offer daily Linux news, software
downloads, a knowledge base of Linux information and links to other Linux
oriented Internet sites in addition to sales of a large selection of Linux
compatible technical products and related merchandise, including its own systems
and servers.
In the summer of 1999, the Company announced the development of its third
product line, the PIA (or Personal Internet Appliance) which targets
cost-conscious consumers or institutions seeking a full service Internet access
device. The Company plans to introduce the PIA during the fall of 1999. The PIA
is a stylized desktop computer that utilizes the Linux operating system and is
designed to enable users to surf the Web easily, exchange e-mail and perform
basic functions such as word processing and spreadsheets.
To continue the development of its products and the execution of its strategies,
in August 1999, the Company completed a private placement of a $7.1 million
convertible debt facility (the Debenture). In connection with the Debenture, the
Company issued warrants to acquire 245,000 shares of common stock at an exercise
price as defined by a securities purchase agreement. The Company received an
initial infusion of $2.1 million from the Debenture which was utilized to repay
the Company's outstanding debt at June 30, 1999, and to provide working capital.
The remaining $5 million was deposited as a letter of credit with a bank to
serve as collateral for the Debenture. The Debenture is convertible, at the
holder's option, into shares of the Company's common stock over an 18 month
period at approximately $394,000 per month. The Company's ability to reduce the
cash collateral required for the letter of credit and to have these amounts
available for working capital is contingent upon the holder converting the
Debenture or the Company's ability to pay down the Debenture with cash from
other sources. If the holder converts the Debenture, at its sole discretion, the
Company can draw approximately $275,000 per month on the letter of credit to
fund operations. Although management believes this funding will be sufficient to
fund operations through 2000, the Company will need to raise additional capital
to fund its operations and continue the execution of its strategy. However,
there can be no assurances that the Company will be successful in obtaining
additional capital.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed, the Company incurred
losses and had negative cash flow from operations in 1999 and 1998 and has not
obtained sufficient capital needed to achieve management's plans and support its
operations. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from this uncertainty.
INDUSTRY ENVIRONMENT
Successful future operations are subject to certain risks and uncertainties
including, among others, actual and potential competition by entities with
larger customer bases, greater financial resources, longer operating histories,
greater name recognition and more established relationships in the industry than
the Company. The Company's future success will greatly depend upon its ability
to timely and effectively address the rapid changes in the computer product
industry and customers' acceptance of the Linux system in general and the
Company's PC systems in particular. As a result, certain of these competitors
may be able to develop and expand their network infrastructures more quickly,
and take advantage of acquisitions more readily than can the Company. The
Company's future operating results will depend substantially on the ability of
its officers and key employees to manage changing business conditions. Further
risks and uncertainties relate to technological advancements, the regulatory
environment and the ability of the Company to generate sufficient revenue and
obtain additional financing to fund current operating losses.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
F-8
58
For purposes of the statements of cash flows, all highly liquid investments with
a maturity of three months or less at the time of purchase are considered to be
cash equivalents.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or net realizable
value. Reserves are established against Company-owned inventory for excess,
slow-moving, and obsolete items and for items where the net realizable value is
less than cost.
Inventory consists of the following:
June 30,
-------------------------
1999 1998
---------- ----------
Components $1,155,981 $ 183,418
Work-in-process 44,947 --
Finished goods 367,220 141,113
---------- ----------
$1,568,148 $ 324,531
========== ==========
F-9
59
FURNITURE AND EQUIPMENT
Furniture and equipment consists primarily of computer equipment and office
furniture. Furniture and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets.
Furniture and equipment at June 30 consists of the following:
Useful
Life 1999 1998
-------- -------- -------
Furniture, fixtures and office equipment 3 years $295,566 $29,702
Software 3 years 200,495 29,427
Leasehold improvements 2 years 53,293 401
-------- -------
549,354 59,530
Less - accumulated depreciation (74,576) (6,093)
-------- -------
$474,778 $53,437
======== =======
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates the carrying value of long-lived assets in
accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of. Under SFAS No. 121, long-lived assets and certain identifiable
intangible assets to be held and used in operations are reviewed for impairment
whenever events or circumstances indicate that the carrying amount of an asset
may not be fully recoverable. An impairment loss is recognized if the sum of the
expected long-term undiscounted cash flows is less than the carrying amount of
the long-lived assets being evaluated. In management's opinion, no such amounts
or changes in circumstances have occurred.
