As filed with the Securities and Exchange Commission on June 25, 2001
Registration Statement No. 333-
U. S. Securities and Exchange Commission
Washington, D.C. 20549
Form SB-2 Registration Statement
Under the Securities Act of 1933
IBIZ TECHNOLOGY CORP.
(Name of small business issuer in its charter)
Florida 7379 86-0933890
------- ---- ----------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Employer Classification Code Identification No.)
Number)
1919 West Lone Cactus Drive, Phoenix, Arizona 85021, (623) 492-9200
(Address and telephone number of principal executive offices)
1919 West Lone Cactus Drive, Phoenix, Arizona 85021
(Address of principal place of business or intended principal place of business)
Mr. Kenneth Schilling, President
iBIZ Technology Corp.
1919 West Lone Cactus Drive
Phoenix, Arizona 85021
(Name, address and telephone number of agent for service)
Copy to:
Gregory Sichenzia, Esq.
Thomas A. Rose, Esq.
Sichenzia, Ross, Friedman & Ference LLP
135 West 50th Street
New York, New York 10020
Approximate date of proposed sale to the public: As soon as practicable
after this 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, 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, please 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(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 Amount to be Proposed maximum Proposed maximum Amount of
of securities to be registered(1) offering price per aggregate offering registration
registered share(3) price(3) fee(3)
- ----------------------- ------------------- ---------------------- ------------------------ -----------------
Common stock, $.001 25,000,000(2) $0.05 $1,250,000.00 $313
par value
- ----------------------- ------------------- ---------------------- ------------------------ -----------------
Common stock, $.001 1,500,000(4) $0.05 $ 75,000.00 $ 19
par value
- ----------------------- ------------------- ---------------------- ------------------------ -----------------
Total 26,500,000 $332
- ----------------------- ------------------- ---------------------- ------------------------ -----------------
(1) Represents the shares of common stock being registered for resale by the
selling security holders.
(2) Pursuant to a registration rights agreement between us and certain selling
security holders, we were required to register a sufficient number of shares so
that upon conversion of certain of our eight-percent convertible notes and
certain warrants issued in connection therewith, the selling security holder
could resell all registered securities. This presentation is not intended to
constitute a prediction as to the future market price of the common stock or as
to the number of shares of common stock issuable upon conversion of the notes.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of the Securities Act, based on the closing bid price on
the NASD OTC Bulletin Board on June 21, 2001, the initial filing date of this
registration statement.
(4) Represents shares issuable upon exercise of common stock purchase warrants.
2
iBIZ TECHNOLOGY CORP.
26,500,000 shares of common stock
Up to 26,500,000 shares of common stock are being offered by certain of
our security holders. We will not receive any of the proceeds from the sale of
common stock by the security holders. However, we will receive amounts upon
exercise of outstanding warrants.
We have agreed to pay all of the expenses related to this offering, but
the security holders will pay sales or brokerage commissions or discounts with
respect to sales of their shares.
The security holders may elect to sell shares of common stock described
in this prospectus through brokers at the price prevailing at the time of sale
or at negotiated prices. The common stock may also be offered in block trades,
private transactions or otherwise at prices to be negotiated.
Our common stock is traded on the OTC Bulletin Board under the symbol
"IBIZ." On June 21, 2001, the closing bid price for our common stock was
approximately $0.05 per share.
----------------------------
Investing in our common stock involves certain risks, see "Risk
Factors" beginning on page 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
-----------------------------
3
Table of Contents
Section Page Number
Prospectus Summary 3
Risk Factors 5
Use of Proceeds 8
Selling Securityholders 9
Plan of Distribution 11
Legal Proceedings 11
Directors, Executive Officers, Promoters & Control Persons 12
Security Ownership of Management and Certain Beneficial Owners 13
Description of Securities 15
Description of Business 19
Management's Discussion and Analysis of Financial Condition and Results of Operations 28
Description of Property 33
Executive Compensation 33
Market for Common Equity and Related Matters 33
Index to Financial Statements F-1
3
Prospectus Summary
General Overview
iBIZ is primarily engaged in the business of co-location and the
distribution of personal digital assistant accessories, but also provides many
other goods and services. Founded in 1979 by our President Ken Schilling, iBIZ
has been in the computer industry for over twenty years.
Co-location is providing network connections, such as Internet leased
lines, to several servers housed together in a server room. Typically, we
provide a server, usually a Web server, located at our dedicated facility
designed with resources which include a secured cage or cabinet, regulated
power, dedicated internet connection, security and support.
Our principal offices are located at 1919 West Lone Cactus Drive,
Phoenix, Arizona 85021, and our telephone number is (623) 492-9200. Our web site
is located at www.ibizcorp.com. iBIZ was formed under the laws of the state of
Florida.
This Offering
Shares of common stock outstanding prior to this offering........................38,017,966
Shares offered in this prospectus................................................26,500,000
Total shares outstanding after this offering.....................................64,517,966
Use of proceeds..................................................................We will not receive any proceeds from the
sale of the shares of common stock
offered in this prospectus. We may
receive proceeds of $183,750 upon
the exercise of 1,500,000 warrants
Such proceeds will be used for
working capital and business
expansion.
Pursuant to a registration rights agreement between us and certain
selling security holders, we were required to register a sufficient number of
shares so that upon conversion of certain of our eight-percent convertible notes
and certain warrants issued in connection therewith, the selling security holder
could resell all registered securities. The actual number of shares of common
stock to be issued upon conversion of our eight-percent convertible notes is
dependent upon the trading price of our common stock at the time of conversion.
The number of shares is also subject to adjustment under anti-dilution
provisions included in the notes and warrants covering the additional issuance
of shares by iBIZ resulting from stock splits, stock dividends or similar
transactions. This presentation is not intended to constitute a prediction as to
the future market price of the common stock or as to the number of shares of
common stock issuable upon conversion of the notes.
The foregoing numbers of shares of common stock to be issued assumes:
4
o the conversion of all of the notes and warrants at 100% of the maximum
number of shares issuable
o the sale of all shares registered; and
o excludes shares issuable upon exercise of options and warrants not
registered in this prospectus.
Other Concurrent Offerings
In addition to the shares of common stock offered by this
prospectus, we have other prospectuses which, in the aggregate, offer
up to 54,073,205 additional shares of common stock.
5
Risk Factors
Investment in our common stock involves a high degree of risk. You
should consider the following discussion of risks as well as other information
in this prospectus. The risks and uncertainties described below are not the only
ones. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial also may impair our business operations. If any of the
following risks actually occur, our business could be harmed. In such case, the
trading price of our common stock could decline.
Except for historical information, the information contained in our SEC
prospectuses are "forward-looking" statements about our expected future business
and performance. Our actual operating results and financial performance may
prove to be very different from what we might have predicted as of the date of
this prospectus.
We Have A History Of Losses and Anticipate Future Losses Which will
Compel us to Seek Additional Capital
For the fiscal year ended October 31, 1999, we sustained a loss before
other income (expense) of approximately $1,074,180 and for the fiscal year ended
October 31, 2000, we sustained a loss before other income (expense) of
$3,570,789. Future losses are anticipated to occur. We continue to have
insufficient cash flow to grow operations and we cannot assure you that we will
be successful in reaching or maintaining profitable operations.
Since December 1, 1999, we have raised approximately $5,900,000 through
the sale of convertible debentures, convertible notes, common stock and warrants
to various investors. If we are unable to raise additional funds when necessary,
we may have to reduce planned expenditures, scale back our product developments,
sales or other operations, lay-off employees and enter into financing
arrangements on terms that we would not otherwise accept or be forced into
insolvency.
We Have Recently Added New Lines Of Business Which are Unproven and
Which Require Substantial Attention of Management
We recently began offering network integration services, digital
subscriber line high-speed Internet communications services and a co-location
and data warehousing hosting facility. However, we cannot assure you that we
will develop and implement successful marketing strategies for these new
services. In addition, as DSL services are an emerging technology, we cannot
assure you that this technology will gain market acceptance or not become
obsolete in the future. Our service lines of business require increasing
attention by management and do not provide much synergy or economies of scale
with our existing products. Heightened focus of management on our service
business may cause a decline in the revenues or margins of our products
business.
Our Officers And Directors Can Exercise Control Over All Matters
Submitted To A Vote Of Shareholders, Effectively Depriving Other Shareholders
of Such Rights
6
As of March 31, 2001, our executive officers and directors beneficially
owned an aggregate of approximately 37.33% of our outstanding common stock.
These officers, acting together, will probably be able to effectively control
matters requiring approval by our shareholders, including election of members to
our board of directors. As a practical matter, current management will continue
to control iBIZ for the foreseeable future.
We Are Subject To Government Regulation And Changes In Laws That Could
Inhibit our Ability to Conduct Business or Result in Significantly Higher
Expenses.
We provide Internet services, in part, through data transmission over
public telephone lines as well as through the private Northpoint network. These
transmissions are governed by State and Federal regulatory policies establishing
charges and terms for wireline communications. While we are not currently
subject to direct regulation by the Federal Communication Commission, we could
become subject to regulation by the FCC or another regulatory agency as a
provider of basic telecommunication services. Such a regulation, if enacted,
would create substantial barriers to our entry into the Internet telephone
market. Moreover, we are subject to a variety of risks that could materially
effect our business due to the rapidly changing legal and regulatory landscape
governing the Internet access providers. For example, the FCC currently exempts
Internet access providers from having to pay permanent access charges that long
distance telecommunication providers may charge local telephone companies for
the use of the local telephone network. In addition, Internet access providers
are currently exempt from having to pay a percentage of their gross revenues as
a contribution to the Federal Universal Service Fund. Should the FCC eliminate
these exemptions and impose such charges on Internet access providers, this
would increase our cost for providing dial-up Internet access service and could
have a material adverse effect on our business, financial condition and results
of operations.
Proposed FCC Regulations Could Provide Advantages to Our Competitors,
Making it More Difficult for Us to be Successful.
The FCC is considering measures that could stimulate the development of
high-speed telecommunication facilities to make it easier for operators of these
facilities to obtain access to customers. Such favorable regulatory measures
could enhance the viability of our competitors in the Internet access
marketplace. In addition, changes in the regulatory environment may provide
competing Internet service providers the right of access to the cable systems of
local franchise cable operators. The adoption of local access cable systems by
Internet service providers could harm our business.
We Depend On Our Telecommunication Carriers And Other Suppliers, the
Loss of Which Would Force us to Curtail our Operations.
We are dependent on telecommunication carriers for access to high speed
Internet communications. We currently operate pursuant to agreements with UUNet
(MCI Worldcom), ELI (Electric Lightways), Cox, and Genuity. Only in the event of
termination or nonrenewal of all of these agreements, there can be no assurance
that we will be able to provide continued access to high-speed Internet
connections at a reasonable price. In such case, our operations may have to be
curtailed.
7
We Must Rely On Our Strategic Partners To Keep Pace With Rapid
Technological Change And Evolving Industry Standards, the Failure of Which Would
Detract from the Marketability of our Products.
The markets for telecommunication services are characterized by rapidly
changing technology, evolving industry standards, merging competition and
frequent new services, software and other product introductions. Because we are
primarily a marketer and reseller of Internet services and technological
products, we must rely on our strategic partners to keep pace with technological
change. There can be no assurance that our strategic partners can successfully
identify new service opportunities or products and develop and bring new
products and services, if any, to market in a timely and cost effective manner.
We also cannot assure that software, services, products or technologies
developed by others will not render the services, technologies or products of
our strategic partners less competitive or obsolete. In addition, there can be
no assurance that any product or service developments will achieve or sustain
market acceptance or be able to effectively address the compatibility and
operability issues raised by technological changes or new industry standards.
We Face The Risk of System Failure Which Would Disable our Internet
Operations.
Our co-location and internet services segments' success is largely
dependent upon our ability to deliver high quality, high speed uninterrupted
access to the Internet. System failures could have an adverse effect on our
operations and business. As we attempt to expand our network and daily traffic
grows, there will be increased stress on network hardware and traffic management
systems. Our operations are also dependent on our ability to successfully expand
our network and to integrate new and emerging technologies and equipment into
the network, which is likely to increase the risk of system failure and cause
unforeseen strains on the network. Significant or prolonged systems failures, or
difficulties for subscribers in accessing and maintaining connection with the
Internet could damage our reputation and result in the loss of subscribers. With
respect to DSL, we have little technical control over the Northpoint network and
there can be no assurance that our customers will not experience failures
relating to that network.
We Have a Limited Product Range Which Must be Expanded in Order to
Effectively Compete
To effectively compete in our industry, we need to continue to expand
our business and generate greater revenues so that we have the resources to
timely develop new products. We must continue to market our products and
services through our direct sales force and expand our e-commerce distribution
channels. At the present time, we have no other products in the development
process. We cannot assure you that we will be able to grow sufficiently to
provide the range and quality of products and services required to compete.
We Have Few Proprietary Rights, the Lack of Which May Make it Easier
for our Competitors to Compete Against Us.
8
We attempt to protect our limited proprietary property through
copyright, trademark, trade secret, nondisclosure and confidentiality measures.
Such protections, however, may not preclude competitors from developing similar
technologies.
"Penny Stock" regulations may impose certain restrictions on
marketability of our stock, which may affect the ability of holders of our
common stock to sell their shares.
The Securities and Exchange Commission has adopted regulations that
generally define a "penny stock" to be any equity security that has a market
price of less than $5.00 per share. Our common stock is currently subject to
these rules that impose additional sales practice requirements. For transactions
covered by these rules, the broker-dealer must make a special suitability
determination for the purchase of the common shares and must have received the
purchaser's written consent to the transaction prior to the purchase. The "penny
stock" rules also require the delivery, prior to the transaction, of a risk
disclosure document mandated by the SEC relating to the penny stock market. The
broker-dealer must also disclose:
o the commission payable to both the broker-dealer and the registered
representative,
o current quotations for the securities, and
o if the broker-dealer is the sole market maker, the broker-dealer must
disclose this fact and the broker-dealer's presumed control over the
market.
Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks.
These rules apply to sales by broker-dealers to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together
with their spouse), unless our common shares trade above $5.00 per share.
Consequently, the "penny stock" rules may restrict the ability of broker-dealers
to sell our common shares, and may affect the ability to sell the common shares
in the secondary market as well as the price at which such sales can be made.
Also, some brokerage firms will decide not to effect transactions in "penny
stocks" and it is unlikely that any bank or financial institution will accept
"penny stock" as collateral.
9
Use of Proceeds
We will not receive any proceeds from the sale of the common stock
offered by this prospectus. We may, however, receive proceeds of $183,750 upon
the exercise of 1,500,000 warrants We are solely responsible for the expenses of
this offering, which are estimated at $15,000. iBIZ intends to use the net
proceeds from exercise of warrants, if any, primarily for working capital needs
and general corporate purposes, including payment of contractors for the work
they did to complete the co-location facility and marketing expenses related to
developing the customer base of the co-location facility. There can be no
assurance that any warrants will be exercised.
10
Selling Security Holders
The following table lists the selling security holders, the number of
shares of common stock held by each selling security holder as of the date
hereof, the number of shares included in the offering and the shares of common
stock held by each such selling security holder after the offering. The shares
included in the prospectus are issuable to the selling security holders upon
conversion of the debentures or the exercise of warrants.
- ------------------ ------------- ------------ -------------- ------------ ----------- -------------
Total Total
Shares of Percentage
Common of Common
Stock Stock, Percentage
Issuable Assuming Shares of Beneficial Beneficial of Common
Upon Full Common Stock Ownership Ownership Stock Owned
Conversion Conversion Included in Before the After the After
of Notes Prospectus Offering Offering Offering
Name and Warrants (1) (2) (3) (3)
- ------------------ ------------- ------------ -------------- ------------ ----------- -------------
Laurus Master 14,000,000 41.07% 26,500,000 1,996,733 0 -
Fund, Ltd. (4)(5)
- ------------------ ------------- ------------ -------------- ------------ ----------- -------------
"*" means less than one percent.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholder has sole or shared voting power or investment power and
also any shares which the selling stockholder has the right to acquire within 60
days. The actual number of shares of common stock issuable upon the conversion
of the debentures and exercise of the debenture warrants is subject to
adjustment depending on, among other factors, the future market price of the
common stock, and could be materially less or more than the number estimated in
the table.
(1) Pursuant to the terms of our agreements with the convertible note holder,
the number of shares included in this prospectus for such holder is equal to two
times the number of shares actually issuable, if the convertible notes were
converted in their entirety. At the option of the holder, we may also issue
shares of our common stock in payment of accrued interest, which may be offered
pursuant to this prospectus.
(2) Represents shares of common stock issuable upon conversion of debentures or
exercise of warrants of the selling shareholder, at an assumed conversion price
of $0.04 per share. However, the selling shareholder has contractually agreed to
restrict its ability to convert its debentures or exercise its warrants and
receive shares of our common stock such that the number of shares of common
stock held by it and its affiliates after such conversion or exercise exceed
4.99% of the then issued and outstanding shares of common stock following such
conversion or exercise. This restriction may not be waived.
11
(3) Assumes that all securities registered will be sold.
(4) The following chart discloses the principal(s) of each selling
securityholder and the person(s) with investment and dispositive power:
Investment/dispositive
Securityholder Principal authority
- -------------- --------- ---------------------------
Laurus Master Fund, Ltd. David Grin and David Grin and
Eugene Grin Eugene Grin
(5) Of which, 1,500,000 shares are issuable upon exercise of presently
exercisable warrants.
We issued a convertible note in the principal amount of $500,000 to
Laurus Master Fund, Ltd. We also issued a five year warrant to purchase
1,500,000 shares of our common stock, at an exercise price of $.1225 per share,
which remain outstanding as of the date hereof:
12
Plan of Distribution
Selling security holders may sell common stock in the over-the-counter
market or on any exchange on which our common stock is listed. Shares may also
be sold in block transactions or private transactions or otherwise, through
brokers or dealers. Brokers or dealers may be paid commissions or receive sales
discounts. The selling security holders must pay their own commissions and
absorb the discounts. Brokers or dealers used by the selling security holders
may be deemed to be underwriters under the Securities Act. In addition, the
selling security holders will be underwriters under the Securities Act with
respect to the common stock offered.
In the event sales are made to broker-dealers as principals, we would
be required to file a post-effective amendment to the registration statement of
which the prospectus forms a part. In such post-effective amendment, we would be
required to disclose the names of any participating broker-dealers and the
compensation arrangements relating to such sales. In addition, if any shares of
common stock or warrants offered for sale pursuant to this prospectus are
transferred, subsequent holders could not use this prospectus until a
post-effective amendment is filed, naming such holders.
Legal Proceedings
iBIZ has been assessed approximately $62,000 in penalties and interest
by the IRS in connection with payroll taxes due through the first quarter of
1999. iBIZ has paid the taxes, interest, and some portion of the penalty, but
has requested an abatement of the remaining penalty imposed. iBIZ is awaiting a
final disposition by the IRS.
On February 28, 2001, the Securities and Exchange Commission commenced
an administrative proceeding against iBIZ. IBIZ has negotiated and submitted a
settlement offer, which has been formally approved by the Commission itself.
Pursuant to this settlement agreement, an administrative order has been issued
which orders iBIZ to cease and desist from committing or causing any future
violations of Section 10(b) of the Securities and Exchange Act of 1934 and Rule
10b-5 thereunder. No other relief against iBIZ is being sought.
This administrative proceeding is based on the Commission's allegations
that iBIZ, through its President and CEO Ken Schilling, referenced certain
reports prepared by Michael A. Furr in its press releases, and posted hyperlinks
to Furr's reports on its website. The Commission alleges that the Furr reports
contained false revenue and stock price projections. The Commission also alleges
that iBIZ falsely characterized Furr as independent of iBIZ. IBIZ neither admits
nor denies the allegations as part of the settlement offer.
13
Directors, Executive Officers, Promoters and Control Persons
- -------------------------------- -------- ---------------------------------------------------------------
Name Age Position
- -------------------------------- -------- ---------------------------------------------------------------
Kenneth W. Schilling 49 President, Chief Executive Officer, Director
Terry S. Ratliff 43 Vice President, Chief Financial Officer, Director
Mark H. Perkins 37 Executive Vice President, Director
James A. Ratliff(1) 43 Chief Operating Officer
(1) James Ratliff and Terry Ratliff were formerly husband and wife.
The term of each director continues until the next annual meeting. No
director holds any other directorships in reporting companies.
Kenneth W. Schilling founded INVNSYS' predecessor, SouthWest Financial
Systems, in 1979, and has been Chief Executive Officer, President and a Director
since INVNSYS' founding. Mr. Schilling studied for a B.S. in electrical
engineering at the University of Pittsburgh from 1970 to 1972 but left for
military service prior to receiving his degree. On February 28, 2001, the
Securities and Exchange Commission filed a federal court action in the District
of Arizona against Mr. Schilling. Mr. Schilling, however, has reached a
settlement with the Commission in which he neither admits nor denies the
allegations made against him. Pursuant to this settlement, Mr. Schilling will be
permanently enjoined from violating Section 10(b) of the Exchange Act or Rule
10b-5 thereunder. Mr. Schilling will also be required to pay a $20,000 civil
penalty.
Terry S. Ratliff joined INVNSYS in 1989 as controller and has served as
Vice President, Secretary and a Director since March 5, 1999, and was appointed
Chief Financial Officer on July 1, 2000. Ms. Ratliff studied accounting at
Nicholls State University in Thibodaux, Louisiana.
Mark H. Perkins joined INVNSYS in 1994 and currently serves as
Executive Vice President. Mr. Perkins was appointed to iBIZ's Board of
Directors on March 5, 1999. Prior to his joining INVNSYS, Mr. Perkins was
employed at American Express as a project manager for major systems
implementation, a position he held for eight years. Mr. Perkins earned a
degree in business management from California State University-Sonoma.
James A. Ratliff joined iBIZ as Chief Operating Officer in January
2000. Prior to joining the iBIZ, Mr. Ratliff held the position of Director of
Global Procurement at American Express from February 1998 to December 1999. From
August 1995 to January 1998, Mr. Ratliff served as International Program Manager
for AlliedSignal Aerospace, where he was responsible for the development of
international partnerships. From 1991 through July 1995, Mr. Ratliff served as
an International Buyer for Amoco Corporation. Mr. Ratliff earned an MBA and a BS
in Purchasing Materials and Logistics from Arizona State University, where he
graduated summa cum laude in 1991.
14
Security Ownership of Certain Beneficial Owners and Management
As of March 31, 2001, there were 38,017,966 shares of common stock, par
value $0.001 outstanding.
The following table sets forth certain information regarding the
beneficial ownership of the our common stock as of March 31, 2001, by:
o all directors
o each person who is known by us to be the beneficial owner of more than
five percent (5%) of the outstanding common stock
o each executive officer named in the Summary Compensation Table
o all directors and executive officers as a group
The number of shares beneficially owned by each director or executive
officer is determined under rules of the SEC, and the information is not
necessarily indicative of beneficial ownership for any other purpose. Under the
SEC rules, beneficial ownership includes any shares as to which the individual
has the sole or shared voting power or investment power. In addition, beneficial
ownership includes any shares that the individual has the right to acquire
within 60 days of March 31, 2001, through the exercise of any stock option or
other right. Unless otherwise indicated, each person listed below has sole
investment and voting power (or shares such powers with his or her spouse). In
certain instances, the number of shares listed includes (in addition to shares
owned directly), shares held by the spouse or children of the person, or by a
trust or estate of which the person is a trustee or an executor or in which the
person may have a beneficial interest.
- ---------------------------------------------------------------------------------------------------------
Number of Shares of Common Stock Beneficially Owned
- ----------------------------------------------------------------------------------------------------------
Name and Address of Beneficial Owner Shares Vested Options (1) Total (1) Percent (1)
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Kenneth W. Schilling(2) -------- 225,000 225,000 *
1919 W. Lone Cactus Drive
Phoenix, AZ 85021
Moorea Trust(2)
1919 W. Lone Cactus Drive
Phoenix, AZ 85021 9,710,480 --------- 9,710,480 25.54
Terry S. Ratliff
1919 W. Lone Cactus Drive
Phoenix, AZ 85021 1,771,200 325,000 2,096,200 5.51
Mark H. Perkins
1919 W. Lone Cactus Drive
Phoenix, AZ 85021 1,771,200 325,000 2,096,200 5.51
All directors and officers as group
(4 persons)(3) 13,253,880 1,375,000 14,628,880 38.47
- ----------------------------------------------------------------------------------------------------------
(1) Includes options vested on or before March 31, 2001. "*" means less than
one percent.
(2) Kenneth and Diane Schilling, husband and wife, hold the shares as trustees
under the Moorea Trust dated December 18, 1991.
(3) Includes Kenneth Schilling, Mark Perkins, Terry Ratliff, and James Ratliff.
iBIZ Technology Corp. Stock Option Plan
15
The iBIZ Technology Corp. Stock Option Plan provides for the grant of
stock options to purchase common stock to eligible directors, officers, key
employees, and service providers of iBIZ. The stock option plan covers an
aggregate maximum of five million (5,000,000) shares of common stock and
provides for the granting of both incentive stock options (as defined in Section
422 of the Internal Revenue Code of 1986, as amended) and non-qualified stock
options (options which do not meet the requirements of Section 422). Under the
stock option plan, the exercise price may not be less than the fair market value
of the common stock on the date of the grant of the option. As of March 31,
2001, 3,385,000 options had been granted to 37 persons (net of cancelled and
exercised) under the plan at exercise prices of between $0.53 and $5.00. As of
February 26, 2001, the market price of the stock was $0.1875. The options have
been granted for periods ranging from one (1) to ten (10) years, subject to
earlier cancellation upon termination of employment, resignation, disability and
death. The options vest pursuant to the terms of each individual option, which
to date have ranged from immediate to a five (5) year period. Approximately 53
people are eligible to participate in the stock option plan, which is unfunded.
The stock option plan benefits currently have no value, as all of the
outstanding options were issued at exercise prices greater than the current
price of our common stock. Ken Schilling, C.E.O., holds 250,000 options. Terry
Ratliff, C.F.O., V.P. and Secretary, holds 350,000 options. Mark Perkins, Exec.
V.P., holds 350,000. The executive group, which includes all of the Directors,
collectively holds 1,450,000 options, while the non-executive officer and
employee group holds 1,935,000 options.
The Board of Directors administers and interprets the stock option plan
and is authorized to grant options thereunder to all eligible persons. In the
event the Board has at least two (2) members who are not either employees or
officers of iBIZ or of any parent or subsidiary of iBIZ, the stock option plan
will be administered by a committee of not less than two (2) persons who are
such independent directors. The Board designates the optionees, the number of
shares subject to the options and the terms and conditions of each option.
Certain changes in control of iBIZ, as defined in the stock option plan, will
cause the options to vest immediately. Each option granted under the stock
option plan must be exercised, if at all, during a period established in the
grant that may not exceed ten (10) years from the date of grant. An optionee may
not transfer or assign any option granted and may not exercise any options after
a specified period subsequent to the termination of the optionee's employment
with iBIZ. The Board may make amendments to the stock option plan from time to
time it deems proper and in the best interests of iBIZ provided it may not take
any action which disqualifies any option granted under the stock option plan as
an incentive stock option or which adversely effects or impairs the rights of
the holder of any option under the stock option plan.
16
Description of Securities
General. iBIZ's Articles of Incorporation authorize the issuance of
100,000,000 shares of common stock, $0.001 par value.
Common Stock. Holders of shares of common stock are entitled to one
vote for each share of common stock held of record on all matters submitted to a
vote of the shareholders. Each share of common stock is entitled to receive
dividends as may be declared by our Board of Directors out of funds legally
available. Management, however, does not presently intend to pay any dividends.
In the event of liquidation, dissolution or winding up of iBIZ, the holders of
common stock are entitled to share ratably in all assets remaining after payment
in full of all our creditors and the liquidation preferences of any outstanding
shares of preferred stock, if any. There are no redemption or sinking fund
provisions applicable to the common stock.
Debentures. Between November 1999 and March 2000, iBIZ issued a series
of three 7% debentures totaling an aggregate of $3.2 million. In November 1999,
iBIZ issued Six Hundred Thousand Dollars ($600,000.00) of 7% debentures to Globe
United Holdings, Inc.. Thereafter, in December 1999, iBIZ issued to Globe an
additional One Million Dollars ($1,000,000.00) of 7% debentures. On March 27,
2000, iBIZ issued One Million Six Hundred Thousand Dollars ($1,600,000.00) of 7%
debentures to Lites Trading, Co.
The material terms of all the 7% debentures are the same, except for
purchase amounts, certain relevant dates and time periods and related warrants.
Where the rights of Globe and Lites Trading conflict, Globe has agreed to waive
its rights in favor of Lites Trading.
Globe has now converted all of its 7% debentures into shares of common
stock. Lites Trading has converted all but $750,000 of its outstanding
debentures into common stock. On June 1 and on June 21, 2000, Lites Trading
converted an aggregate of $200,000 of principal of debentures into a total of
362,653 shares of common stock.
The remaining 7% debentures accrue interest at seven percent per annum
and are due March 27, 2005. iBIZ is obligated to make payments of accrued
interest semi-annually and interest is due on the first day of May and December.
At the holders' option, iBIZ may make interest payments in the form of shares of
common stock (calculated as if a portion of principal, as described below).
The holder may at any time convert all or a portion of the outstanding
principal amount, together with any accrued but unpaid interest, into that
number of shares of common stock equal to the quotient obtained by dividing the
principal amount of the debenture to be converted by the Applicable Conversion
Price (as defined in the debentures).
In connection with the sale of the $600k and $1000k 7% debentures, iBIZ
agreed to file a registration statement to cover the resale of the common stock
issuable upon conversion of the 7% debentures and the exercise of the warrants
(described below). This registration statement on Form SB-2, File No. 333-94409,
was declared effective February 1, 2000 and has remained continuously effective
through the date hereof.
17
In connection with the sale of the $1600k 7% debentures, iBIZ filed a
second registration statement to cover the resale of the common stock issuable
upon conversion of the 7% debentures and the exercise of the warrants on Form
SB-2, File No. 333-34936, which was declared effective May 1, 2000 and has
remained continuously effective through the date hereof.
iBIZ may not, without the prior written consent of Lites, offer or
sell, shares of its capital stock or any security or other instrument
convertible into or exchangeable for shares of common stock, for the period
ending on the earlier of 180 days after the date on which this registration
statement is declared effective by the SEC or the date on which Lites shall have
converted all of the debentures into common stock, except that iBIZ may:
o issue securities for the aggregate consideration of at least
Seven Million Five Hundred Thousand Dollars ($7,500,000.00) in
connection with a bona fide, firm commitment, underwritten
public offering under the Securities Act;
o may issue additional shares of common stock upon the exercise
or conversion of outstanding options, warrants and other
convertible securities issued prior to March 27, 2000; and
o may issue options, in addition to all options previously
issued as of March 27, 2000, to purchase up to 1,000,000
shares of its common stock to its directors, officers and
employees in connection with its existing stock option plans.
In addition, iBIZ is restricted from registering any shares of its
capital stock (other than shares to be received upon exercise by option and
warrant holders as of March 27, 2000) until the later to occur of the expiration
of the respective lock-up periods or the registration statement filed by iBIZ
covering shares to be issued to Lites upon conversion of the 7% debentures or
exercise of the warrants has been effective under the Securities Act for a
period of at least 180 days.
Lites has a right of first refusal on purchases of additional
securities for a period of 18 months from the date of execution of the $1600k 7%
Debentures. So long as the 7% Debentures or warrants issued to Lites are
outstanding, iBIZ may not declare or pay any dividends or make distributions to
any holder of common stock or acquire any common stock of iBIZ. Lites has orally
waived certain of these rights so that the most recent financing could be
accomplished. In particular, Lites orally agreed to permit us to sell additional
notes and warrants, the underlying common stock of which is offered for sale
pursuant to this prospectus. Lites also orally agreed to permit the registration
of such securities for resale.
October and December 2000 Convertible Notes.
General Terms
In October 2000, we entered into agreements, pursuant to which certain
investors agreed to purchase an aggregate of $5 million of 8% convertible notes.
We issued an aggregate of $2.1 million principal amount of convertible notes. Of
the $2.1 million of convertible notes issued, $1 million matures on October 30,
2002 and interest only payments are due quarterly commencing January 1, 2001,
and the principal is due in one lump sum on October 30, 2002. The additional
$1.1 million of convertible notes matures on December 20, 2002 and interest only
payments are due quarterly commencing on April 1, 2001.
18
1
We also issued warrants to purchase to purchase an aggregate of
1,328,750 shares of common stock at exercise prices ranging from $0.2275 to
$0.90.
On April 17, 2001, iBIZ and the subscribers amended the terms of their
agreements such that no further issuances of securities will be made under the
agreements with the subscribers. There were no fees or penalties incurred in
connection with modification of the agreements.
The conversion price for all of the convertible notes is the lesser of
80% of the average of the three lowest closing bid prices of the common stock
for the 22 trading days prior to the closing date, or 80% of the average of the
five lowest closing bid prices of the common stock for the 60 trading days prior
to the conversion date. Upon any conversion, the holder of the convertible note
can elect to receive payment of interest in cash or additional shares of common
stock at the same conversion ratio. Any such shares received in payment of
interest may be offered for resale by the holder pursuant to this prospectus.
The maximum shares that any subscriber, including its affiliates, may own after
conversion at any given time is 4.99%, which restriction may not be waived.
The parties have made mutually agreeable standard representations and
warranties. We have also entered into certain covenants including, but not
limited to, the following:
o we may not redeem the Notes without the consent of the holder of the
Notes;
o we paid to certain finders a cash fee of 10% of the principal amount of
the convertible notes for location of the financings; and
o we agreed to incur certain penalties for untimely delivery of the
shares. If we cannot deliver the shares for any reason, then we must
pay in cash 130% of the principal of the convertible notes which the
Subscribers are seeking to convert, with unpaid interest, and the debt
will be extinguished.
iBIZ and the Subscribers have mutually agreed to indemnify the other
for damages from any misrepresentation, breach of any warranty, and any
uncorrected breach of the Subscription Agreement. As compensation to Subscribers
for delays in the delivery of shares, we will pay late payments to Subscribers
in the amount of $100 per business day after the Delivery Date or Mandatory
Redemption Payment Date, as the case may be, for each $10,000 of Note principal
amount being converted or redeemed.
If we request an injunction forbidding conversion, it must post a
surety bond for 130% of the amount of the Note until the dispute is resolved. If
we do not deliver the shares, the Subscriber may buy them on the open market and
be reimbursed by iBIZ.
Options and Warrants Not Included in Prospectus. In addition to the
shares issuable upon exercise of options and warrants included in this
prospectus, iBIZ has issued, net of cancelled or exercised, 3,037,500 options to
employees under the Stock Option Plan. The shares underlying these options have
been registered on a registration statement on Form S-8, File No. 333-95475,
filed on January 27, 2000. In connection with the 7% Debentures, as of the date
of this prospectus, iBIZ has issued to Equinet warrants to purchase 281,250
shares of common stock. The warrants issued to Equinet have an exercise price of
$0.99 per share, have a term of five years and are immediately exercisable. We
also have an additional 2,224,489 warrants outstanding with exercise prices
ranging from $.50 to $2.50.
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Shares Exercise Price Vesting EXPIRATION
- ------ -------------- ------- -----------
500,000 $0.4755 Immediate 5 years
550,000 $0.2275 Immediate 5 years
278,750 $0.90 Immediate 3 years
Securities Included in this Prospectus
We are registering 25,000,000 shares of common stock issuable on
conversion of a $500,000 convertible note issued to an accredited investor on
April 26, 2001. 12,500,000 shares of common stock are issuable upon conversion
of the convertible note based on a conversion price of $0.04 per share, however,
are required to register 200% of this amount, for a total of 25,000,000 shares.
In addition, 1,500,000 shares issuable on exercise of warrants are being
registered. These warrants have an exercise price of $0.1225 per share.
The note bears interest at 8% and is convertible into our common stock
at the lesser of:
a) $0.1225; or
b) 80% of the average of the three lowest closing prices of our
common stock for the sixty days immediately prior to the
conversion date.
The unconverted portion of the note is due April 26, 2003.
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities.
iBIZ's Articles of Incorporation, as amended, provide to the fullest
extent permitted by Florida law, a director or officer of iBIZ shall not be
personally liable to iBIZ or its shareholders for damages for breach of such
director's or officer's fiduciary duty. The effect of this provision of iBIZ's
Articles of Incorporation, as amended, is to eliminate the right of iBIZ and its
20
shareholders (through shareholders' derivative suits on behalf of iBIZ) to
recover damages against a director or officer for breach of the fiduciary duty
of care as a director or officer (including breaches resulting from negligent or
grossly negligent behavior), except under certain situations defined by statute.
iBIZ believes that the indemnification provisions in its Articles of
Incorporation, as amended, are necessary to attract and retain qualified persons
as directors and officers.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to its directors, officers and controlling persons pursuant
to the foregoing provisions or otherwise, iBIZ has been advised that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
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Description of Business.
iBIZ History
iBIZ was originally incorporated under the laws of the State of Florida
in 1994. From its incorporation through December 31, 1998, we operated as a
development stage company with no operations or revenues while it sought to
identify a strategic business combination with a private operating company. To
facilitate the acquisition of a private company doing business outside of its
initial purpose upon incorporation, we changed our name to EVC Ventures, Inc. in
May 1998 and to INVNSYS Holding Corporation in October 1998.