ACCOUNTS PAYABLE
Included in accounts payable is approximately $215,000 of bank overdraft at June
30, 1999.
ACCRUED EXPENSES
Accrued expenses consist primarily of amounts accrued for employee compensation,
customer deposits, professional fees, interest and advertising.
REVENUE RECOGNITION
The Company recognizes revenue from the sale of computer hardware and software
products upon shipment from the vendor to the end user, or when shipped from the
Company, whichever is appropriate. Computer hardware and software sales are
final and are subject to repair and replacement only. System component and
replacement costs are generally covered
F-10
60
under the third-party manufacturer's warranty. The Company had an allowance for
warranty repair costs of approximately $8,000 and $0 at June 30, 1999 and 1998,
respectively, related to the sales of its M2 system computers.
ADVERTISING COSTS
Advertising costs are expensed as incurred and are included in sales and
marketing expenses in the accompanying statements of operations. Advertising
expense was approximately $100,000 and $8,000 for the years ended June 30, 1999
and 1998, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
LOSS PER SHARE
During 1998, the Company adopted SFAS No. 128, Earnings Per Share. Pursuant to
SFAS No. 128, basic earnings per common share are computed by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding during the year. No outstanding options or warrants were assumed to
be exercised for purposes of calculating diluted earnings per share for the
years ended June 30, 1999 and 1998, as their effect was anti-dilutive. Below are
the disclosures required pursuant to SFAS No. 128 for the years ended June 30,
1999 and 1998. All per share amounts have been adjusted to give effect to the
one for ten reverse stock split effected in June 1998 (in thousands, except per
share data):
For the Years Ended
June 30,
----------------------------
1999 1998
----------- -----------
Basic loss per share:
Loss attributable to common stockholders $ (1,954) $ (422)
Weighted average common shares 6,821 5,620
----------- -----------
Loss per common share $ (0.29) $ (.08)
========== ===========
For the Years Ended
June 30,
----------------------------
1999 1998
----------- -----------
Diluted loss per share:
Loss attributable to common stockholders $ (1,954) $ (422)
Weighted average common shares 6,821 5,620
----------- -----------
Total common shares plus assumed conversions 6,821 5,620
----------- -----------
Diluted per share amount $ (0.29) $ (.08)
=========== ===========
F-11
61
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 required a change from the deferred
method of accounting for income taxes to the asset and liability method of
accounting for income taxes. Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to be recovered or
settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations of
credit risk, as defined by SFAS No. 105, Disclosure of Information About
Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk, consist primarily of trade accounts receivable.
The Company does not require collateral upon delivery of its products or
services. The Company derives a significant portion of its total revenue from
relatively few customers. The Company's business is moving towards a more
diversified customer base. The percentage of total revenue of customers to whom
sales exceed 10% of total revenue for the years ended June 30 were as follows:
Accounts
Receivable
Outstanding
at June 30, Sales
------------------------ ----------------------
1999 1998 1999 1998
----------- --------- --------- ---------
Customer #1 $ 441,000 $-- 26% 32%
Customer #2 -- -- 19 39
Customer #3 930,000 -- 15 --
FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 1999 and 1998, the carrying value of cash, accounts receivable,
accounts payable and accrued expenses approximate fair values since they are
short-term in nature or payable upon demand. Notes payable approximate fair
value as they are short-term in nature or have stated interest rates based on
current market rates. It is not practical to estimate fair value of the notes
payable to related parties as the agreements are between related parties.
The Company estimates fair values of financial instruments by using available
market information. Considerable judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates may not
be indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions or valuation methodologies
could have a material effect on the estimate fair value amounts.
F-12
62
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT
In March 1998, the American Institute of Certified Public Accountants released
Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, which establishes guidance on
accounting for the costs of computer software developed or obtained for
internal use. The Company adopted this statement in fiscal 1999 and there was
no cumulative catch up upon adoption. The Company amortizes its software on a
straight-line basis over its estimated useful life of three years.
During 1999, the Company adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, which established revised standards for the
reporting of financial and descriptive information about operating segments in
financial statements. The Company has determined that it has one reportable
operating segment. As a result, the Company has determined that it is
appropriate to aggregate its operating segments into one reportable segment
consistent with the guidance in SFAS No. 131. Accordingly, the Company has not
presented separate financial information for its operating segments as the
Company's financial statements present its one reportable segment.
RECENTLY ISSUED ACCOUNTING STATEMENT
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. The Company
is required to adopt this statement for the year ending June 30, 2000. SFAS No.
133 establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. The Company has not determined the effect, if any, that adoption
will have on its financial position or results of operations.
(3) RELATED PARTY TRANSACTIONS:
AMOUNTS DUE FROM AFFILIATED COMPANY
During fiscal year 1998, members of senior management of the Company
participated in the development and formation of an Internet catalog company
with an unaffiliated corporation. During 1998, the Company advanced the
Internet catalog company an estimated $57,500 in the form of overhead expenses
and accrued compensation. This amount was recorded as a receivable from
affiliate. At June 30, 1998, the Company could not determine the amount, if any,
it will be reimbursed by the parties involved. As a result, the Company wrote
off the receivable.
The Company contracted with a consulting company, controlled by an outside
director of the Company, to supply financial consulting services related to
accounting and financial systems. Under this agreement, as of June 30, 1999 and
1998, the Company had paid an aggregate of $22,700 and $-0-, respectively, and
issued 31,325 and -0- common shares, respectively, of common stock for services
rendered. This agreement ended February 1999.
EXODUS GROUP, LLC
During 1999, certain of the Company's employees and officers purchased a total
of 65% of the available membership units in The Exodus Group, LLC, a franchisee
that purchases products from the Company. Sales to this customer were
approximately $36,000 and $-0- for the years ended June 30, 1999 and 1998,
respectively.
(4) INCOME TAXES:
The Company has cumulative net operating losses as of June 30, 1999, in excess
of $3,500,000. The Company's ability to utilize its net operating losses to
offset future taxable income may be limited under the Internal Revenue Code
Section 382 change in ownership rules. The Company has established a valuation
reserve as it has not determined that it is more likely than not that the
deferred tax asset is realizable.
No provision for income taxes has been presented in the accompanying statements
of operations for the years ended June 30, 1999 and 1998, as the Company was
conducting business as a calendar year-end
F-13
63
Sub-Chapter S corporation during 1998 and all income has been reported by the
stockholders on their individual tax returns.
The components of the provision for (benefit from) income taxes consist of the
following:
June 30,
-----------------------------
1999 1998
------------ ------------
Current income taxes:
Federal $ -- $ --
State and Provincial -- --
------------ ------------
-- --
------------ ------------
Deferred income taxes:
Federal -- --
State and Provincial -- --
------------ ------------
Total provision for (benefit from)
income taxes $ -- $ --
============ ============
Differences between the financial statement and tax bases of the Company's
assets and liabilities are not material.
A reconciliation of the federal statutory rate to the Company's effective tax
rate for the years ended June 30 are as follows:
1999 1998
-------- --------
Statutory federal rate (34)% (34)%
State taxes, net of federal benefit (6) (6)
Change in valuation allowance 40 40
-------- --------
Total -- % -- %
======== ========
(5) BANK LINE OF CREDIT:
In September 1998, the Company obtained a line of credit from a bank for
borrowings in an amount up to $250,000. Interest accrues at prime (8.75% at June
30, 1999) plus 1% and is payable monthly. Principal is due at maturity. In May
1999, the bank increased the line of credit from $250,000 to $350,000 with the
additional $100,000 maturing in May 2000. The line of credit is guaranteed by
the Company's two largest stockholders and is secured by the Company's accounts
receivable and inventory. Availability under this line of credit at June 30,
1999, was $0. The weighted average interest rate on amounts outstanding was
8.75% during the year ended June 30, 1999. $250,000 of the line of credit
expires September 1999. The Company had borrowings under the line of credit of
$350,000 as of June 30, 1999. During August 1999, the Company used proceeds from
the $7.1 million Debenture (see Note 1) to repay the outstanding balance on the
line of credit.