Effective January 1, 1999, we entered into a Plan of Reorganization and
Stock Exchange Agreement with INVNSYS Technology Corporation ("INVNSYS") and
various shareholders of INVNSYS (the "Reorganization"). As a result of the
Reorganization, INVNSYS became a wholly-owned subsidiary of iBIZ. On February 1,
1999, we changed our name to iBIZ Technology Corp.
While operating as a development stage company, our officers and
directors were not compensated for their services. From incorporation through
December 31, 1994, Mr. Julio A. Padilla served as President and sole Director.
Mr. Eric P. Littman served as President and sole Director from January 1, 1995
through July 9, 1998. Thereafter, Mr. John Xinos served as President,
Secretary, and Treasurer from July 10, 1998 through December 31, 1998. Messrs.
Padilla, Littman and Xinos are no longer involved in the management of iBIZ and
are believed not to be shareholders.
Business History of INVNSYS
We conduct business solely through its operating subsidiary INVNSYS.
For your convenience, this prospectus will refer to the parent company as iBIZ
and the wholly-owned operating company as INVNSYS.
INVNSYS (formerly known as SouthWest Financial Systems, Inc.) was
founded in 1979. Under the direction of INVNSYS' founder, Kenneth Schilling, we
initially focused on distributing front-end bank branch automation computer
systems for networking applications. INVNSYS acted as a regional distributor for
SHARP Electronics ("SHARP"), a privately held Japanese manufacturer of computers
and electronic devices. In addition, INVNSYS also distributed the products of
Billcon Company, Ltd., and Glory, manufacturers of bank automation and money
processing systems.
In 1985, INVNSYS became a master distributor of SHARP products and
acquired the exclusive rights to distribute SHARP products to financial
institutions in the western United States. Between 1987 and 1990, INVNSYS won
various awards from SHARP for outstanding sales performance. Also during this
time, INVNSYS began to participate in the design of computer systems for
financial institutions. In cooperation with Wells Fargo Bank and SHARP, INVNSYS
produced the first plain paper facsimile machine in 1990.
In 1992, INVNSYS began to design and build its own computer systems,
focusing on integrated systems for the banking industry. In 1993, INVNSYS
terminated its relationship with SHARP and focused on developing its own
products. In approximately 1994, INVNSYS began working in conjunction with Epson
America ("Epson"), a leading manufacturer of point-of-sale computer products, in
the development of products for the banking industry. For example, INVNSYS
designed a software program that enabled Epson transactional printers to produce
cashier's checks, an industry innovation. In addition, in cooperation with
Epson, INVNSYS designed and marketed a stackable computer system for financial
institutions. In 1996, INVNSYS produced its first entry into the market for
complete computer systems with its Vision 2000 Multimedia Notestation, an Intel
Pentium-based computer/printer combination. In October 1998, INVNSYS began to
market a line of business transaction computers, the iT series.
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In January 2000, we began offering network integration services. In
March 2000, we began offering digital subscriber line (DSL) services.
On September 18, 2000, we announced the opening of its new data
center/Web-hosting server co-location facility, located in Phoenix. The data
center allows clients to run their Web-based activities over the Internet
without having to maintain internal IT and other systems-related staffing and
equipment. Through this facility, iBIZ provides Web-hosting services, including
hardware connections, scalable bandwidth, and back-up servers to ensure clients
of continuous data traffic and Internet-based operations with uninterrupted
connectivity. iBIZ also provides high levels of physical and systems security
and around-the-clock maintenance, monitoring and technical support. The facility
has an extensive raised floor, with secured cabinet space for up to 390 clients,
11 full-size, individually secured data suites, and a mezzanine level with rack
space for 1200 leased computer servers. Additionally, the facility has space
available for custom built enclosures. The iBIZ-designed infrastructure includes
3 primary environmental control systems, uninterruptible power systems with
battery and generator back-up functions. The facility is connected by 3 diverse
optical fiber routes and by 4 major access providers, delivering Internet
traffic directly to the Internet backbone.
iBIZ's principal offices are located at 1919 West Lone Cactus, Phoenix,
Arizona 85021. iBIZ maintains a website at www.ibizcorp.com. The information on
the website is not part of this prospectus.
Statements regarding the various hardware products offered by us, joint
ventures, marketing agreements and web-hosting services are forward-looking and
you should not rely on them or assume that the products discussed will ever be
shipped in quantities sufficient to generate material revenue or that marketing
agreements and web-hosting services will generate any revenue. Many products
discussed in this prospectus may ultimately not be sold or may only be sold in
limited quantities. Technology used in computer products is subject to rapid
obsolescence, changing consumer preferences, software advancements, and
competitors' products time to market. These factors, among others, may result in
unforeseen changes in the types of products ultimately sold and services offered
by iBIZ.
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Products
INVNSYS engages in the business of designing, manufacturing and
distributing small-footprint desktop computers, transaction printers, general
purpose financial application keyboards, numeric keypads, cathode ray tube
("CRT") and thin-film transistor liquid-crystal-display ("TFT-LCD") monitors and
related products. INVNSYS also markets a line of original equipment manufacturer
("OEM") notebook computers and distributes color printers. In addition to
hardware, in December 1999, INVNSYS began reselling third-party hardware,
software, and related supplies. INVNSYS provides DSL services to commercial
consumers through an agreement with Northpoint Communications, Inc. and began
offering co-location services on September 14, 2000.
We currently derive revenue from all of the foregoing products and
services. The sale of computer hardware and third party software account for
approximately $100,000 monthly in sales volume. Our DSL offering has
historically generated approximately $30,000 monthly. However, the recent sale
of the material assets of our primary DSL provider, Northpoint Communications to
AT&T, will impact those revenue streams in the near term fiscal periods. INVNSYS
has secured an agreement with Qwest to provide their ADSL brand product and will
continue to provide a DSL offering to their customers. The current customer base
for Northpoint DSL will not directly transfer to the Qwest product due to a
material difference in the product technical protocols. Continued sales efforts
will be required to rebuild the monthly recurring revenues relating to the
Northpoint offering, in the event the Northpoint network should become
commercially unavailable as a result of their asset sale. Our co-location
offering is generating monthly revenues of approximately $50,000. We anticipate
there to be steady monthly growth in the revenues associated with this offering.
INVNSYS' continued success is partially dependent upon the introduction
of new products and the enhancement of existing products. INVNSYS is actively
engaged in the design and development of additional computers and peripherals to
augment its present product line. Currently, INVNSYS designs many of its
products in-house. INVNSYS employs a seven-person product design and development
staff that is managed directly by Kenneth Schilling. During fiscal years 2000
and 1999, INVNSYS spent $7,942 and $5,014, respectively, on expenses directly
allocated for research and development.
Because of the rapid pace of technological advances in the personal
computer industry, INVNSYS must be prepared to design, develop, manufacture and
market new and more powerful hardware products in a relatively short time span.
While INVNSYS believes that it has been successful to date in accomplishing that
goal, there can be no assurance that it will continue to do so in the future.
o Personal Computers. We offer two small footprint personal computers, the
Sahara and the Safari.
o Keyboards. We market a range of keyboards and numeric keypads targeted at
financial institutions. We market our "KeySync" line of keyboards and
lapboards, specifically designed for use with hand-held personal organizers
such as 3COM's Palm(TM) devices.
24
o Displays and Monitors. We sell a line of space-saving, zero-emission
Harsper TFT-LCD flat panel displays. We believe our TFT-LCD panels take up
less than one-tenth of the space needed for an equivalent cathode ray tube
monitor and are some of the thinnest available on the market. We also offer
a line of traditional monitors.
o Notebook Computers. We market a complete line of competitively priced,
build-to-order notebook computers. Currently, we sell two models, the
Apache and the Phoenix.
o Printers and Peripherals. We are an authorized distributor of Epson
printers and peripherals and currently offer two transactional printers.
o Third-Party Hardware, Software, and Related Supplies. In an effort to
provide our customers a wider range of products, we recently began
reselling third-party hardware, software, and related supplies.
Services
Responding to market demand for complete network solutions, INVNSYS
began providing network integration services in the last quarter of 1999.
Through previous contacts developed by its Director of Network Services prior to
joining iBIZ, INVNSYS acquired network integration service accounts with
American Express, Motorola, and Intel. These services are currently generating
approximately $25,000 per month in revenues, although we do not anticipate
significant growth in this area and we are reviewing the future viability of the
service.
Expanding its networking capabilities, in November 1999, INVNSYS
entered into an agreement with Northpoint Communications. Through this
agreement, INVNSYS began offering digital subscriber line ("DSL") services to
commercial customers. DSL service is an emerging technology providing high-speed
Internet connections over phone carriers' existing copper wiring at connection
speeds ranging from 144 KBPS to 1.5 MBPS. Management believes DSL service offers
a lower cost alternative to competing products such as T-1 and frame relay
services that provide similar connection speeds but require additional
infrastructure expenditures.
Management believes that the addition of network integration and DSL
services will allow INVNSYS to expand its customer base by enabling us to offer
complete networking solutions. To date, INVNSYS has recognized no significant
revenue from these new services. There can be no assurance that INVNSYS will be
successful in developing, integrating and profiting from its network integration
or DSL services.
INVNSYS completed a co-location facility in August, 2000 and opened it
for service on September 14, 2000. "Co-location" is providing network
connections, such as Internet leased lines, to several servers housed together
in a server room. Typically, we provide a server, usually a Web server, located
at our dedicated facility designed with resources which include a secured cage
or cabinet, regulated power, dedicated internet connection, security and
support.
25
Our co-location facility offers our customers a secure place to
physically house their hardware and equipment. The potential for fire, theft, or
vandalism is much greater locating such equipment in their offices or warehouse.
Our facility also offers high security - including cameras, fire detection and
extinguishing devices - multiple connection feeds, filtered power, backup power
generators and other items to ensure high-availability, which is mandatory for
all Web-based, virtual businesses.
Our customers prefer co-location because the server-owners want their
machine to be on a high-speed Internet connection and/or they do not want the
security risks of having the server on their own network.
There can be no assurance that INVNSYS will develop the economies of
scale or obtain the customer base necessary to achieve long-term profitability
in its co-location facility.
Marketing, Sales and Distribution
INVNSYS markets and distributes products directly to end users through
a direct sales force, regional resellers, value-added providers in the banking
and point-of-sale ("POS") market and Internet commerce sites. INVNSYS has a
direct sales force of nine employees, directed by Mr. Schilling, who market
INVNSYS' products.
INVNSYS has discontinued selling its products to retail customers
through its website.
In January 2000, INVNSYS was named the exclusive United States
distributor (subsequently, INVNSYS permitted the agreement to become
non-exclusive) of certain current and all new Harsper Co., Ltd. TFT-LCD products
and services. The Master Distribution Agreement is effective until September 31,
2001, subject to annual renewal unless terminated by either party prior to the
then effective renewal date. After the initial period, the agreement may be
terminated subject to mutual acceptance of the parties and upon 30 days written
notice. The sale of Harsper TFT - LCD products is beginning to generate monthly
revenues. We anticipate material revenues from this relationship beginning in
our fiscal 3rd quarter.
INVNSYS also distributes its products to regional resellers national
distributors and to retail stores such as CompUSA, Inc. and Fry's Electronics.
INVNSYS is actively seeking to expand it distribution of PDA accessories to
additional retail stores but there is no assurance that this expansion will
occur. Our PDA related products represent a significant portion of our current
revenue stream. The product line has grown to 42 items over the past year and we
have made significant progress in the development of our retail distribution
channels. We anticipate further growth in this area over the coming periods. The
average monthly revenues from this product offering are approximately $100,000
per month.
INVNSYS has a marketing agreement with Global Telephone Communication,
Inc. ("Global"), whereby Global will market INVNSYS' products in the Pacific
Rim. Management believes that Global, through a joint venture with Pacific
Assets International, will provide access to numerous banks throughout Asia,
including Mainland China, Hong Kong, Taiwan, South Korea, Malaysia, Indonesia
and Japan. To date, however, INVNSYS has not recognized revenues from its
marketing agreement with Global, and there can be no assurance of revenues in
the foreseeable future.
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Manufacturing
INVNSYS' products are engineered and manufactured by various entities
in Taiwan. Currently, INVNSYS has an agreement with DataComp, a private
Taiwanese company, to manufacture INVNSYS' keyboards and keypads. The Harsper
TFT-LCD panels are manufactured in South Korea. First International Computer in
Taiwan currently manufactures INVNSYS' Sahara desktop computers.
These manufacturers build INVNSYS' products to INVNSYS' specifications
with non-proprietary components. Therefore, the vast majority of parts used in
INVNSYS' products are available to INVNSYS' competitors. Although INVNSYS has
not experienced difficulties in the past relating to engineering and
manufacturing, the failure of INVNSYS' manufacturers to produce products of
sufficient quantity and quality could adversely affect INVNSYS' ability to sell
the products its customers' demand.
INVNSYS engages in final assembly, functional testing and quality
control of its products in its Phoenix, Arizona facility. Management believes
INVNSYS' completion of the final stages of manufacturing allows INVNSYS to
ensure quality control for its products manufactured overseas.
INVNSYS has entered into an agreement with Twinhead Corporation, a
Taiwanese manufacturer of notebook computers ("Twinhead"), to produce
build-to-order notebook computers. The design, engineering and manufacturing of
INVNSYS' notebook computers is done entirely by Twinhead. Management believes
this relationship allows INVNSYS to offer a broader range of products to its
customers without the cost of research and development and manufacturing.
Licenses
Microsoft, Inc. In June 1999, INVNSYS entered into an agreement with
Microsoft, Inc. to become an OEM system builder. Participation in this program
allows INVNSYS to install genuine Microsoft operating systems in selected
applications with full support from Microsoft. In addition, this agreement
entitles INVNSYS to pre-production versions of Microsoft products and enables
INVNSYS to provide input into development and design of new products. The
agreement with Microsoft is currently facilitating the generation of revenue in
certain products contained in our PDA line. While we do not generate revenue
directly from this agreement, it supports current and future development efforts
for products on the Microsoft platforms.
KeyLink Software License. iBIZ has an exclusive, perpetual license to
use, distribute and offer for sale with associated hardware the software that
facilitates the connection between the KeySync keyboard and the 3COM Palm
devices. The KeyLink software is our proprietary software on which sales of the
KeySync Keyboard are based. We do not generate revenue directly from the sale of
the software but rather the sale of the products that utilize the KeyLink
software as their interface to other platforms. We will continue to develop on
this base as new PDA's are introduced requiring driver support.
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Patents and Trademarks
INVNSYS holds no United States or foreign patents for its products.
However, iBIZ has filed a patent application for its Lapboard keyboard. In
general, INVNSYS believes that its continued success will depend primarily upon
the technical expertise, creative skills, and management abilities of its
officers, directors, and key employees rather than on patent ownership.
iBIZ has filed an application with the United States Patent and
Trademark Office for the use of the names "iBIZ" and "KeySync" and is currently
investigating various other product trademarks.
Service and Support
INVNSYS provides its customers with a comprehensive service and support
program. Technical support is provided to customers via a toll-free telephone
number as well as through the iBIZ website. The number is available Monday
through Friday 8:00 a.m. to 5:00 p.m., Mountain Standard Time. INVNSYS maintains
a staff of approximately 20 technical and customer support representatives who
respond to telephone inquiries.
Also available on iBIZ's website are links to files for software
patches and drivers used for software updates.
INVNSYS' products have either a one-year or three-year limited warranty
covering parts and service. In addition, INVNSYS offers extended service
agreements, which may extend warranty coverage for up to two additional years.
Under the Virtual Spare program, INVNSYS provides replacement units by next-day
shipment in the event a customer's unit fails. Under this program, customers
have, at no additional expense, the option to have their existing hard-drive
configuration installed on the replacement unit. The customer's units are then
returned to INVNSYS' Phoenix facility for service. Under INVNSYS' On-Site
program, customers have the ability to have a company-owned spare on-site for
immediate availability in the event of a failure. Failed units are then returned
to INVNSYS' facility for service and returned to replace the spare for future
needs. INVNSYS believes its Virtual Spare and On-Site programs eliminate the
need for on-site technical support for the replacement units and reduce set-up
time at customer facilities.
Competition
Personal Computers
The personal computer industry is highly competitive. INVNSYS competes
at the product level with various other personal computer manufacturers and at
the distribution level primarily with computer retailers, on-line marketers and
the direct sales forces of large personal computer manufacturers.
At the product level, the personal computer industry is characterized
by rapid technological advances in both hardware and software development and by
the frequent introduction of new and innovative products. There are
approximately 100 manufacturers of personal computers, the majority of which
have greater financial, marketing and technological resources than INVNSYS.
Competitors at this level include IBM, Compaq, Dell, NEC, and Gateway 2000.
Gateway 2000 and NEC, among other competitors, have recently introduced smaller
desk top computers than have been manufactured in the past. However, those
computers are targeted for the consumer and not for the corporate customer and
are more expensive than the computers offered by INVNSYS. INVNSYS' main
competitors for its line of thin-client computer systems include specialty
manufacturers such as WYSE Technology.
28
Competitive factors include product quality and reliability, price to
performance characteristics, marketing capability, and corporate reputation. In
addition, a segment of the industry competes primarily for customers on the
basis of price. Although INVNSYS' products are price competitive, INVNSYS does
not attempt to compete solely on the basis of price.
The intense nature of competition in the computer industry subjects
INVNSYS to numerous competitive disadvantages and risks. For example, many major
companies will exclude consideration of INVNSYS' products due to limited size of
the company. Moreover, INVNSYS' current revenue levels cannot support a high
level of national or international marketing and advertising efforts. This, in
turn, makes it more difficult for INVNSYS to develop its brand name and create
customer awareness. Additionally, INVNSYS' products are manufactured by third
parties in Taiwan or South Korea. As such, INVNSYS is subject to numerous risks
and uncertainties of reliance on offshore manufacturers, including, taxes or
tariffs, non-performance, quality control, and civil unrest. Also, as INVNSYS
holds no patents, the vast majority of parts used in its products are available
to its competitors.
Management believes that it can compete effectively by providing
computers and peripherals utilizing unique designs and space-saving qualities,
such as small footprints. Although Management believes it has been successful to
date, there can be no assurance that INVNSYS will be able to compete
successfully in the future.
Services
INVNSYS recently began offering network integration services and DSL
high-speed Internet connection services. Although management believes these
services will enable INVNSYS to expand its customer base through the offering of
complete network solutions, each service will experience intense competition.