(6) NOTES PAYABLE:
Notes payable at June 30 consist of the following:
F-14
64
1999 1998
------------- -------------
Note payable to a stockholder, interest at 10%, due on
demand, unsecured. $ 30,000 $ --
Note payable to a stockholder, interest at 10%, due on
demand, unsecured. 30,000 --
Note payable to related party, interest at 10%, principal and interest, due
April 19, 2000, secured by the Company's assets, convertible into
shares of common stock at a rate of $6.00 of note principal convert. 500,000 --
Note payable to an individual, interest at 10%, principal and interest due
September 25, 1999, secured by the Company's assets. 50,000 --
------------- -------------
$ 610,000 $ --
============= =============
In connection with the $500,000 note above, the Company issued warrants to
purchase 250,000 common shares at an exercise price substantially in excess of
the then fair market value. The fair value of each warrant as estimated using
the Black Scholes option pricing model was not significant primarily because the
exercise price was in excess of the then fair value of the common stock. These
warrants are exercisable at any time during the term of the warrants and expire
two years from the note repayment date.
As of August 1999, all the notes payable above were repaid in full using
proceeds obtained from the $7.1 million private placement (see Note 1).
(7) STOCKHOLDERS' EQUITY:
REVERSE STOCK SPLIT
Share amounts in the accompanying financial statements and notes to the
financial statements give retroactive effect to a one-for-ten reverse stock
split effective June 1998.
CAPITALIZATION
The Company amended its Articles of Incorporation in 1999 to authorize the
issuance of up to 70,000,000 shares of Class A common stock. In addition, the
Articles of Incorporation authorize the issuance of up to 5,000,000 shares of
preferred stock. The Board of Directors of the Company, at its sole discretion,
may establish par value, divide the shares of preferred stock into series, and
fix and determine the dividend rate, designations, preferences, privileges,
ratify powers, if any, and determine the restrictions and qualifications of the
shares of each series of preferred stock as established.
PREFERRED STOCK
The Board of Directors has designated 100,000 shares of Series A Convertible
Preferred Stock, (Preferred Stock) and during 1999, the Company issued 10,895
shares of Preferred Stock, at $100 per share. Net proceeds from the issuance of
Preferred Stock was approximately $869,000. These shares have a liquidation
preference of $100 per share, and are entitled to a $10 per share cumulative
annual dividend, accrued quarterly commencing April 1, 1999, and payable at the
discretion of the Company. The Company, at its discretion, may redeem the
Preferred Stock whenever the price of its common stock is equal to or greater
than $9.00 per share 20 out of 30 consecutive trading days. Each share of
Preferred Stock may be converted, at the option of the holder, into common stock
at a conversion rate of one share for every $6.00 of principal converted. In
addition, the Preferred Stock automatically converts it to common stock whenever
the price of the Company's common stock is equal to or greater than $13.50 per
share 20 out of 30 consecutive trading days.
F-15
65
WARRANTS TO PURCHASE COMMON STOCK
As of June 30, 1998, the Company had three series of warrants outstanding
totaling 665,553. Each warrant entitles the holder thereof to purchase one share
of common stock. The 665,553 warrants outstanding at June 30, 1998 comprised of
29,667, 317,943, and 317,943 series C, E and F warrants, respectively. Series C,
E and F had exercise prices of $15.00, $2.00, and $3.00, respectively, and
expired at June 15, 1999, December 1, 1998, and June 1, 1999, respectively. All
three series of warrants are callable by the Company under certain conditions.
In December 1998, Series E and F holders exercised 183,994 and 206,962,
respectively, of the outstanding warrants to purchase common stock for a total
of $293,448. In June 1999, the Company extended the expiration date of the
Series F warrants to December 1, 1999. As of June 30, 1999, 110,981 Series F
warrants are outstanding.
At June 30, 1999, the Company had outstanding warrants, issued in connection
with financing transactions, to purchase 86,644 shares of common stock through
December 2000, at prices ranging from $2.10 to $3.00 per share.