For example, network integration services are offered by a wide range of
competitors, including large established companies such as IBM and AT&T, as well
as small private entities. Many of INVNSYS' competitors in network integration
services are more established and have greater resources. INVNSYS has a
technology manager with significant network integration experience and industry
contacts. However, as this is a new line of business, no assurance can be given
that INVNSYS will be able to expand its business of network integration
services.
Similarly, the market for Internet connection services is highly
competitive. INVNSYS' agreement with Northpoint Communications enables it to
offer DSL high-speed Internet connection services. DSL is an emerging technology
that allows for higher speed connections over existing copper phone lines.
Currently, large established companies such as Qwest Communications (formerly
U.S. West Communications), COX Communications, Covad Communications and Rhythms
NetConnections offer DSL services. Co-location and data warehousing competitors
include large public companies such as Exodus Communications, GST, Above-Net,
and Global Center. Management believes that these companies' greater resources
may increase market awareness and acceptance of DSL and co-location services.
However, as INVNSYS has only recently entered the market for Internet connection
services, there can be no assurance that it can successfully compete in the
marketplace.
29
INVNSYS' DSL services also compete with numerous local and national
conventional dial-up Internet service providers such as America Online and
MindSpring. Although capable of providing higher connection speeds than
traditional modem dial-up services, the market for DSL services is currently
limited by the technological requirement that customers be located within a
fixed proximity of a central office which provides the service. In contrast,
conventional dial-up Internet services, while providing slower connection
speeds, may be accessed by any telephone line. There can be assurance that the
market for DSL services will develop to successfully compete against
conventional dial-up Internet service providers or that INVNSYS will
successfully market its DSL services. There can be no assurance that the changes
in technology will not make co-location services obsolete or that INVNSYS will
achieve the necessary market penetration in its geographic region necessary to
achieve profitability in its co-location facility.
Reselling
As part of its efforts to provide complete networking solutions, in
December 1999, INVNSYS began reselling third-party hardware, software, and
related supplies to business customers. The market for reselling these products
is highly competitive. INVNSYS competes against a wide range of competitors,
including the direct sales forces of companies such as CompUSA, and ASAP
Software Express, a division of Corporate Express, Inc., and mail order
companies such as Insight Enterprises, and Computer Discount Warehouse. Many of
INVNSYS' competitors are more established and have greater resources. Management
believes that INVNSYS can compete effectively in this market segment in that
INVNSYS can provide complete network solutions in conjunction with competitively
priced third-party hardware, software and related supplies. To date, management
estimates that the reselling of third-party software has generated sales of
approximately $100,000 per month. However, there is no assurance that iBIZ's
relationship with its third-party suppliers will continue, that such revenue
levels will be sustained or that we will be able to effectively compete in the
third-party reselling market segment.
Customers For Products
Throughout its history, INVNSYS' ability to deliver innovative product
designs and quality customer service has enabled it to provide products to major
financial institutions including Wells Fargo, Bank of America, Security Pacific,
Northrim Bank, and First Interstate Banks. Currently, no single customer
accounts for more than 10% of INVNSYS' product revenues.
30
Employees; Labor Relations
As of March 31, 2001, INVNSYS had approximately 53 full-time employees.
No employee of INVNSYS is represented by a labor union or is subject to a
collective bargaining agreement. INVNSYS has never experienced a work-stoppage
due to labor difficulties and believes that its employee relations are good.
FCC Regulations
The Federal Communications Commission (the "FCC") has adopted
regulations setting radio frequency emission standards for computing equipment.
Management believes all of INVNSYS' current products meet applicable FCC and
foreign requirements.
INVNSYS is in the process of exploring foreign operations. Many foreign
jurisdictions require governmental approval prior to the sale or shipment of
personal computing equipment and in certain jurisdictions such requirements are
more stringent than in the United States. Any delays or failures in obtaining
necessary approvals from foreign jurisdictions may impede or preclude INVNSYS'
efforts to penetrate such markets.
Use of Trademarks and Tradenames
All trademarks and trade names used in this prospectus are the property
of their respective owners.
Management's Discussion and Analysis or Plan of Operation
Through its operating subsidiary, INVNSYS, iBIZ designs, manufactures,
and distributes small footprint desktop computers, transaction printers, general
purpose financial application keyboards, numeric keypads, CRT's, TFT-LCD
monitors and related products. INVNSYS also markets a line of OEM notebook
computers and distributes a line of transactional and color printers. During
fiscal 2000, iBIZ began offering network integration services, digital
subscriber line high-speed Internet connection services, a co-location server
facility and business-to-business software sales. To provide a greater range of
products, iBIZ recently began reselling third-party hardware, software and
related supplies.
Selected Financial Information
- ------------------------------------------------- ------------------------------------------------------------
Year Ended
- ------------------------------------------------- ------------------------------------------------------------
10/31/99 10/31/00
Statement of Operations Data $ $
Net sales 2,082,515 4,144,822
Gross profit 399,610 841,100
Operating income (loss) (1,074,180) (3,570,789)
Net earnings (loss) after tax (1,053,563) (5,455,678)
Net earnings (loss) per share (0.04) (0.18)
Balance Sheet Data
Total assets 1,043,030 4,016,882
Total liabilities 1,476,557 3,135,576
Stockholders' equity (deficit) (433,527) 881,306
31
- ------------------------------------------------- ------------------------------------------------------------
Six Months Ended
- ------------------------------------------------- ------------------------------------------------------------
4/30/00 4/30/01
Statement of Operations Data $ $
- ----------------------------
Net sales 2,064,979 1,609,685
Gross profit 289,858 512,817
Operating income (loss) (1,538,698) (1,504,796)
Net earnings (loss) after tax (2,793,385) (2,393,158)
Net earnings (loss) per share (0.10) (0.06)
Balance Sheet Data At 10/31/00 At 4/30/01
- ------------------
Total assets 4,016,882 3,540,495
Total liabilities 3,135,576 4,487,893
Stockholders' equity (deficit) 881,306 947,398
Results of Operations.
Fiscal year ended October 31, 2000 compared to fiscal year ended
October 31, 1999.
Revenues. Sales increased by approximately 99% to $4,144,822 in the
fiscal year ended October 2000 from $2,082,515 in the fiscal year ended October
1999. The increase was mainly a result of marketing a new line of products and
distributing third-party software.
Our PDA accessory line began retail shipments in June of 2000 and
accounted for approximately 50% of the growth in revenues year over year. We are
experiencing margins ranging from 20% to 50% for these items and anticipate
continued growth in demand over the next three years. We are comfortable in our
ability to maintain the profit percentages for this category due to the rapidly
evolving nature of new product introductions in the PDA space. The products are
inherently lo-tech and therefore relatively inexpensive to produce. As new
models are introduced by major PDA suppliers our cost to adapt current or
develop new offerings are in the sub $50,000 range. Additional expense items may
be incurred should the need for additional warehouse space, personnel, or
shipping capability be necessary to manage to flow of product relative to a
growth in demand for the products. We do not have sales contracts for the sale
of PDA products, other than customary purchase orders.
Our second major new offering relates to the establishment of our
co-location facility. Material revenues were not realized in the 2000 fiscal
year as the facility came on-line in October of 2000. Current revenues for
internet related services are approximately $70,000 per month with significant
short-term prospects for rapid growth. Contractual expenses related to
connectivity for this offering currently total approximately $50,000 per month
and will increase as the client base grows. Based on the current suite of
internet related products and services we anticipate obtaining a 30% gross
margin at current state with margins increasing as expenses are spread over a
broader base of customers.
32
Cost of Sales. The cost of sales of $3,303,722 in the fiscal year ended
October 2000 rose from $1,682,905 in the fiscal year ended October 1999, or
approximately a 96% increase. This rise reflects a coinciding increase in the
sale of products resulting in the purchase of more hardware from INVNSYS'
overseas suppliers.
Gross Profit. Gross profit increased by approximately 110% to $841,100
in the fiscal year ended October 2000 from $399,610 in the fiscal year ended
October 1999. The significant increase resulted primarily from the increase in
revenues coupled with the cost of sales that did not increase in direct
proportion to the increase in revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately 199% to $4,411,889 in the fiscal
year ended October 2000 from $1,473,790 for the fiscal year ended October 1999.
The increase was primarily due to costs of developing new lines of business
(principally DSL and co-location services) and fees paid in connection with
financing activities.
Interest Expense. Interest expense of $58,085 for the fiscal year ended
October 1999 and of $101,563 for the fiscal year ended October 2000 was accrued
on notes payable to Community First National Bank primarily extended for working
capital purposes and on convertible debentures issued to various investors as
described herein.
Interest Expense - Convertible Debenture-Beneficial Conversion Feature.
We issued convertible debt securities with a non-detachable conversion feature
that was "in the money" at the date of issue. IBIZ accounts for such securities
in accordance with Emerging Issues Task Force Topic 98-5. We recorded the fair
value of the beneficial conversion feature as interest expense and an increase
to Paid-in Capital in Excess of Par Value of Stock. Interest expense of
$1,860,454 for the fiscal year ended October 2000 was incurred under the
Company's convertible debenture-beneficial conversion feature.
Net Earnings. Net loss increased to $5,455,678 for the fiscal year
ended October 2000 from a net loss of $1,053,563 for the fiscal year ended
October 1999. The loss resulted from the significant increase in the selling,
general and administrative expenses and the imposition of interest expenses for
the convertible debenture-beneficial conversion feature.
Three month period ended April 30, 2001, compared to three month period ended
April 30, 2000.
Revenues. Sales decreased by approximately 58% to $604,357 for the
three month period ended April 30, 2001 from $1,436,126 for the three month
period ended April 30, 2000. The decrease was mainly as a result of an industry
wide delay in technology capital spending coupled with the cessation of the
Northpoint Communications DSL Service offering.
Cost of Sales. The cost of sales decreased by approximately 61.40% to
$472,601 in the three month period ended April 30, 2001 from $1,224,326 in three
month period ended April 30, 2000. The decrease in cost of sales is attributable
primarily to the decrease in sales over the period and a shift to higher margin
products and services
33
Gross Profit. Gross profit decreased to approximately $131,756 for the
three month period ended April 30, 2001 from approximately $211,800 for the
three month period ended April 30, 2000. The decrease of approximately 37.79%
resulted primarily from the decrease in period revenues as compared to the same
prior year period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately 2.43% to $1,052,992 from
$1,028,002 for the three month period ended April 30, 2001. The increase was
primarily due to costs associated with expanding the PDA and co-location product
offerings, as well as fees paid in connection with financing activities.
Interest Expense. Interest expenses increased to $57,783 for the three
month period ended April 30, 2001 from $36,199 for the three month period ended
April 30, 2000. Interest accrued is primarily related to the convertible
debentures.
Interest Expense. Convertible Debenture-Beneficial Conversion Feature.
The Company has issued convertible debt securities with a non-detachable
conversion feature that was "in the money" at the date of issue. The Company
accounts for such securities in accordance with Emerging Issues Task Force Topic
D-98-5. The Company has recorded the fair value of the beneficial conversion
feature as interest expense and an increase to Paid-in Capital in Excess of Par
Value of Stock. Interest expense of $509,026 for the three month period ended
April 30, 2001, a decrease of 23.9% from the interest expense of $669,504 for
the three month period ended April 30, 2000 was incurred under the Company's
convertible debenture-conversion feature. The decrease resulted from the
reduction in new convertible debentures issued as compared to the corresponding
period from the prior year.
Net Earnings. Net losses decreased to $1,460,646 for the three month
period ended April 30, 2001 from $1,510,330 for the three month period ended
April 30, 2000. The decrease in losses resulted primarily from the decrease in
the interest expenses for the Company's convertible debenture-beneficial
conversion feature coupled with a decrease in Cost of Sales.
34
Six month period ended April 30, 2001, compared to six month period ended April
30, 2000.
Revenues. Sales decreased by approximately 22% to $1,609,685 for the
the six month period ended April 30, 2001 from $2,064,979 for the six month
period ended April 30, 2000. The decrease was mainly as a result of an industry
wide delay in technology capital spending coupled with the cessation of the
Northpoint Communications DSL Service offering.
Cost of Sales. The cost of sales decreased by approximately 38.21% to
$1,096,868 in the six month period ended April 30, 2001 from $1,775,121 in six
month period ended April 30, 2000. The decrease in cost of sales is attributable
primarily to an overall reduction in revenues coupled with the sale of products
which have greater relative margins than past products.
Gross Profit. Gross profit increased to approximately $512,817 for the
six month period ended April 30, 2001 from approximately $289,858 for the six
month period ended April 30, 2000. The increase of approximately 76.92% resulted
primarily from the sale of products which have greater relative margins than
past products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately 23.70% to $2,261,944 from
$1,828,556 for the six month period ended April 30, 2001. The increase was
primarily due to costs associated with expanding the PDA and co-location product
offerings, as well as fees paid in connection with financing activities.
Interest Expense. Interest expense increased to $93,324 for the six
month period ended April 30, 2001 compared to $29,221 for the six month period
ended April 30, 2000. Interest accrued primarily related to the convertible
debentures.
Interest Expense. Convertible Debenture-Beneficial Conversion Feature.
The Company has issued convertible debt securities with a non-detachable
conversion feature that was "in the money" at the date of issue. The Company
accounts for such securities in accordance with Emerging Issues Task Force Topic
D-98-5. The Company has recorded the fair value of the beneficial conversion
feature as interest expense and an increase to Paid-in Capital in Excess of Par
Value of Stock. Interest expense of $811,417 for the six month period ended
April 30, 2001, a decrease of 34.69% from the interest expense of $1,242,439 for
the six month period ended April 30, 2000 was incurred under the Company's
convertible debenture-conversion feature. The decrease resulted from the
reduction in new convertible debentures issued as compared to the corresponding
period from the prior year.
35
Net Earnings. Net losses decreased to $2,393,158 for the six month
period ended April 30, 2001 from $2,793,385 for the six month period ended April
30, 2000. The decrease in losses resulted primarily from the decrease in the
interest expenses for the Company's convertible debenture-beneficial conversion
feature, as well as a decrease in Cost of Sales coupled with an increase in
Gross Profit.
Liquidity and Capital Resources
As a result of the shift of the focus of our business to the sale of
PDA products and co-location services, we experienced a significant change in
the components of our current assets. Our accounts receivable more than doubled
from the 1999 period to the 2000 period, as a result of the increased sales
activity. Our allowance for doubtful accounts also increased as a result a shift
in our customer base from financial institutions to resellers and small
businesses. The focus on PDA products also required us to substantially increase
our tooling and inventory levels to better support increasing demand on a timely
basis. We also incurred increases in prepaid expenses for participation at trade
shows to support the new product areas and increases in service deposits
relating to internet access fees for our co-location services.
We spent substantial funds on construction and installation of our
co-location facility and expansion of our sales and marketing efforts. As a
result, we have consistently raised capital to maintain the business as a going
concern.
Since December 1, 1999, we raised approximately $5,900,000 through the
sale of convertible debentures, convertible notes, common stock and warrants to
various individuals. We relied upon either Section 4(2) or Regulation D, Rule
506 promulgated under the Securities Act of 1933 with respect to these sales of
common stock.. We had commitments for an additional $2,900,000 of convertible
debenture financing, subject to meeting certain representations, warranties,
covenants, and conditions. In April 2001, we mutually agreed to terminate these
commitments, without penalty, as a result of our inability to immediately
register the shares of common stock issuable upon conversion of the convertible
debentures. Certain investors have orally agreed to fund approximately $750,000
through additional convertible debentures, once the registration of which this
prospectus forms a part is declared effective. We believe this should satisfy
our funding requirements for approximately the next 12 months, although there
can be no assurance such funds will be adequate. In the event we do not receive
additional funds within the next three months, we may be required to curtail
certain operations until funds become available.
In September, Globe United Holdings, Inc. ("Globe"), converted
debentures totaling $350,000 and received 1,163,432 shares of common stock and
Lites Trading, Inc. ("Lites"), converted debentures totaling 672,672 and
received 2,172,247 shares of common stock, including stock paid for interest
due. As of December 29, 2000, Lites had an aggregate of $750,000 in principal
amount of debentures outstanding due and payable on March 27, 2005.
36
From October to December 2000, we raised $2.1 million dollars by
issuing 8% convertible debentures. The debentures are due and payable on October
30, 2002, and December 18, 2002, unless converted into our common stock prior to
that time. In December 2000, two parties converted their 8% convertible
debentures totaling $27,000 and received 144,742 shares of common stock,
including stock paid for interest due.
Future minimum lease payments on our facility (excluding taxes and
expenses) are as follows:
October 31, 2001 $161,280
October 31, 2002 169,344
October 31, 2003 177,816
October 31, 2004 186,708
November 1, 2004 - December 31, 2024 6,482,145
- ----------------------------------------------------- ------------------
Total $7,177,263
- ----------------------------------------------------- ------------------
Rent expense for the years ended October 31, 2000 and 1999 was $160,311
and $86,959, respectively. We charged $764,595 and $15,492 to operations for
advertising costs for the years ended October 31, 2000 and 1999, respectively.
The note payable to Community First National Bank demands monthly
payments of principal and interest of $545 with interest at 7% until March 7,
2003.
In April 2001, the Company issued $500,000 of 8% convertible notes. The
notes are due and payable on April 26, 2002, unless converted into common stock
of the Company prior to that time. Certain investors have orally agreed to fund
approximately $750,000 through additional convertible debentures. We believe
this should satisfy our funding requirements for approximately the next 12
months, although there can be no assurance such funds will be adequate. In the
event we do not receive additional funds within the next three months, we may be
required to curtail certain operations until funds become available.
Management believes that its recent diversification into broadband
connectivity services, third-party software sales, and its server co-location
facility should improve its liquidity and cash flow. iBIZ recently expanded its
distribution of it's PDA accessory line and certain hardware into several major
retail and E-Commerce stores. A continuing increase in orders from various PDA
retail outlets may require greater capital than is presently available to the
Company. The Company has entered into a purchase order and receivables financing
agreement established to insure available funding for anticipated growth in PDA
sales volumes.
37
The Company's server co-location facility was opened in September, 2000.
If the consumer demand that the Company anticipates for the server co-location
facility fails to continue to increase, the Company may need additional funding.
There is no assurance that the sales revenue currently received and high margins
experienced, as well as currently anticipated sales growth from both the PDA
accessory and the co-location facility will continue. Entry of additional
competitors with substantially greater resources than those of the Company could
put downward pressure on the anticipated margins.
38
Description of Property
On July 1, 1999, iBIZ began leasing an approximately 15,000 square foot
custom-built office building located at 1919 West Lone Cactus, Phoenix, Arizona.
The facility is used for administration, design, engineering and assembly of
products. iBIZ's lease ("Lease") is for a term of 26.5 years, with monthly
rental payments of $12,800, subject to annual increases, plus taxes and
operating costs.