SALE OF COMMON STOCK
In December 1998, the Company sold 455,781 shares of common stock in a private
placement. Net proceeds from the issuance of common stock was approximately
$901,000.
STOCK OPTION PLAN
In November 1998, the Company adopted the CPU MicroMart 1998 Equity Incentive
Plan (the Plan). The Plan will terminate 10 years after the effective date. The
Plan authorizes awards of incentive stock options to employees and non-qualified
stock options to officers, directors, employees, and consultants of the Company.
A total of 1,000,000 shares of common stock was reserved for issuance under the
Plan.
The Plan is administered by a committee appointed by the Board who have the
exclusive authority to administer and interpret the Plan. The committee has the
power to, among other things, designate participants, determine types of awards
to be granted and the price, timing, terms and duration of awards.
The following summarizes the activity under the Company's stock option plan:
Year Ended June 30,
-------------------------
1999
-------------------------
Weighted
Average
Number Option Price
of Shares Per Share
--------- ------------
Options outstanding, beginning of year -- $ --
Granted 663,000 1.96
Canceled/expired -- --
Exercised -- --
--------- ------------
Options outstanding, end of year 663,000 $ 1.96
========= ============
Options exercisable, end of year 140,000 $ 1.28
Options available for grant 337,000
Weighted average fair value of options granted $ 1.29
Options outstanding and exercisable by price range as of June 30, 1999:
F-16
66
Options Outstanding Options Exercisable
-------------------------------------- ---------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
------- ----------- ----------- -------- ----------- --------
$1.00 522,000 9.13 $1.00 130,000 $1.00
$4.88 30,000 9.59 4.88 10,000 4.88
$5.50-$6.00 111,000 9.92 5.70 -- --
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
During 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which defines a fair value based method of accounting for an
employee stock option or similar equity instrument and encourages all entities
to adopt that method of accounting for all of their employee stock compensation
plans. However, it also allows an entity to continue to measure compensation
cost related to stock options issued to employees under these plans using the
method of accounting prescribed by Accounting Principles Board Opinion No. 25
(APB No. 25), Accounting for Stock Issued to Employees. Entities electing to
continue accounting for stock-based compensation under in APB No. 25 must make
pro forma disclosures of net income (loss) and earnings (loss) per share, as if
the fair value based method of accounting defined in SFAS No. 123 has been
applied.
The Company has elected to account for its stock-based compensation plans under
APB No. 25; therefore, no compensation cost is recognized in the accompanying
financial statements for stock-based employee awards. However, the Company has
computed for pro forma disclosure purposes the value of all options and Purchase
Plan shares granted during fiscal 1999, using the Black-Scholes option pricing
model with the following weighted average assumptions:
1999
Options
-----------
Risk free interest rate 5.26%
Expected dividend yield --
Expected lives 3-5 years
Expected volatility 80%
The total value and compensation expense which would have been recorded of
options granted was computed to be the following approximate amounts, which
would be amortized on the straight-line basis over the vesting period:
Compensation
Fair Value Expense
---------- ------------
Year ended June 30, 1999 $858,394 $143,564
If the Company had accounted for its stock-based compensation plans using a fair
value based method of accounting, the Company's net loss and basic and diluted
loss per common and common share equivalent would have been as follows (in
thousands, except per share data):
F-17
67
Year Ended
June 30,
1999
----------
Net loss:
As reported $ (1,954)
Pro forma (2,098)
Loss per common and common share equivalent:
As reported - basic (.29)
As reported - diluted (.29)
Pro forma - basic (.31)
Pro forma - diluted (.31)
The effects of applying SFAS No. 123 for providing pro forma disclosures for
1999 are not likely to be representative of the effects on reported net loss and
loss per common and common share equivalent for future years, because options
vest over several years and additional awards generally are made each year.
(8) COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company entered into a two-year lease in June, 1999 for its office facility
in Scottsdale, Arizona. The Company leases its offices and warehouse space under
leases expiring in April and July 2001, with extension options, and are
cancelable with six months notice. Rental expense related to these leases
amounted to approximately $165,000 and $36,000 for the years ended June 30, 1999
and 1998, respectively.