The facility is leased from Lone Cactus Capital Group, L.L.C., a
limited liability company in which Kenneth Schilling is a member. Mr. Schilling
and his wife, Diane, personally guarantee the Lease. The Lease is no longer
secured by the assets of iBIZ. Management believes this new facility provides
adequate space to accommodate iBIZ's current plan of growth and expansion.
We do not have a policy regarding investments in real estate,
mortgages, or in companies investing in real estate or mortgages. We are not
presently contemplating an investment in real estate.
Certain Relationships and Related Transactions
While a private company, INVNSYS (now iBIZ) made loans totaling
$992,037 to Kenneth Schilling. These loans are payable on demand and accrued
interest at eight percent (8%) during 1997 and six percent (6%) during 1998 and
1999. As of January 31, 2001, the balance of the loans payable by Mr. Schilling
to INVNSYS totaled approximately Three Hundred Eighty-Four Thousand Nine Hundred
Eighty-Eight Dollars and Ninety-Four Cents ($384,988.94). Mr. Schilling, as
trustee of the Moorea Trust, pledged 2,000,000 shares of iBIZ common stock to
secure this debt.
iBIZ leases its facility from Lone Cactus Capital Group, L.L.C., a
limited liability company in which Kenneth Schilling is a member. iBIZ believes
the terms of the lease are at an arms-length fair market rate.
Market for Common Equity and Related Stockholder Matters
Our common stock is currently traded on the OTC Bulletin Board. The
common stock was initially listed under the symbol "EVCV" on June 3, 1998, and
trading began on July 16, 1998. On October 26, 1998, we changed our trading
symbol to "IBIZ." The following charts indicate the high and low sales price for
the common stock for each fiscal quarter between November 1, 1998, and March 31,
2001, as quoted on the OTC:BB. These quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions.
39
---------------------- ----------------------------------
Price
Quarter Ended High Low
---------------------- ----------------- ----------------
January 99 2.563 1.156
April 99 1.875 0.750
July 99 2.266 0.625
October 99 1.500 0.844
January 00 2.063 0.969
April 00 3.188 0.938
July 00 1.281 0.625
October 00 1.219 0.375
January 01 0.419 0.177
April 01 0.220 0.135
Through June 21, 0.20 0.035
2001
---------------------- ----------------- ----------------
As of April 30, 2001, management believes there to be 163 holders of
record of iBIZ's common stock. To date, iBIZ has not paid any dividends on its
common stock. iBIZ does not currently intend to pay dividends in the future.
iBIZ is prohibited from declaring or paying dividends while certain debentures
or warrants are outstanding.
Executive Compensation
The Board believes that leadership and motivation of our executives are
critical to establishing iBIZ's preeminence both in the marketplace and as an
investment for stockholders. The Board is responsible for ensuring that the
individuals in executive positions are highly qualified and that they are
compensated in a manner that furthers our business strategies and aligns their
interests with those of the stockholders. To support this philosophy, the
following principles provide a framework for the compensation program:
o offer competitive total compensation value that will attract
the best talent to iBIZ; motivate individuals to perform at
their highest levels; reward outstanding achievement; and
retain those individuals with the leadership abilities and
skills necessary for building long-term stockholder value.
o encourage executives to manage from the perspective of owners
with an equity stake in iBIZ.
o iBIZ's compensation program for executive officers is targeted
to provide highly competitive total compensation levels
(including both annual and long-term incentives) for highly
competitive performance.
40
The following table sets forth certain compensation paid or accrued by
us to certain of our executive officers during fiscal years ended 2000 and 1999.
Summary Compensation Table
- -----------------------------------------------------------------------------------------------------------
Name and Principal Position Fiscal Year Salary Bonus Options(1) (#)
($)
- -----------------------------------------------------------------------------------------------------------
Kenneth W. Schilling, President & CEO 1999 $200,000 250,000
2000 $200,000 $40,000
Terry S. Ratliff, Vice President, Chief Financial
Officer, Director 1999 $88,000 300,000
2000 $88,000 $40,000
Mark H. Perkins, Executive Vice President, Director 1999 $88,000 300,000
2000 $88,000 $40,000
(1) Includes 50,000 options granted for service as a director of iBIZ.
Option Grants in Last Fiscal Year
No options were granted during the fiscal year ended October 31, 2000.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
- ------------------------------------------------------------------------------------------------------------
Number of Unexercised Value of Unexercised
Shares Options at Fiscal Year In-the-Money Options at
Acquired on Value End Exercisable/ Fiscal Year End Exercisable/
-
Name Exercise (#) Realized ($) Un-exercisable Un-exercisable (1)
- ------------------------------------------------------------------------------------------------------------
Kenneth W. Schilling -0- -0- 225,000/25,000 $0/$0
Terry S. Ratliff -0- -0- 325,000/25,000 $0/$0
Mark H. Perkins -0- -0- 325,000/25,000 $0/$0
- ------------------------------------------------------------------------------------------------------------
(1) Based on closing price of the Common Stock on October 31, 2000 of
$0.4844 per share. None of the options are "in-the-money."
There were no long-term incentive plans or rewards made in fiscal 2000.
Compensation of Directors
Pursuant to the terms of their employment agreements, effective April
22, 1999, Messrs. Schilling, Perkins and Ms. Ratliff each received fifty
thousand (50,000) options to purchase fifty thousand (50,000) shares of common
stock in consideration for their services as directors of iBIZ. Of this 50,000,
25,000 vested on April 22, 2000, and the final 25,000 will vest on April 22,
2001. Each director holds office until the next annual meeting of shareholders
or until their successors are elected and qualified.
Employment Agreements
Employment Agreement for Kenneth W. Schilling
Effective March 5, 1999, Kenneth W. Schilling and iBIZ entered into an
Employment Agreement (the "Agreement"), as amended as of April 22, 1999.
Under the Agreement, Mr. Schilling has been retained to act as
President and Chief Executive Officer of iBIZ. The Agreement is for a term of
two years ending March 4, 2001. Under the Agreement, Mr. Schilling shall receive
41
an annual base salary of $200,000. In addition, effective April 22, 1999, Mr.
Schilling received two hundred fifty thousand (250,000) options to purchase two
hundred fifty thousand (250,000) shares of common stock of iBIZ at an exercise
price of $0.75 per share. Two hundred thousand (200,000) options were issued in
consideration of Mr. Schilling's services as an officer of iBIZ and fifty
thousand (50,000) options were issued in consideration for services as a
director. Two hundred thousand (200,000) options vested upon granting on April
22, 1999, and twenty-five thousand (25,000) options vested on April 22, 2000. An
additional 25,000 will vest on April 22, 2001.
The Agreement provides that upon total and permanent disability, as
defined in the Agreement, iBIZ shall pay Mr. Schilling such benefits as may be
provided to officers of iBIZ under any iBIZ provided disability insurance or
similar policy or under any iBIZ adopted disability plan. In the absence of such
policy or plan, iBIZ shall continue to pay Mr. Schilling for a period of not
less than six months the compensation then in effect as of the effective date of
his termination.
Mr. Schilling may terminate the Agreement upon written notice, within
thirty (30) days following the occurrence of an event constituting "Good
Reason," as defined below. Upon the termination by Mr. Schilling for Good
Reason, Mr. Shilling will be entitled to receive a payment equal to the lesser
of: (1) an amount equal to one-half of his annual base salary in effect at the
time of termination; or (2) the remaining compensation due to Mr. Schilling
under the terms of the Agreement. If Mr. Schilling fails to exercise his rights
to terminate the Agreement for Good Reason within thirty (30) days following an
event constituting Good Reason, such rights shall expire and be of no further
force or effect.
"Good Reason" is defined to mean the occurrence of any of the following
events without Mr. Schilling's consent: (1) assignment of Mr. Schilling to any
duty substantially inconsistent with his position or duties contemplated by the
Agreement or a substantial reduction of his duties contemplated by the
Agreement; (2) the removal of any titles bestowed under the Agreement; (3) any
material breach or failure of iBIZ to carry out the provisions of the Agreement
after notice and an opportunity to cure; and (4) the relocation of Mr.
Schilling, his corporate office facilities, or personnel outside the Phoenix
metropolitan area.
We are currently negotiating a new employment agreement with Mr.
Schilling for an additional three years.
Employment Agreement for Terry Ratliff
Effective March 5, 1999, Terry Ratliff and iBIZ entered into an
Employment Agreement (the "Agreement"), as amended as of April 22, 1999.
Under the Agreement, Ms. Ratliff has been retained to act as
Vice-President/Controller of iBIZ. The Agreement is for a term of two years
ending March 4, 2001. Under the Agreement, Ms. Ratliff shall receive an annual
base salary of $88,000.
In addition, effective April 22, 1999, Ms. Ratliff received three
hundred thousand (300,000) options to purchase three hundred thousand (300,000)
shares of common stock of iBIZ at an exercise price of $0.75 per share. Three
42
hundred thousand (300,000) options were issued in consideration of Ms. Ratliff's
services as an officer of iBIZ and an additional fifty thousand (50,000) options
were issued in consideration for services as a director. Three hundred thousand
(300,000) options vested upon granting on April 22, 1999, and twenty-five
thousand (25,000) options vested on April 22, 2000. An additional 25,000 will
vest on April 22, 2001.
The other terms of Ms. Ratliff's Employment Agreement are identical in
all material respect to Ms. Schilling's.
We are currently negotiating a new employment agreement with Ms.
Ratliff for an additional three years.
Employment Agreement for Mark Perkins
Effective March 5, 1999, Mark Perkins and iBIZ entered into an
Employment Agreement (the "Agreement"), as amended as of April 22, 1999.
Under the Agreement, Mr. Perkins has been retained to act as Vice-
President of Operations of iBIZ. The Agreement is for a term of two years
ending March 4, 2001. Under the Agreement, Mr. Perkins shall receive an
annual base salary of $88,000.
In addition, effective April 22, 1999, Mr. Perkins received three
hundred thousand (300,000) options to purchase three hundred thousand (300,000)
shares of common stock of iBIZ at an exercise price of $0.75 per share. Three
hundred thousand (300,000) options were issued in consideration of Mr. Perkins's
services as an officer of iBIZ and an additional fifty thousand (50,000) options
were issued in consideration for services as a director. Three hundred thousand
(300,000) options vested upon granting on April 22, 1999, and twenty-five
thousand (25,000) options vested on April 22, 2000. An additional 25,000 will
vest on April 22, 2001.
The other terms of Mr. Perkins's Employment Agreement are identical in
all material respect to Ms. Schilling's.
We are currently negotiating a new employment agreement with Mr.
Perkins for an additional three years.
43
TABLE OF CONTENTS
PAGE NO.
INDEPENDENT AUDITORS' REPORT.................................................................... F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheets.............................................................. F-2
Consolidated Statements of Operations.................................................... F-3
Consolidated Statements of Stockholders' Equity.......................................... F4 - F5
Consolidated Statements of Cash Flows.................................................... F6 - F7
Notes to Consolidated Financial Statements............................................... F8 - F24
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders
IBIZ Technology Corp. and Subsidiary
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of IBIZ Technology
Corp. and Subsidiary as of October 31, 2000 and 1999 and the related
consolidated 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 the
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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 IBIZ Technology Corp. and
Subsidiary as of October 31, 2000 and 1999, and the results of their operations
and their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
/S/MOFFITT & COMPANY, P.C.
MOFFITT & COMPANY, P.C.
SCOTTSDALE, ARIZONA
December 30, 2000
Restated and reissued April 10, 2001 (See Note 28)
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2000 AND 1999
(RESTATED)
ASSETS
2000 1999
----------------- ------------------
CURRENT ASSETS
Cash and cash equivalents $ 631,375 $ 25,343
Accounts receivable 432,113 212,300
Inventories 439,582 268,087
Prepaid expenses 104,874 38,984
----------------- ------------------
TOTAL CURRENT ASSETS 1,607,944 544,714
----------------- ------------------
PROPERTY AND EQUIPMENT, NET OF
ACCUMULATED DEPRECIATION 1,948,715 124,747
----------------- ------------------
OTHER ASSETS
Notes receivable, officers 391,332 356,810
Customer list, net of accumulated amortization 7,932 0
Deposits 60,959 16,759
----------------- ------------------
TOTAL OTHER ASSETS 460,223 373,569
----------------- ------------------
TOTAL ASSETS $ 4,016,882 $ 1,043,030
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
2000 1999
----------------- ------------------
CURRENT LIABILITIES
Accounts payable $ 973,894 $ 762,965
Accrued liabilities
Payroll 96,283 31,295
Other 101,736 106,904
Customer deposits 0 115,408
Sales and payroll taxes payable 89,023 98,774
Corporation income taxes payable 19,028 19,078
Deferred income 85,798 54,962
Convertible debentures payable 0 200,000
Notes payable, current portion 5,335 67,497
----------------- ------------------
TOTAL CURRENT LIABILITIES 1,371,097 1,456,883
----------------- ------------------
LONG - TERM LIABILITIES
Convertible debentures payable 1,750,000 0
Notes payable 14,479 19,674
----------------- ------------------
TOTAL LONG - TERM LIABILITIES 1,764,479 19,674
----------------- ------------------
STOCKHOLDERS' EQUITY
Common stock
Authorized - 100,000,000 shares, par
value $.001 per shares
Issued and outstanding
October 31, 1999 - 26,370,418 shares 0 26,370
October 31, 2000 - 37,812,425 shares 37,813 0
Paid in capital in excess of par value of stock 7,940,384 1,106,266
Advance on stock subscription 0 75,000
Retained earnings ( 7,096,891) ( 1,641,163)
------------------- --------------------
TOTAL STOCKHOLDERS' EQUITY 881,306 ( 433,527)
----------------- ------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 4,016,882 $ 1,043,030
================= ==================
See Accompanying Notes and Independent Auditors' Report.
F-2
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
(RESTATED)
2000 1999
----------------- ------------------
SALES $ 4,144,822 $ 2,082,515
COST OF SALES 3,303,722 1,682,905
----------------- ------------------
GROSS PROFIT 841,100 399,610
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ( 4,411,889) ( 1,473,790)
CANCELLATION OF DEBT 39,950 154,933
OTHER INCOME 0 32,339
----------------- ------------------
OPERATING (LOSS) ( 3,530,839) ( 886,908)
INTEREST INCOME AND (EXPENSES)
Interest income 37,178 28,260
Interest expense ( 101,563) ( 58,085)
Interest expense - convertible debentures-beneficial
conversion feature ( 1,860,454) 0
------------------- ------------------
(LOSS) BEFORE INCOME TAXES ( 5,455,678) ( 916,733)
INCOME TAXES ( 50) ( 136,830)
----------------- ------------------
NET (LOSS) $ ( 5,455,728) $ ( 1,053,563)
================== ===================
NET (LOSS) PER COMMON SHARE
Basic and Diluted $ ( .18) $ ( .04)
================== ===================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 30,425,004 25,116,013
================== ===================
See Accompanying Notes and Independent Auditors' Report.
F-3
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS
OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
(RESTATED)
Common Stock
Shares Amount
BALANCE, NOVEMBER 1, 1998 .......................... 8,000,000 $ 8,000
ISSUANCE OF COMMON STOCK FOR ACQUISITION
OF INVNSYS TECHNOLOGY CORPORATION AND
TRANSFER OF NET ASSETS AT BOOK VALUE
PER REVERSE ACQUISITION ......................... 16,000,000 16,000
ISSUANCE OF COMMON STOCK FOR CASH
AT .35(cent)PER SHARE ........................... 640,318 640
AT .50(cent)PER SHARE ........................... 1,730,100 1,730
FEES AND COSTS FOR ISSUANCE OF STOCK ............... 0 0
ADVANCES ON STOCK SUBSCRIPTION ..................... 0 0
NET (LOSS) FOR THE YEAR ENDED OCTOBER 31, 1999 ..... 0 0
---------- ----------
BALANCE, OCTOBER 31, 1999 .......................... 26,370,418 26,370
NOVEMBER, 1999 - CONVERSION OF DEBENTURES
FOR COMMON STOCK ................................ 300,962 301
NOVEMBER, 1999 - ISSUANCE OF COMMON STOCK
FOR CASH ........................................ 100,000 100
JANUARY, 2000 - ISSUANCE OF COMMON STOCK
FOR CASH ........................................ 250,000 250
NOVEMBER, 1999 TO JANUARY, 2000 - FEES AND
COSTS FOR ISSUANCE OF STOCK ..................... 0 0
FEBRUARY, 2000 - ISSUANCE OF COMMON STOCK
FOR ADVANCES ON STOCK SUBSCRIPTIONS ............. 100,000 100
FEBRUARY, 2000 - CONVERSION OF DEBENTURES
FOR COMMON STOCK ................................ 300,000 300
MARCH, 2000 - CONVERSION OF DEBENTURES FOR
COMMON STOCK .................................... 1,292,482 1,293
APRIL, 2000 - CONVERSION OF DEBENTURES FOR
COMMON STOCK .................................... 88,938 89
APRIL, 2000 - ISSUANCE OF COMMON STOCK FOR
CASH FROM WARRANTS .............................. 420,000 420
APRIL, 2000 - ISSUANCE OF COMMON STOCK FOR
CASH FROM STOCK OPTIONS ......................... 70,000 70
APRIL, 2000 - ISSUANCE OF COMMON STOCK FOR
ACCOUNT PAYABLE ................................. 100,000 100
See Accompanying Notes and Independent Auditors' Report.
F-4
Paid in
Capital in
Excess of Advances
Par Value on Stock Retained
of Stock Subscriptions Earnings
$ 145,282 $ 154,111 $ ( 74,266)
0 0 ( 513,334)
223,471 0 0
863,320 ( 154,111) 0
( 125,807) 0 0
0 75,000 0
0 0 ( 1,053,563)
---------------------- ---------------------- ----------------------
1,106,266 75,000 ( 1,641,163)
200,734 0 0
49,900 0 0
274,750 0 0
( 188,000) 0 0
74,900 ( 75,000) 0
199,700 0 0
1,039,585 0 0
59,944 0 0
314,580 0 0
52,430 0 0
49,900 0 0
See Accompanying Notes and Independent Auditors' Report.
F-4
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS
OF STOCKHOLDERS' EQUITY(CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
(RESTATED)
Common Stock
Shares Amount
APRIL, 2000 - ISSUANCE OF COMMON STOCK FOR
SERVICES ........................................ 250,000 $ 250
APRIL, 2000 - ISSUANCE OF COMMON STOCK FOR
PAYROLL BONUSES ................................. 50,000 50
APRIL, 2000 - ISSUANCE OF COMMON STOCK FOR
FEES AND COSTS FOR ISSUANCE OF COMMON STOCK ..... 407,375 407
FEBRUARY, 2000 TO APRIL, 2000 - FEES AND COSTS
FOR ISSUANCE OF STOCK ........................... 0 0
JUNE, 2000 - ISSUANCE OF COMMON STOCK FOR
SERVICES ........................................ 150,000 150
JUNE, 2000 - ISSUANCE OF COMMON STOCK FOR
DEBENTURES ...................................... 362,653 363
JULY, 2000 - ISSUANCE OF COMMON STOCK FOR
SERVICES ........................................ 480,000 480
SEPTEMBER 2000 - ISSUANCE OF COMMON STOCK
FOR CASH FOR EMPLOYEE STOCK OPTIONS ............. 20,000 20
SEPTEMBER 2000 - CONVERSION OF DEBENTURES
FOR COMMON STOCK ................................ 3,335,679 3,336
SEPTEMBER, 2000 - ISSUANCE OF COMMON STOCK
FOR CASH FOR WARRANTS ........................... 100,000 100
SEPTEMBER 2000 - ISSUANCE OF COMMON STOCK
FOR CASH ........................................ 3,040,918 3,041
OCTOBER, 2000 - ISSUANCE OF COMMON STOCK
FOR CASH ........................................ 223,000 223
MAY, 2000 TO OCTOBER, 2000 - FEES AND COSTS FOR
ISSUANCE OF COMMON STOCK ........................ 0 0
INTEREST EXPENSE - CONVERTIBLE DEBENTURES-
BENEFICIAL CONVERSION FEATURE ................... 0 0
NET (LOSS) FOR THE YEAR ENDED OCTOBER 31, 2000 ..... 0 0
--------- ---------
BALANCE, OCTOBER 31, 2000 .......................... 37,812,425 $ 37,813
========= =========
See Accompanying Notes and Independent Auditors' Report.
F-5
Paid in
Capital in
Excess of Advances
Par Value on Stock Retained
of Stock Subscriptions Earnings
$ 210,500 $ 0 $ 0
50,450 0 0
483,147 0 0
( 668,987) 0 0
131,100 0 0
226,295 0 0
383,520 0 0
14,980 0 0
1,029,612 0 0
74,900 0 0
1,049,911 0 0
100,127 0 0
( 240,314) 0 0
1,860,454 0 0
0 0 ( 5,455,728)
---------------------- ---------------------- ----------------------
$ 7,940,384 $ 0 $ ( 7,096,891)
====================== ====================== ======================
See Accompanying Notes and Independent Auditors' Report.
F-5
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
(RESTATED)
2000 1999
----------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) .............................................$ ( 5,455,728) $ (1,053,563)
Adjustments to reconcile net (loss) to
net cash (used) by operating activities
Depreciation and amortization ...................... 73,357 42,104
Loss on disposition of property and equipment ...... 21,081 0
Interest expense - convertible debentures-beneficial
conversion feature ............................... 1,860,454 0
Common stock issued for convertible interest ....... 82,082 0
Common stock issued for services ................... 776,500 0
Changes in operating assets and liabilities
Accounts receivable ................................ (219,813) (58,764)
Other receivables .................................. 0 1,500
Inventories ........................................ (171,495) 55,310
Prepaid expenses ................................... (65,890) (11,984)
Deferred tax assets ................................ 0 145,054
Accounts payable ................................... 260,929 (26,898)
Accrued liabilities and taxes ...................... 50,019 (80,443)
Customer deposits .................................. (115,408) (279,856)
Deferred income .................................... 30,836 (16,069)
Changes in deposits .................................. ( 44,200) 3,396
----------- -----------
NET CASH (USED) BY OPERATING
ACTIVITIES ................................... (2,917,276) (1,280,213)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .................... (1,918,232) (90,315)
Purchase of customer list .............................. (11,900) 0
----------- -----------
NET CASH (USED) BY INVESTING
ACTIVITIES .................................... (1,930,132) (90,315)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft ......................................... 0 (13,700)
Net proceeds from issuance of common stock ............. 1,355,319 806,873
Advances on stock subscriptions ........................ 0 75,000
Proceeds from issuance of convertible debentures payable 4,200,000 200,000
Repayment of notes payable ............................. (67,357) (306,532)
Increase in notes receivable, officers ................. (34,522) 634,030
----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES .................................... $ 5,453,440 $ 1,395,671
----------- -----------
See Accompanying Notes and Independent Auditors' Report.
F-6
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999
(RESTATED)
2000 1999
----------------- ------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 606,032 $ 25,143
CASH AND CASH EQUIVALENTS, AT
BEGINNING OF YEAR 25,343 200
----------------- ------------------
CASH AND CASH EQUIVALENTS, AT
END OF YEAR $ 631,375 $ 25,343
================= ==================
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during year:
Interest $ 83,801 $ 56,766
================= ==================
Taxes $ 50 $ 50
================= ==================
NON CASH INVESTING AND FINANCING
ACTIVITIES
Issuance of common stock for investment in Invnsys
Technology Corporation $ 0 $ 16,000
================= ==================
Issuance of common stock for convertible debentures $ 2,761,552 $ 0
================= ==================
Issuance of common stock for fees, services and
payroll included in selling general and administrative
expenses $ 776,500 $ 0
================= ==================
Issuance of common stock for fees included in paid in
capital in excess of par value of stock $ 483,554 $ 0
================= ==================
Issuance of common stock for advances on stock
subscriptions $ 75,000 $ 0
================= ==================
Issuance of common stock for accounts payable $ 50,000 $ 0
================= ==================
Interest expense - convertible debentures-beneficial
conversion feature $ 1,860,454 $ 0
================= ==================
See Accompanying Notes and Independent Auditors' Report.
F-7
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2000 AND 1999
(RESTATED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
IBIZ Technology Corp. (hereinafter referred to as the Company)
was organized on April 6, 1994, under the laws of the State
of Florida. In January, 1999, the Company acquired Invnsys
Technology Corporation, an Arizona corporation. Per the
acquisition agreement, the Company issued 16,000,000 shares
of newly issued restricted common stock for 100% of the
issued and outstanding stock of Invnsys Technology
Corporation. IBIZ Technology Corp. operates as a holding
company for subsidiary acquisitions.
Invnsys Technology Corporation (hereinafter referred to as
Invnsys) is in the business of designing, manufacturing and
distributing desktop computers, monitors, transactional
printers, financial application keyboards, numeric keypads and
related products. Invnsys also provides network integration
services, digital subscriber line high speed internet connection
services, business-to-business sale of software and a
co-location computer data and server facility. Invnsys
Technology Corporation also provides repair services and sells
maintenance contracts. The corporation operates a service center
in Phoenix, Arizona.
Principles of consolidation
The consolidated financial statements include the accounts of
IBIZ Technology Corp. and its wholly owned subsidiary, Invnsys
Technology Corporation.
All material inter-company accounts and transactions have been
eliminated.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash
equivalents.
Inventories
Inventories are stated at the lower of cost (determined
principally by average cost) or market.
Property and Equipment
Property and equipment are stated at cost. Major renewals and
improvements are charged to the asset accounts while
replacement, maintenance and repairs, which do not improve or
extend the lives of the respective assets, are expensed. At the
time property and equipment are retired or otherwise disposed
of, the asset and related accumulated depreciation accounts are
relieved of the applicable amounts. Gains or losses from
retirements or sales are credited or charged to income.
See Accompanying Notes and Independent Auditors' Report.
F-8
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000 AND 1999
(RESTATED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment (Continued)
Invnsys depreciates its property and equipment for financial reporting purposes
using the straight-line method based upon the following useful lives of the
assets:
Tooling 3 Years
Machinery and equipment 5-10 Years
Office furniture and equipment 5-10 Years
Vehicles 5 Years
Leasehold improvements 5 Years
Computer software 3-5 Years
Co-location
Computer equipment 5 Years
Rack systems 10 Years
Cabling and leasehold improvements 25 Years
Accounting for Convertible Debt Securities
The Company has issued convertible debt securities with a non-detachable
conversion feature that was "in the money" at the date of issue. The Company
accounts for such securities in accordance with Emerging Issues Task Force Topic
98-5. The Company has recorded the fair value of the beneficial conversion
feature as interest expense and an increase to Paid in Capital in Excess of Par
Value of Stock.
The beneficial interest is computed by subtracting the stock conversion price
from the market price of the stock times the number of shares converted.
Customer Lists
The customer list is recorded at cost and is being amortized on a straight-line
basis over three years.
Accounting Estimates
Management uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from the estimates that were used.
Revenue Recognition
Invnsys recognizes its revenue as follows:
Products sales - When the goods are shipped and title passes to the customer.
See Accompanying Notes and Independent Auditors' Report.
F-9
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000 AND 1999
(RESTATED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
Maintenance agreements - Income from maintenance agreements is being recognized
on a straight-line basis over the life of the service contracts. The unearned
portion is recorded as deferred income.
Service income - When services are performed.
Internet sales (DSL and Co-location) - When services are performed and
completed.
Income Taxes
Provisions for income taxes are based on taxes payable or refundable for the
current year and deferred taxes on temporary differences between the amount of
taxable income and pretax financial income and between the tax basis of assets
and liabilities and their reported amounts in the financial statements. Deferred
tax assets and liabilities are included in the financial statements at currently
enacted income tax rates applicable to the period in which the deferred tax
assets and liabilities are expected to be realized or settled as prescribed in
FASB Statement No.109, Accounting for Income Taxes. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
Net (Loss) Per Share
The Company adopted Statement of Financial Accounting Standards No. 128 that
requires the reporting of both basic and diluted (loss) per share. Basic (loss)
per share is computed by dividing net (loss) available to common stockholders by
the weighted average number of common shares outstanding for the period. Diluted
(loss) per share reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common
stock. In accordance with FASB 128, any anti-dilutive effects on net (loss) per
share are excluded.
Risks and Uncertainties
The Company is in the computer and computer technology industry. The Company's
products are subject to rapid obsolescence and management must authorize funds
for research and development costs in order to stay competitive.
Common Stock Issued for Non-Cash Transactions
It is the Company's policy to value stock issued for non-cash transactions such
as accounts payable, payroll or services at the stock closing price at the date
the transaction is completed.
NOTE 2 DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates that the fair value of all financial instruments at
October 31, 2000 and 1999, as defined in FASB 107, does not differ materially
from the aggregate carrying values of its financial instruments recorded in the
accompanying balance sheets. The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. Considerable judgement is required in interpreting
market data to develop the estimates of fair value, and accordingly, the
estimates are not necessarily indicative of the amounts that the Company could
realize in a current market exchange.
See Accompanying Notes and Independent Auditors' Report.
F-10
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000 AND 1999
(RESTATED)
NOTE 3 ACCOUNTS RECEIVABLE
A summary of accounts receivable and allowance for doubtful
accounts is as follows:
2000 1999
----------------- ------------------
Accounts receivable $ 457,113 $ 214,800
Allowance for doubtful accounts 25,000 2,500
----------------- ------------------
Net accounts receivable $ 432,113 $ 212,300
================= ==================
Allowance for doubtful accounts
Balance, beginning of year $ 2,500 $ 2,500
Additions for the year 97,500 0
Write-off of uncollectible accounts
for the year ( 75,000) 0
----------------- ------------------
Balance, end of year $ 25,000 $ 2,500
================= ==================
NOTE 4 INVENTORIES
The inventories are comprised of the following:
2000 1999
----------------- ------------------
Finished products $ 391,479 $ 217,236
Demonstration and loaner units 4,070 5,731
Depot units 0 20,089
Office 44,033 24,712
Parts 0 319
----------------- ------------------
$ 439,582 $ 268,087
================= ==================
NOTE 5 PROPERTY AND EQUIPMENT
Property and equipment and accumulated depreciation consists of:
2000 1999
----------------- ------------------
Co-location
Computer equipment $ 566,761 $ 0
Rack Systems 297,317 0
Cabling and leasehold equipment 855,401 0
Tooling 68,100 68,100
Machinery and equipment 49,404 39,032
Office furniture and equipment 123,308 105,627
See Accompanying Notes and Independent Auditors' Report.
F-11
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000 AND 1999
(RESTATED)
NOTE 5 PROPERTY AND EQUIPMENT (CONTINUED)
2000 1999
----------------- ------------------
Vehicles $ 39,141 $ 39,141
Leasehold improvements 23,179 17,031
Software 96,858 0
----------------- ------------------
2,119,469 268,931
Less accumulated depreciation 170,754 144,184
----------------- ------------------
Total property and equipment $ 1,948,715 $ 124,747
================= ==================
Depreciation expense for the years ended October, 2000 and 1999
was $69,389 and $42,104, respectively.
NOTE 6 NOTES RECEIVABLE, OFFICERS
2000 1999
----------------- ------------------
IBIZ Technology Corp.
Notes to two corporation officers.
The notes are unsecured, bear interest at
6% and are due on January 7, 2002. $ 12,079 $ 0
Invnsys Technology Corporation
The related note is secured by 2,000,000 shares of common
stock in the Company, payable on demand and accrues
interest at 6%. Since the notes are collateralized by
2,000,000 shares of stock, management believes that the
notes are fully collectible, but will not be collected
within the current operating cycle and
classified the asset as a long-term asset. 379,253 356,810
----------------- ------------------
Total notes receivable $ 391,332 $ 356,810
================= ==================
NOTE 7 CUSTOMER LIST
The customer list and accumulated amortization consists of:
2000 1999
----------------- ------------------
Cost $ 11,900 $ 0
See Accompanying Notes and Independent Auditors' Report.
F-12
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000 AND 1999
(RESTATED)
NOTE 7 CUSTOMER LIST (CONTINUED)
2000 1999
----------------- ------------------
Less accumulated amortization ( 3,968) 0
----------------- ------------------
Net customer list $ 7,932 $ 0
================= ==================
The amortization expense for the year ended October 31, 2000 and
1999 was $3,968 and $0, respectively.
NOTE 8 CUSTOMER DEPOSITS
It is Invnsys' policy to obtain a portion of the sales price
when orders are received. These funds are recorded as customer
deposits and are applied to the customer invoices when the
merchandise is shipped.
NOTE 9 INCOME TAXES
2000 1999
----------------- ------------------
(Loss) from continuing operations
before income taxes $ ( 3,595,274) $ ( 916,733)
------------------- ------------------
The provision for income taxes is estimated as follows:
Currently payable $ 50 $ 0
----------------- ------------------
Deferred $ 0 $ 136,830
----------------- ------------------
Significant components of the Company's deferred tax assets and
liabilities are as follows at October 31:
Deferred tax assets:
Net operating loss carryforwards $ 1,096,190 $ 294,800
Accrued expenses and miscellaneous 23,651 23,414
Tax credit carryforward 38,424 38,424
----------------- ------------------
1,158,265 356,638
Less valuation allowance 1,158,265 356,638
----------------- ------------------
Net deferred tax asset $ 0 $ 0
================= ==================
See Accompanying Notes and Independent Auditors' Report.
F-13
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000 AND 1999
(RESTATED)
NOTE 9 INCOME TAXES (CONTINUED)
2000 1999
----------------- ------------------
Deferred tax liabilities
Property and equipment related $ 0 $ 6,199
================= ==================
A reconciliation of the valuation allowance is as follows:
Balance, beginning of year $ 356,638 $ 291,068
Addition to allowance for the year
ended October 31, 2000 and 1999 801,627 65,570
----------------- ------------------
Balance, end of year $ 1,158,265 $ 356,638
================= ==================
NOTE 10 TAX CARRYFORWARDS
The Company has the following tax carryforwards at October 31,
2000:
Expiration
Year Amount Date
Net operating loss
October 31, 1995 $ 2,500 October 31, 2010
October 31, 1997 253,686 October 31, 2012
October 31, 1998 71,681 October 31, 2013
October 31, 1999 842,906 October 31, 2019
October 31, 2000 3,575,081 October 31, 2020
---------------------
$ 4,745,854
=====================
Capital loss
October 31, 1997 25,600 October 31, 2002
Contribution
October 31, 1997 545 October 31, 2002
October 31, 1999 2,081 October 31, 2004
October 31, 2000 3,008 October 31, 2005
Research tax credits 38,424
See Accompanying Notes and Independent Auditors' Report.
F-14
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000 AND 1999
(RESTATED)
NOTE 11 CONVERTIBLE DEBENTURES
2000 1999
------------------ ------------------
Schiff, Stelzer, Bishins, and Nissenbaum $ 0 $ 200,000
----------------------------------------
On June 30, 1999, the Company authorized $200,000 of convertible
debentures. The debentures bear interest at 8%, are unsecured
and are due on June 21, 2000. The debentures were converted into
common stock.
NOTE 11 CONVERTIBLE DEBENTURES
2000 1999
------------------ ------------------
Lites Trading Company - $1,600,000 Debenture $ 750,000 $ 0
---------------------------------------------
On March 27, 2000, the Company issued $1,600,000 of 7%
convertible debentures under the following terms and conditions:
1. Due date - March 27, 2005.
2. Interest only on May 1 and December 1 of each
year commencing May 1, 2000.
3. Default interest rate - 18%.
4. Warrants to purchase 375,000 shares of common
stock at $1.45 per share.
5. Conversion terms - The debenture holder shall have the
right to convert all or a portion of the outstanding
principal amount of this debenture plus any accrued
interest into such number of shares of common stock as
shall equal the quotient obtained by dividing the
principal amount of this debenture by the applicable
conversion price.
6. Conversion price - Lesser of (i) $1.45 (fixed price) or
(ii) the product obtained by multiplying the average
closing price by .80.
7. Average closing price - The debenture holder shall have
the election to choose any three trading days out of
twenty trading days immediately preceding the date on
which the holder gives the Company a written notice of the
holder's election to convert outstanding principal of this
debenture.
See Accompanying Notes and Independent Auditors' Report.
F-15
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000 AND 1999
(RESTATED)
NOTE 11 CONVERTIBLE DEBENTURES (Continued)
8. Redemption by Company - If there is a change in control of
the Company, the holder of the debenture can request that
the debenture be redeemed at a price equal to 125% of the
aggregate principal and accrued interest outstanding under
this debenture.
9. The debentures are unsecured.
10. Any further issuance of common stock or debentures
must be approved by debenture holders.
11. Debenture holders have a eighteen month right of first
refusal on future disposition of stock by the Company.
12. Restriction on payment of dividends, retirement of
stock or issuance of new securities.
2000 1999
------------------ ------------------
$5,000,000 Convertible Debenture $ 1,000,000 $ 0
--------------------------------
On October 31, 2000, the Company issued 8% convertible
debentures as follows:
1. Due date - October 30, 2002.
2. Interest payable quarterly from January 1, 2001.
3. Default interest rate - 20%.
4. On the first $ 1,000,000 of financing, the Company
issued warrants to purchase 500,000 shares of stock at $
0.48 per share. The Company reserved an additional
1,240,000 shares for future borrowing on this debenture
line.
5. Put note purchase price - $4,000,000.
6. Fees and costs - 7% - 10% of cash received for
debentures and warrants plus legal fees.