Future minimum lease payments under these noncancelable leases are approximately
as follows:
Year Ended
June 30,
----------
2000 $ 291,000
2001 275,000
-----------
$ 566,000
===========
LITIGATION
In the normal course of its business, the Company is subject to certain
contractual obligations and litigation. In management's opinion, upon
consultation with legal counsel, there is no current litigation which will
materially affect the Company's financial position or results of operations.
F-18
68
No dealer, salesperson or any other person has been authorized to give
any information or to make any representations other than those contained in
this Prospectus, and, if given or made, such information or representations must
not be relied upon as having been authorized by the company. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the company since the date hereof or that the information contained
herein is correct as of any date subsequent to the date hereof. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any
securities offered hereby to or from anyone in any jurisdiction in which such
offer or solicitation is not authorized or in which the person making such offer
or solicitation is not qualified to do so or to any person to whom it is
unlawful to make such offer or solicitation.
TABLE OF CONTENTS
Page
----
Summary...................................................... 2
Risk Factors................................................. 6
Dividend Policy.............................................. 13
Market for Common Stock...................................... 13
Use of Proceeds.............................................. 14
Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 17
The Business................................................. 22
Management................................................... 34
Principal Stockholders.......................................
Description of Capital Stock.................................
Certain Transactions......................................... 39
Description of Ebiz Securities .............................. 41
Shares Eligible For Future Sale.............................. 45
Plans of Distribution ....................................... 45
Experts...................................................... 46
Legal Matters................................................ 46
Additional Information....................................... 46
Reports to Shareholders...................................... 46
Index to Combined Financial Statements....................... F-1
EBIZ ENTERPRISES, INC.
COMMON STOCK
Prospectus
OCTOBER __, 1999
69
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses of Ebiz
in connection with this Offering.
Amount(1)
---------
SEC Registration Fee..................................................... $ 3,795
NASD Filing Fee(2)......................................................
Legal Fees and Expenses(2)..............................................
Accounting Fees and Expenses(2).........................................
Printing Expenses(2)....................................................
Blue Sky Fees and Expenses(2)...........................................
Miscellaneous(2)........................................................
Total....................................................................
(1) All fees and expenses except the SEC Registration fee are estimates.
(2) To be completed by amendment.
ITEM 25. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Ebiz's Articles Incorporation and bylaws require Ebiz to indemnify each
of its officers and directors against liabilities and reasonable expenses
incurred in any action or proceeding, including stockholders' derivative
actions, by reason of such person being or having been an officer or director of
Ebiz, or of any other corporation for which such person serves as such at the
request of Ebiz, to the fullest extent permitted by Nevada law. Under Nevada
law, Ebiz has adopted provisions in its Articles of Incorporation and bylaws
that eliminate, to the fullest extent available under Nevada law, the personal
liability of its directors and officers for monetary damages incurred as a
result of the breach of their duty of care. These monetary damages incurred as a
result of the breach of their duty of care. These provisions neither limit the
availability of equitable remedies nor eliminate directors' and officers'
liability for engaged in intentional misconduct or fraud, knowingly violating a
law or unlawfully paying a distribution.
Ebiz has been advised that it is the position of the Commission that
insofar as the foregoing provision may be invoked to disclaim liability for
damage arising under the Securities Act, such provision is against public policy
as expressed in the Securities Act and is therefore unenforceable.
Section 78.751 of the Nevada General Corporation enables a corporation
to eliminate or limit personal liability of members of its board of directors
for violations of their fiduciary duties. However, Nevada law does not permit
the elimination of a director's liability for engaging in any transaction form
which the director derived an improper personal benefit or for unlawfully paying
a distribution. The statute has no effect on the availability of equitable
remedies, such as an injunction or rescission, for breach of fiduciary duty.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In June, 1998, our predecessor Vinculum, issued 5,000,000 shares of its
common stock to the three shareholders' of Genras in exchange for all of the
assets, subject to liabilities, of Genras. Fox & Company Investments, Inc., a
NASD registered broker-dealer received an additional 187,500 shares of common
stock for investment banking services related to the transaction. The shares
were issued in reliance on the exemption from registration provided under
Section 4(2) of the Securities Act of 1933, as amended ("Securities Act").