7. The Company must reserve a number of common
shares equal to not less then 200% of the amount of common
shares necessary to allow the debenture and warrant holder
to be able to convert all such outstanding notes and put
notes to common stock.
See Accompanying Notes and Independent Auditors' Report.
F-16
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000 AND 1999
(RESTATED)
NOTE 11 CONVERTIBLE DEBENTURES (Continued)
8. Conversion price for put notes. The initial 50% of the put
notes shall be the lesser of (i) 80% of the average of the
three lowest closing bid prices for the stock for twenty
two days or (ii) 80% of the average of the five lowest
closing bid prices for the stock for sixty days. The
conver- sion price of the balance of the put notes shall
be 86% of the average of the three lowest closing bid
prices for ten days.
9. The debentures have penalty clauses if the common
stock is not issued when required by the debenture
holder.
10. The debentures are unsecured.
11. The Company's right to exercise the put commences
on the actual effective date of the SEC Registration
Statement and expires three years after the effective
date.
12. Right of first refusal - The debenture holders have the
right to purchase a proportionate amount of new issued
shares in order to maintain their ownership interest
percentage.
------------------ ------------------
Total debentures $ 1,750,000 $ 200,000
================== ==================
NOTE 12 NOTES PAYABLE
2000 1999
------------------ ------------------
Note payable to Community First National Bank due in monthly
payments of interest of approximately $3,100. Interest is
computed at national prime as stated in the Wall Street Journal
plus 3 percent. The principal amount is due July 31, 2000. This
note is secured by accounts receivable, general intangibles and
all equipment and leasehold improvements. The principal
shareholder has personally guaranteed the loan and the bank is
the beneficiary of an insurance policy on the life of the
shareholder. Invnsys canceled this line in the year 2000. $ 0 $ 62,426
See Accompanying Notes and Independent Auditors' Report.
F-17
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000 AND 1999
(RESTATED)
NOTE 12 NOTES PAYABLE(continued)
Note payable to Community First National Bank due in monthly
payments of principal and interest of $545 with interest at 7 percent until
March 7, 2004.
The note is secured by an automobile which costs $ 36,000 and
has a book value of $ 9,600. 19,814 24,745
------------------ ------------------
19,814 87,171
Less: current portion 5,335 67,497
------------------ ------------------
Net long-term debt $ 14,479 $ 19,674
=================== ==================
Maturities of long-term debt are as follows:
Year ended October 31
2000 $ 0 $ 67,497
2001 5,476 5,336
2002 5,721 5,721
2003 6,135 6,135
2004 2,482 2,482
------------------ ------------------
$ 19,814 $ 87,171
================== ==================
NOTE 13 REAL ESTATE LEASE
On June 1, 1999, Invnsys leased a new facility from a related entity. The lease
commenced on July 1, 1999, requires initial annual rentals of $153,600 (with
annual increases) plus taxes and operating costs and expires on December 31,
2024. Invnsys has also guaranteed the mortgage on the premises in the amount of
$942,381 and given a security interest in all of its assets, excluding inventory
in the amount of $439,582.
Future minimum lease payments excluding taxes and expenses, are as follows:
October 31, 2000 $ 153,600
October 31, 2001 161,280
October 31, 2002 169,344
October 31, 2003 177,816
October 31, 2004 186,708
November 1, 2004 - December 31, 2024 6,482,145
--------------------
Total $ 7,330,893
====================
Rent expense for the years ended October 31, 2000 and 1999 was $160,311 and
$86,959, respectively.
See Accompanying Notes and Independent Auditors' Report.
F-18
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000 AND 1999
(RESTATED)
NOTE 14 ADVERTISING
All direct advertising costs are expensed as incurred. The
Company charged to operations $764,595 and $15,492 in
advertising costs for the years ended October 31, 2000 and 1999,
respectively.
NOTE 15 INTEREST
The Company incurred interest expenses for the years ended
October 31, 2000 and 1999 as follows:
2000 1999
------------------ ------------------
For operations $ 101,563 $ 58,085
For convertible debentures-beneficial
conversion feature 1,860,454 0
------------------ ------------------
Total $ 1,962,017 $ 58,085
================== ==================
NOTE 16 PRODUCT WARRANTY PROVISION
Invnsys established a provision for product warranty to cover
any potential warranty costs on computer equipment that are not
covered by the computer manufacturer's warranty.
Warranty summary
2000 1999
------------------ ------------------
Balance, beginning of year $ 50,000 $ 50,000
Reduction for the year ( 30,000) 0
------------------ ------------------
Balance, end of year $ 20,000 $ 50,000
================== ==================
NOTE 17 RESEARCH AND DEVELOPMENT
Invnsys incurred research and development cost for the years
ended October 31, 2000 and 1999 of $7,942 and $5,014,
respectively.
NOTE 18 OFFICERS' COMPENSATION
At October 31, 2000, officers' compensation was as follows:
See Accompanying Notes and Independent Auditors' Report.
F-19
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000 AND 1999
(RESTATED)
NOTE 18 OFFICERS' COMPENSATION (continued)
President and Chief Executive officer $ 200,000
Vice President/Chief Financial officer 88,000
Executive Vice President ............. 88,000
Chief Operating Officer .............. 96,200
NOTE 19 ECONOMIC DEPENDENCY
Invnsys purchases the majority of its computer equipment from
three suppliers and purchased 11% of its computer equipment from
one supplier.
NOTE 20 EMPLOYEE STOCK OPTIONS
On January 31, 1999, the corporation adopted a stock option plan
for the purpose of providing an incentive based form of
compensation to the officers, directors, key employees and
service providers of the Company.
The stock subject to the plan and issuable upon exercise of
options granted under the plan are shares of the corporation's
common stock, $.001 par value, which may be either unissued or
treasury shares. The aggregate number of shares of common stock
covered by the plan and issuable upon exercise of all options
granted shall be 5,000,000 shares, which shares shall be
reserved for use upon the exercise of options to be granted from
time to time.
The exercise price is the fair market value of the shares
(average of bid and ask price) at the date of the grant of the
options.
Vesting terms of the options range from immediately to five
years.
The Company has elected to continue to account for stock-based
compensation under APB Opinion No. 25, under which no
compensation expense has been recognized for stock options
granted to employees at fair market value.
A summary of the option activity for the years ended October 31,
2000 and 1999, pursuant to the terms of the plan is as follows:
See Accompanying Notes and Independent Auditors' Report.
F-20
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000 AND 1999
(RESTATED)
NOTE 20 EMPLOYEE STOCK OPTIONS (CONTINUED)
2000 1999
------------------ ------------------
Balance, beginning of year 2,350,000 0
Granted 1,655,000 2,350,000
Exercised ( 90,000) 0
Canceled ( 530,000) 0
------------------ ------------------
Balance, end of year 3,385,000 2,350,000
================== ==================
Shares Weighted
Under Average
Option Exercise Price
Options outstanding at November 1, 1998 0 $ 0
Granted 2,350,000 0.75
Exercised 0 .00
Canceled 0 .00
------------------ ------------------
Options outstanding at October 31, 1999 2,350,000 0.75
Granted 1,655,000 1.16
Exercised ( 90,000) .75
Canceled ( 530,000) 1.08
------------------ ------------------
Outstanding at October 31, 2000 3,385,000 $ 0.92
================== ==================
2,579,167 shares are exercisable at October 31, 2000.
Information regarding stock options outstanding as of October
31, 2000 and 1999 is as follows:
Price range $0.53 - $2.00 $0.75
Weighted average exercise and grant
date prices $0.92 $0.75
Weighted average remaining contractual life 8 years, 8 months 9 years, 6 months
Options exercised
Price range $0.75 0
Shares 90,000 0
Weighted average exercise price $0.75 0
See Accompanying Notes and Independent Auditors' Report.
F-21
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000 AND 1999
(RESTATED)
NOTE 20 EMPLOYEE STOCK OPTIONS (CONTINUED)
The weighted average fair value of options granted in the years
ended October 31, 2000 and 1999 were estimated as of the date of
grant using the Black- Scholes stock option pricing model, based
on the following weighted average assumptions:
NOTE 20 EMPLOYEE STOCK OPTIONS (CONTINUED)
Dividend yield 0 0
Expected volatility 50 % 30 %
Risk free interest rate 5.13% - 6.65 % 6.40 %
Expected life 10 years 10 years
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting
period. The Company's pro forma information follows:
2000 1999
---------------------- ----------------------
Net (loss)
As reported $ ( 5,455,728) $ ( 1,053,563)
Pro forma $ ( 5,814,526) $ ( 1,120,811)
(Loss) per share attributable to
common stock
As reported $ ( .18) $ ( .04)
Pro forma $ ( .19) $ ( .05)
See Accompanying Notes and Independent Auditors' Report.
F-22
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000 AND 1999
(RESTATED)
NOTE 21 COMMON STOCK PURCHASE WARRANTS
As of October 31, 2000 the Company has issued the following common stock
purchase warrants:
Number Exercise
Date of Shares Term Price
May 13, 1999 100,000 3 years $ 1.00
May 7, 1999 80,000 10 years $ 0.75
May 13, 1999 100,000 10 years $ 1.00
November 9, 1999 100,000 4 years $ .94
December 14, 1999 75,000 3 years $ 1.66
December 28, 1999 200,000 4 years $ .94
January 10, 2000 281,250 5 years $ .99
March 27, 2000 615,000 5 years $ 1.45 - 2.05
May 17, 2000 125,000 5 years $ 1.04 - 5.00
June 16, 2000 150,000 1 year $ 1.50 - 2.00
August 30, 2000 34,125 5 years $ .937
August 30, 2000 250,000 3 years $ .50
August 30, 2000 250,000 3 years $ .75
Number Exercise
Date of Shares Term Price
August 30, 2000 36,364 3 years $ 1.00
September 3, 2000 109,000 3 years $ 1.00
September 27, 2000 278,750 3 years $ .90
October 31, 2000 1,740,000 2 years $ 105%
---------------- of average
closing price
of stock
4,524,489
================
2,210,375 shares are exercisable at October 31, 2000.
See Accompanying Notes and Independent Auditors' Report.
F-23
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000 AND 1999
(RESTATED)
NOTE 22 COMMON STOCK AVAILABLE FOR ISSUANCE
Total share authorized 100,000,000
Less shares issued and outstanding ( 37,812,425)
-------------
62,187,575
Less
Reserved for employee stock options ( 5,000,000)
Reserved for purchase warrants ( 4,524,489)
Convertible debentures ( 3,480,000)
-------------
Common stock available for issuance 49,183,086
=============
NOTE 23 FINANCIAL PROJECT MANAGEMENT AGREEMENTS
In May 2000, the Company entered into a fourteen month agreement
with Silverman Heller Associates to promote financial and
corporate communication activities.
The project manager will be compensated as follows:
1. A monthly fee of $5,500 beginning on May 17, 2000.
2. In connection with the services the project manager
will provide, warrants to purchase 75,000 shares of
common stock at the closing price on May 17, 2000
and an additional 50,000 shares at $5.00 per share.
These warrants and the shares to be issued upon the
exercise of the warrants will vest and be
exercisable as of May 17, 2000 and expire five
years from the issue date. The warrants will be
granted registration rights on the next stock
registration within the five-year term.
The individuals will be compensated as follows:
1. 80,000 shares of common stock valued at $.80 per
share on or before June 15, 2000.
2. 400,000 shares of common stock valued at $.80 per
share on or before June 15, 2000.
NOTE 24 LITIGATION
Epson America, Inc. vs, Invnsys Technology Corporation. Civil
Cause # CV 2000-008155 - Superior Court of Arizona.
Epson America, Inc. is suing the corporation for $114,785 to
collect past due accounts payable. The corporation is disputing
the $114,785 as it believes that Epson has not offset the debt
by commissions
See Accompanying Notes and Independent Auditors' Report.
F-24
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000 AND 1999
(RESTATED)
NOTE 24 LITIGATION (continued)
earned and due by Invnsys Technology Corporation. Invnsys has
accrued $102,619 in the accounts payable and has presented a
counter claim to Epson. The outcome of this litigation is not
known as of the date of this report.
NOTE 25 PLAN OF REORGANIZATION AND STOCK EXCHANGE AGREEMENT
On January 1, 1999, the Company issued 16,000,000 shares of
newly issued restricted common stock for 100% of the issued and
outstanding stock of Invnsys Technology Corporation. Invnsys
Technology Corporation became a wholly-owned subsidiary of IBIZ
Technology Corp. and the acquisition was accounted for as a
reverse acquisition with Invnsys Technology Corporation being
considered as the acquirer.
The details of the results of operation (unaudited) for each
separate company, prior to the date of combination, that are
included in the current net income are:
Invnsys IBIZ
Technology Technology
Corporation Corp.
Sales $ 402,127 $ 0
Cost of sales 239,704 0
------------------ ------------------
Gross profit 162,423 0
Selling, general and administrative
expenses 243,094 27,742
------------------ ------------------
(Loss) before income taxes (refund ( 80,671) ( 27,742)
Income taxes (refund) ( 20,150) 0
------------------ ------------------
Net (loss) ( 60,521) $ ( 27,742)
================== ==================
There were no adjustments in the net assets of the combining
companies to adopt the same accounting policies.
Each of the companies had an October 31 fiscal year so no
accounting adjustments were necessary.
NOTE 26 GOING CONCERN
On January 10, 2000, management issued the Company's financial
statements for the year ended October 31, 1999. In those
statements, management represented that there was substantial
doubt as to the Company's ability to continue as a going
concern.
See Accompanying Notes and Independent Auditors' Report.
F-25
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000 AND 1999
(RESTATED)
NOTE 26 GOING CONCERN (CONTINUED)
For the year ended October 31, 2000, management accomplished the
following items which, in their opinion, removes the going
concern situation:
1. Acquired a $5,000,000 line of credit
2. Obtained new customers with a large national and/or
regional presence.
3. Increased its sales force
4. Added new product lines such as PDA products and
co-location services.
5. Increased working capital - working capital at
October 31, 2000 was $236,847 and a deficit of
$912,169 at October 31, 1999.
NOTE 27 CASH IN BANK
The Company has $995,583 deposited in one banking institution.
Only $200,000 of the balance is insured by the Federal Deposit
Insurance Corporation.
NOTE 28 RESTATED FINANCIAL STATEMENTS
The financial statements have been restated to incorporate
additional footnote disclosures and the statement of operations
has been reformatted as required by the Securities and Exchange
Commission.
See Accompanying Notes and Independent Auditors' Report.