In June, 1998, a total of 14 persons exercised their outstanding
Vinculum warrants to purchase a total of 506,706 shares of common stock at $1.00
per share. The shares were issued under the exemption from registration provided
under Section 1145 of the Bankruptcy Code.
In July, 1998, Vinculum issued a total of 317,943 E Warrants and
317,943 F Warrants to 26 persons for nominal consideration. The E Warrants were
exercisable at $2.00 per share with expiration date of December 1, 1998 and the
F Warrants were exercisable at $3.00 per share with expiration date of June 1,
1999. In December, 1998, Ebiz repriced the E Warrants to $0.75 per share and
allowed the holders to exercise an amount of F Warrants equal to the E Warrants
exercised, also at $0.75 per share. A total of 390,956 E Warrants and F Warrants
wee exercised and 390,956 shares of common stock issued. The remaining
outstanding E Warrants expired. In May, 1999, Ebiz extended the expiration
date of the remaining F Warrants to December 1, 1999. The issuance of the
E Warrants and F Warrants and the common stock issued upon exercise of the
warrants were issued in reliance on the exemption from registration of such
securities provided by Section 4(2) of the Securities Act.
In December, 1998, Ebiz issued a total of 455,781 shares of common
stock for approximately $2.16 per share. The issuance was made in reliance on
Rule 504 of Regulation D as promulgated under the Securities Act. First
Financial Equity Corporation, a NASD broker-dealer, and Fox & Company
Investments, Inc. served as the placement agents in the offering and received
placement agent fees of approximately $86,000 and warrants to purchase 86,644
shares of common stock at $2.10 to $3.00 per share.
In March and April, 1999, Ebiz issued 10,895 shares of its Series A 10%
Convertible Preferred Shares for total consideration of $1,089,500. First
Financial Equity Corporation served as the placement agent and received a
placement fee of $108,950 and warrants to purchase 9,086 shares of common stock
at $7.20 per share. The Series A 10% Convertible Preferred Shares were sold only
to "accredited investors" as defined in Regulation D in reliance on the
exemption from registration provided under Rule 506 of Regulation D.
In April, 1999, Ebiz issued a Secured Convertible Subordinated Note
("Note") and Warrant to Aztore Holdings, Inc. The face amount of the Note was
$500,000 and was convertible into shares of Ebiz common stock. The Warrant
entitled the holder to purchase 250,000 shares of Ebiz's common stock. Ebiz
received a total of $500,000 for the Note and Warrant with no commissions or
discounts. The Note was paid and the Warrant cancelled in August, 1999. The Note
and Warrant were issued in reliance on the exemption from registration provided
by Section 4(2) and Section 4(6) of the Securities Act.
On August 25, 1999, the Company issued a $7,100,000 9% Subordinated
Convertible Debenture ("Debenture") and a Warrant to Purchase Common Stock
("Warrant") to JEM Venture EBIZ, LLC, an affiliate of J. E. Matthew, LLC. The
total consideration received was $7,100,000 with no commissions or discount. The
issuance was made in reliance upon the exemption from registration of the
securities provided under Rule 506 of Regulation D as promulgated under the
Securities Act.
II-1
70
ITEM 27. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
ITEM 1. INDEX TO EXHIBITS
2.1(1) Asset Exchange Agreement by and among Genras, Jeffrey I.
Rassas, Vinculum and Aztore Holdings, dated as of March 18,
1998
3.1(1) Articles of Incorporation of Ebiz
3.2(1) Certificate of Amendment to Articles of Incorporation of Ebiz
3.3(1) Second Certificate of Amendment to the Articles of
Incorporation of Ebiz
3.4(1) Certificate of Designation / Resolution of Designation -
Series A 10% convertible Preferred Stock
3.5(1) Bylaws of Ebiz
4.1(1) Specimen common stock certificate
5.1 Opinion of Lewis and Roca LLP
10.1(1) Office Building Lease, dated April 16, 1999, between Ebiz and
Van Wagner Properties
10.2(1) Ebiz 1998 Equity Incentive Plan, Effective December 23, 1998
10.3(1) Securities Purchase Agreement dated as of August 25, 1999, by
and between JEM Ventures Ebiz, LLC ("JEM") and Ebiz.
10.4(1) Subordinated Convertible Debenture, dated August 25, 1999, in
the amount of $7,100,000, made by Ebiz in favor of JEM
10.5(1) Warrant to Purchase Common Stock, dated August 25, 1999,
issued by Ebiz to JEM, for 245,000 shares
10.6(1) Registration Rights Agreement, dated as of August 25, 1999, by
and between Ebiz and JEM, LLC
11.1(1) Statement re: computation of per share earnings
21.1(1) Subsidiaries
23.1 Consent from Arthur Andersen LLP
23.2 Consent from Lewis and Roca LLP-included in Exhibit 5.1
27.1 Financial Data Schedule
(1) Incorporated by reference from Ebiz's Form 10-SB as files with the
Securities and Exchange Commission on October 19, 1999.
II-2
71
ITEM 28. UNDERTAKINGS
1. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission ("SEC") such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer of expenses
incurred or paid by a director, officer or controlling person in connection with
the securities being registered) the small business issuer will, unless in the
opinion of its counsel that the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act, and will be governed by the final adjudication of such issue.
2. The undersigned small business issuer will: (i) for determining any
liability under the Securities Act, treat the information omitted from the form
of prospectus filed as a part of this Registration Statement in reliance upon
Rule 430A and contained in a form or prospectus filed by the small business
issuer under Rule 424(b)(1), or (4) 497(h) under the Securities Act as part of
this Registration Statement as of the time the SEC declared it effective and
(ii) for determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
3. The undersigned small business issuer will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of
the Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change
in the information in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar
volume of securities offered would not exceed that which
was registered) and any deviation from the low or high
end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the
changes in the volume and price represent no more than a
20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
II-3
72
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Scottsdale, County of
Maricopa, Arizona, on October 25, 1999.
Ebiz Enterprises, Inc.
By /s/ Jeffrey I. Rassas
-----------------------------------
Jeffrey I. Rassas
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Dated: October 25, 1999 /s/ Jeffrey I. Rassas
----------------------------------
Jeffrey L Rassas, Director
Dated: October 25, 1999 /s/ Stephen C. Herman
----------------------------------
Stephen C. Herman, Director
III-4
73
EXHIBIT INDEX
2.1(1) Asset Exchange Agreement by and among Genras, Jeffrey I.
Rassas, Vinculum and Aztore Holdings, dated as of March 18,
1998
3.1(1) Articles of Incorporation of Ebiz
3.2(1) Certificate of Amendment to Articles of Incorporation of Ebiz
3.3(1) Second Certificate of Amendment to the Articles of
Incorporation of Ebiz
3.4(1) Certificate of Designation / Resolution of Designation -
Series A 10% convertible Preferred Stock
3.5(1) Bylaws of Ebiz
4.1(1) Specimen common stock certificate
5.1 Opinion of Lewis and Roca LLP
10.1(1) Office Building Lease, dated April 16, 1999, between Ebiz and
Van Wagner Properties
10.2(1) Ebiz 1998 Equity Incentive Plan, Effective December 23, 1998
10.3(1) Securities Purchase Agreement dated as of August 25, 1999, by
and between JEM Ventures Ebiz, LLC ("JEM") and Ebiz.
10.4(1) Subordinated Convertible Debenture, dated August 25, 1999, in
the amount of $7,100,000, made by Ebiz in favor of JEM
10.5(1) Warrant to Purchase Common Stock, dated August 25, 1999,
issued by Ebiz to JEM, for 245,000 shares
10.6(1) Registration Rights Agreement, dated as of August 25, 1999, by
and between Ebiz and JEM, LLC
11.1(1) Statement re: computation of per share earnings
21.1(1) Subsidiaries
23.1 Consent from Arthur Andersen LLP
23.2 Consent from Lewis and Roca LLP - included in Exhibit 5.1
27.1 Financial Data Schedule
(1) Incorporated by reference from Ebiz's Form 10-SB as files with the
Securities and Exchange Commission on October 19, 1999.