F-26
Table of Contents
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).........................................................................F-27
BALANCE SHEETS ..........................................................................................F-27
STATEMENTS OF OPERATIONS.................................................................................4
STATEMENT OF CASH FLOWS..................................................................................7
NOTES TO FINANCIAL STATEMENTS...........................................................................11
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
APRIL 30, 2001 AND OCTOBER 31, 2000
ASSETS
April 30, October 31,
2001 2000
(Unaudited) (Audited)
CURRENT ASSETS
Cash and cash equivalents ............................................................. $ 374,623 $ 631,375
Accounts receivable ................................................................... 197,242 432,113
Inventories ........................................................................... 479,937 439,582
Prepaid expenses ...................................................................... 129,973 104,874
----------- -----------
TOTAL CURRENT ASSETS ........................................................... 1,181,775 1,607,944
----------- -----------
PROPERTY AND EQUIPMENT, NET OF
ACCUMULATED DEPRECIATION .................................................................. 1,927,024 1,948,715
----------- -----------
OTHER ASSETS
Notes receivable, officers ............................................................ 365,736 391,332
Customer list, net of accumulated amortization ........................................ 5,948 7,932
Deposits .............................................................................. 60,012 60,959
----------- -----------
TOTAL OTHER ASSETS ............................................................. 431,696 460,223
----------- -----------
TOTAL ASSETS ................................................................... $ 3,540,495 $ 4,016,882
=========== ===========
See Accompanying Notes
F-27
LIABILITIES AND STOCKHOLDERS' EQUITY
April 30, October 31,
2001 2000
(Unaudited) (Audited)
CURRENT LIABILITIES
Accounts payable ...................................................................... $ 614,274 $ 973,894
Customer deposits ..................................................................... 77,180 0
Accrued liabilities
Payroll .............................................................................. 60,332 96,283
Other ................................................................................ 249,475 101,736
Sales and payroll taxes payable ....................................................... 93,532 89,023
Corporation income taxes payable ...................................................... 19,028 19,028
Deferred income ....................................................................... 41,052 85,798
Notes payable, current portion ........................................................ 5,692 5,335
Convertible debentures payable ........................................................ 500,000 0
----------- -----------
TOTAL CURRENT LIABILITIES ...................................................... 1,660,565 1,371,097
----------- -----------
LONG - TERM LIABILITIES
Convertible debentures payable ........................................................ 2,815,800 1,750,000
Notes payable, long-term portion ...................................................... 11,528 14,479
----------- -----------
TOTAL LONG - TERM LIABILITIES .................................................. 2,827,328 1,764,479
----------- -----------
STOCKHOLDERS' EQUITY
Common stock
Authorized - 100,000,000 shares, par
value $.001 per shares
Issued and outstanding
April 30, 2001 - 38,017,966 shares ............................................... 38,018 0
October 31, 2000 - 37,812,424 shares ............................................ 0 37,813
Paid in capital in excess of par value of stock ....................................... 8,504,633 7,940,384
Retained earnings (deficit) ........................................................... (9,490,049) (7,096,891)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ..................................................... (947,398) 881,306
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ........................................................ $ 3,540,495 $ 4,016,882
=========== ===========
See Accompanying Notes
F-28
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED APRIL 30, 2001 AND 2000
(UNAUDITED)
Three Months Ended Six Months Ended
April 30, April 30,
---------------------------- ----------------------------
2000 2000
2001 (Restated) 2001 (Restated)
------------ ------------ ------------ ------------
SALES ............................... $ 604,357 $ 1,436,126 $ 1,609,685 $ 2,064,979
COST OF SALES ....................... 472,601 1,224,326 1,096,868 1,775,121
------------ ------------ ------------ ------------
GROSS PROFIT ................. 131,756 211,800 512,817 289,858
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES .......... (1,052,992) (1,028,002) (2,261,944) (1,828,556)
SETTLEMENT OF LAWSUIT ............... 0 0 101,369 0
CANCELLATION OF DEBT ................ 0 0 122,000 0
OTHER INCOME ........................ 20,636 0 20,962 0
------------ ------------ ------------ ------------
OPERATING (LOSS) ............ (900,600) (816,202) (1,504,796) (1,538,698)
OTHER INCOME (EXPENSE)
Interest income .............. 6,763 11,575 16,379 16,973
Interest expense ............. (57,783) (36,199) (93,324) (29,221)
Interest expense - convertible
debentures-beneficial
conversion feature .................. (509,026) (669,504) (811,417) (1,242,439)
------------ ------------ ------------ ------------
NET (LOSS) .......................... $ (1,460,646) $ (1,501,330) $ (2,393,158) $( 2,793,385)
============ ============ ============ ============
NET (LOSS) PER COMMON SHARE
Basic and diluted ............ $ (.04) $ (.05) $ (.06) $ (.10)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic and diluted ............ 37,989,702 27,799,927 37,989,702 27,799,927
============ ============ ============ ============
See Accompanying Notes
F-29
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT
OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED APRIL 30, 2001
(UNAUDITED)
Common Stock
Shares Amount
BALANCE, NOVEMBER 1, 2000 ........... 37,812,424 $ 37,813
CONVERSION OF DEBENTURES FOR
COMMON STOCK ..................... 205,542 205
FEES AND COSTS FOR ISSUANCE OF
COMMON STOCK AND CONVERTIBLE
DEBENTURES ....................... 0 0
INTEREST EXPENSE - CONVERTIBLE
DEBENTURES - BENEFICIAL CONVERSION
FEATURE .......................... 0
0
NET (LOSS) FOR THE SIX MONTHS ENDED
APRIL 30, 2001 ................... 0 0
---------- ----------
BALANCE, APRIL 30, 2001 .... 38,017,966 $ 38,018
========== ==========
See Accompanying Notes
F-30
Paid in
Capital in
Excess of Retained
Par Value Earnings
of Stock (Deficit)
$ 7,940,384 $ (7,096,891)
34,371 0
(281,539) 0
811,417 0
0 (2,393,158)
---------- -----------
$ 8,504,633 $ (9,490,049)
========== ===========
See Accompanying Notes
F-31
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 2001 AND 2000
(UNAUDITED)
2000
2001 (Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) .............................................$ (2,393,158) $ (2,793,385)
Adjustments to reconcile net (loss) to
net cash (used) by operating activities:
Depreciation and amortization ...................... 122,507 25,924
Issuance of common stock for interest, services
and payroll bonuses .............................. 374 287,913
Interest expense - convertible debentures-beneficial
conversion feature ............................... 811,417 1,242,439
Changes in operating assets and liabilities:
Accounts receivable ................................ 234,871 (423,648)
Inventories ........................................ (40,355) 3,952
Prepaid expenses ................................... (25,099) 9,326
Deposits ........................................... 947 359
Accounts payable ................................... (359,620) (252,830)
Accrued liabilities and taxes ...................... 116,297 53,826
Customer deposits .................................. 77,180 (115,408)
Deferred income .................................... (44,746) 63,411
----------- -----------
NET CASH (USED) BY OPERATING
ACTIVITIES ................................... (1,499,385) (1,898,121)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .................... (98,832) (240,189)
Loans to related parties ............................... 596 (101,176)
Purchase of customer list .............................. 0 (11,900)
----------- -----------
NET CASH (USED) BY INVESTING
ACTIVITIES .................................... (98,236) (353,265)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock ............. 0 394,349
Proceeds from issuance of convertible debentures ....... 1,343,463 3,200,000
Repayments on notes payable ............................ (2,594) (64,853)
----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES .................................... $ 1,340,869 $ 3,529,496
----------- -----------
See Accompanying Notes
F-32
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED APRIL 30, 2001 AND 2000
(UNAUDITED)
2000
2001 (Restated)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ....................................... $ (256,752) $1,278,110
CASH AND CASH EQUIVALENTS, AT
BEGINNING OF PERIOD .................................... 631,375 25,343
---------- ----------
CASH AND CASH EQUIVALENTS, AT
END OF PERIOD .......................................... $ 374,623 $1,303,453
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during period for:
Interest ........................................ $ 2,354 $ 19,196
========== ==========
Taxes ........................................... $ 0 $ 50
========== ==========
NON CASH INVESTING AND FINANCING
ACTIVITIES
Issuance of common stock for convertible debentures $ 34,576 $1,501,946
========== ==========
Issuance of common stock for interest, services and
payroll ......................................... $ 374 $ 744,804
========== ==========
Issuance of common stock on stock
subscriptions ................................... $ 0 $ 75,000
========== ==========
Issuance of common stock for accounts payable ...... $ 0 $ 50,000
========== ==========
Fees paid for issuance of debentures by reduction
of notes receivable, officer .................... $ 25,000 $ 0
========== ==========
Interest expense - convertible debentures-beneficial
conversion feature .............................. $ 811,417 $1,242,439
========== ==========
See Accompanying Notes
F-33
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2001
(UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
IBIZ Technology Corp. (hereinafter referred to as the
Company) was organized on April 6, 1994, under the laws of the
State of Florida. The Company operates as a holding company
for subsidiary acquisitions.
Invnsys Technology Corporation (hereinafter referred to as
Invnsys) is in the business of designing, manufacturing and
distributing desktop computers, monitors, transactional
printers, financial application keyboards, numeric keypads and
related products. Invnsys also provides network integration
services, digital subscriber line high speed internet connection
services, business-to-business sale of software and a
co-location computer data and server facility. Invnsys also
provides repair services and sells maintenance contracts. The
corporation operates a service center in Phoenix, Arizona.
Principles of consolidation
The consolidated financial statements include the accounts of
IBIZ Technology Corp. and its wholly owned subsidiary, Invnsys
Technology Corporation.
All material inter-company accounts and transactions have been
eliminated.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash
equivalents.
Inventories
Inventories are stated at the lower of cost (determined
principally by average cost) or market.
Property and Equipment
Property and equipment are stated at cost. Major renewals and
improvements are charged to the asset accounts while
replacements, maintenance and repairs, which do not improve or
extend the lives of the respective assets, are expensed. At the
time property and equipment are retired or otherwise disposed
of, the asset
See Accompanying Notes
F-34
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2001
(UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and related accumulated depreciation accounts are relieved of
the applicable amounts. Gains or losses from retirements or
sales are credited or charged to income.
Property and Equipment (Continued)
Invnsys depreciates its property and equipment for financial
reporting purposes using the straight-line method based upon the
following useful lives of the assets:
Tooling 3 Years
Machinery and equipment 5-10 Years
Office furniture and equipment 5-10 Years
Vehicles 5 Years
Leasehold improvements 5 Years
Computer software 3-5 Years
Co-location
Computer equipment 5 Years
Rack systems 10 Years
Cabling and leasehold improvements 25 Years
Accounting for Convertible Debt Securities
The Company has issued convertible debt securities with a
non-detachable conversion feature that were "in the money" at
the date of issue. The Company accounts for such securities in
accordance with Emerging Issues Task Force Topic 98-5. The
Company has recorded the fair value of the beneficial conversion
feature as interest expense and an increase to Paid in Capital
in Excess of Par Value of Stock.
The beneficial interest is computed by subtracting the stock
conversion price from the market price of the stock times the
number of shares and warrants eligible for conversion.
Customer Lists
The customer list is recorded at cost and is being amortized on
a straight-line basis over three years.
See Accompanying Notes
F-35
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2001
(UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting Estimates
Management uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent
assets and liabilities, and the reported revenues and expenses.
Actual results could vary from the estimates that were used.
Revenue Recognition
Invnsys recognizes its revenue as follows:
Products sales - When the goods are shipped and title
passes to the customer.
Maintenance agreements - Income from maintenance
agreements is being recognized on a straight-line
basis over the life of the service contracts. The
unearned portion is recorded as deferred income.
Service income - When services are performed.
Internet sales (DSL and Co-location) - When services
are performed and completed.
Income Taxes
Provisions for income taxes are based on taxes payable or
refundable for the current year and deferred taxes on temporary
differences between the amount of taxable income and pretax
financial income and between the tax basis of assets and
liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are included in
the financial statements at currently enacted income tax rates
applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled as prescribed
in FASB Statement No.109, Accounting for Income Taxes. As
changes in tax laws or rates are enacted, deferred tax assets
and liabilities are adjusted through the provision for income
taxes.
See Accompanying Notes
F-36
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2001
(UNAUDITED)
Net (Loss) Per Share
The Company adopted Statement of Financial Accounting Standards
No. 128 that requires the reporting of both basic and diluted
(loss) per share. Basic (loss) per share is computed by dividing
net (loss) available to common stockholders by the weighted
average number of common shares outstanding for the period.
Diluted (loss) per share reflects the potential dilution that
could occur if securities or other contracts to issue common
stock were exercised or converted into common stock. In
accordance with FASB 128, any anti-dilutive effects on net
(loss) per share are excluded.
Risks and Uncertainties
The Company is in the computer and computer technology industry.
The Company's products are subject to rapid obsolescence and
management must authorize funds for research and development
costs in order to stay competitive.
Common Stock Issued for Non-Cash Transactions
It is the Company's policy to value stock issued for non-cash
transactions such as accounts payable, payroll or services at
the stock closing price at the date the transaction is
completed.
NOTE 2 DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates that the fair value of all financial
instruments as of April 30, 2001 and October 31, 2000, as
defined in FASB 107, does not differ materially from the
aggregate carrying values of its financial instruments recorded
in the accompanying balance sheets. The estimated fair value
amounts have been determined by the Company using available
market information and appropriate valuation methodologies.
Considerable judgement is required in interpreting market data
to develop the estimates of fair value, and accordingly, the
estimates are not necessarily indicative of the amounts that the
Company could realize in a current market exchange.
See Accompanying Notes
F-37
NOTE 3 ACCOUNTS RECEIVABLE
A summary of accounts receivable and allowance for doubtful
accounts is as follows:
April 30, October 31,
2001 2000
(Unaudited) (Audited)
Accounts receivable $ 222,242 $ 457,113
Allowance for doubtful accounts 25,000 25,000
----------------- -----------------
Net accounts receivable $ 197,242 $ 432,113
================= =================
Allowance for doubtful accounts
Balance, beginning of period $ 25,000 $ 2,500
Additions for the period 13,616 97,500
Write-off of uncollectible accounts
for the period ( 13,616) (75,000)
----------------- -----------------
Balance, end of period $ 25,000 $ 25,000
================= =================
NOTE 4 INVENTORIES
The inventories are comprised of the following:
April 30, October 31,
2001 2000
(Unaudited) (Audited)
Finished products $ 426,926 $ 391,479
Demonstration and loaner units 1,447 4,070
Office 51,564 44,033
--------------- ------------------
$ 479,937 $ 439,582
=============== ===================
See Accompanying Notes
F-38
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2001
(UNAUDITED)
NOTE 5 PROPERTY AND EQUIPMENT
Property and equipment and accumulated depreciation consists of:
April 30, October 31,
2001 2000
(Unaudited) (Audited)
Co-location
Computer equipment $ 632,489 $ 566,761
Rack Systems 297,317 297,317
Cabling and leasehold improvements 885,693 855,401
Tooling 68,100 68,100
Machinery and equipment 49,855 49,404
Office furniture and equipment 125,669 123,308
Vehicles 39,141
39,141
Leasehold improvements 23,179 23,179
Software 96,858 96,858
---------------- -------------
2,218,301 2,119,469
Less accumulated depreciation 291,277 170,754
---------------- -------------
Total property and equipment $ 1,927,024 $ 1,948,715
================ =============
Depreciation expense for the six months ended April 30, 2001 and
2000 was $120,523 and $23,940, respectively.
NOTE 6 NOTES RECEIVABLE, OFFICERS
April 30, October 31,
2001 2000
(Unaudited) (Audited)
IBIZ Technology Corp.
Notes to two corporation officers.
The notes are unsecured, bear interest at
6% and are due on January 7, 2002. $ 0 $ 12,079
Invnsys Technology Corporation
A note to an officer of the Company,
payable on demand and accruing interest at 6%.
The note is collateralized by 2,000,000 shares
See Accompanying Notes
F-39
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2001
(UNAUDITED)
of common stock in the Company. However,
in April 2001, the officer pledge the same
stock as collateral for a $500,000 debenture
from Laurus Master Fund, Ltd. (See Note 10).
The Company now has a second position in
the 2,000,000 share collateral. 365,736 379,253
----------------- ------------------
Total notes receivable $ 365,736 $ 391,332
================= ==================
NOTE 7 CUSTOMER LIST
The customer list and accumulated amortization consists of:
April 30, October 31,
2001 2000
(Unaudited) (Audited)
Cost $ 11,900 $ 11,900
Less accumulated amortization 5,952 3,968
----------------- ------------------
Net customer list $ 5,948 $ 7,932
================= ==================
The amortization expense for the six months ended April 30, 2001
and 2000 was $1,984 for each period.
NOTE 8 INCOME TAXES
April 30,
April 30, 2000
2001 (Unaudited)
(Unaudited) (Restated)
(Loss) from continuing operations
before income taxes $ ( 2,393,158) $ ( 2,793,385)
----------------- ------------------
The provision for income taxes is estimated as follows:
Currently payable $ 0 $ 0
----------------- ------------------
Deferred $ 0 $ 0
----------------- ------------------
Significant components of the Company's deferred tax assets and
are as follows:
See Accompanying Notes
F-40
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2001
(UNAUDITED)
NOTE 8 INCOME TAXES (CONTINUED)
April 30, October 31,
2001 2000
(Unaudited) (Audited)
Deferred tax assets:
Net operating loss carryforwards $ 949,000 $ 1,096,190
Accrued expenses and miscellaneous 8,100 23,651
Tax credit carryforward 38,424 38,424
----------------- ----------------
995,524 1,158,265
Less valuation allowance 995,524 1,158,265
----------------- ----------------
Net deferred tax asset $ 0 $ 0
================= ================
April 30, October 31,
2001 2000
(Unaudited) (Audited)
A reconciliation of the valuation allowance is as follows:
Balance, beginning of period $ 497,524 $ 356,638
Addition to allowance 498,000 801,627
---------------- --------------------
Balance, end of period $ 995,524 $ 1,158,265
================ ====================
NOTE 9 TAX CARRYFORWARDS
The Company has the following tax carryforwards at April 30,
2001:
See Accompanying Notes
F-41
Expiration
Year Amount Date
Net operating loss
October 31, 1995 $ 2,500 October 31, 2010
October 31, 1997 253,686 October 31, 2012
October 31, 1998 71,681 October 31, 2013
October 31, 1999 842,906 October 31, 2019
October 31, 2000 3,574,086 October 31, 2020
April 30, 2001 1,581,741 October 31, 2021
------------------
$ 6,326,600
==================
Capital loss
October 31, 1997 25,600 October 31, 2002
Contribution
October 31, 1997 545 October 31, 2002
October 31, 1999 2,081 October 31, 2004
October 31, 2000 3,008 October 31, 2005
Research tax credits 38,424
NOTE 10 CONVERTIBLE DEBENTURES
April 30, October 31,
2001 2000
(Unaudited) (Audited)
Lites Trading Company - $1,600,000 Debenture $ 750,000 $750,000
---------------------------------------------
On March 27, 2000, the Company issued $1,600,000 of 7%
convertible debentures under the following terms and conditions:
1. Due date - March 27, 2005.
2. Interest only on May 1 and December 1 of each
year commencing May 1, 2000.
3. Default interest rate - 18%.
4. Warrants to purchase 375,000 shares of common
stock at $1.45 per share.
5. Conversion terms - The debenture holder shall have the right
to convert all or a portion of the outstanding principal
amount of this debenture plus any accrued interest into such
number of shares of common stock as shall equal the quotient
obtained by dividing the principal amount of this debenture
by the applicable conversion price.
6. Conversion price - Lesser of (i) $1.45 (fixed price) or (ii)
the product obtained by multiplying the average closing
price by .80.
7. Average closing price - The debenture holder shall
See Accompanying Notes
F-42
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2001
(UNAUDITED)
have the election to choose any three trading days out of
twenty trading days immediately preceding the date on which
the holder gives the Company a written notice of the
holder's election to convert outstanding principal of this
debenture.
8. Redemption by Company - If there is a change in control of
the Company, the holder of the debenture can request that
the debenture be redeemed at a price equal to 125% of the
aggregate principal and accrued interest outstanding under
this debenture.
9. The debentures are unsecured.
10. Any further issuance of common stock or debentures
must be approved by debenture holders.
11. Debenture holders have a eighteen month right of first
refusal on future disposition of stock by the Company.
12. Restriction on payment of dividends, retirement of
stock or issuance of new securities.
NOTE 10 CONVERTIBLE DEBENTURES (CONTINUED)
April 30, October 31,
2001 2000
(Unaudited) (Audited)
$5,000,000 Convertible Debenture $ 2,065,800 $ 1,000,000
--------------------------------
On October 31, 2000, the Company issued the following 8%
convertible debentures:
1. Due date - October 30, 2002.
2. Interest payable quarterly from January 1, 2001.
3. Default interest rate - 20%.
4. On the first $ 1,000,000 of financing, the Company
issued warrants to purchase 500,000 shares of stock at $
0.4755 per share. On the second investment of $1,100,00, the
Company issued warrants to purchase 550,000 shares of stock
at $0.2275 per share.
5. Put note purchase price - $4,000,000.
6. Fees and costs - 7% - 10% of cash received for
debentures and warrants plus legal fees.
7. The Company must reserve a number of common
shares equal to not less then 200% of the amount of common
shares necessary to allow the debenture and warrant holder
to be able to convert all such outstanding notes and put
notes to common stock.
8. Conversion price for put notes. The initial 50% of the put
notes shall be the lesser of: (i) 80% of the average of the
three lowest closing bid prices for the stock for twenty two
days or (ii) 80% of the average of the five lowest closing
bid prices for the stock for sixty days. The conver- sion
price of the balance of the put notes shall be 86% of the
average of the three lowest closing bid prices for ten days.
9. The debentures have penalty clauses if the common
stock is not issued when required by the debenture holder.
10. The debentures are unsecured.
11. The Company's right to exercise the put commences
on the actual effective date of the SEC Registration
Statement and expires three years after the effective date.
12. Right of first refusal - The debenture holders have the
right to purchase a proportionate amount of new issued
shares in order to maintain their ownership interest
percentage.
See Accompanying Notes
F-43
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2001
(UNAUDITED)
NOTE 10 CONVERTIBLE DEBENTURES (CONTINUED)
April 30, October 31,
2001 2000
(Unaudited) (Audited)
Laurus Master Fund, Ltd. $ 500,000 $ 0
------------------------
In April 2001, the Company issued $500,000 of 8% convertible
debentures under the following terms and conditions:
1. Due date - April 2002.
2. Interest on September 30, 2001 and quarterly
thereafter.
3. Default interest rate - 20%.
4. Five year warrants to purchase 1,500,000 shares of common
stock at the lesser of $.1225 per share or an amount equal
to the average of the three lowest closing bid prices for a
ten day trading period. The Company may redeem the warrants
for $.6666 per share.
5. Conversion terms - The debenture holder shall have the right
to convert all or a portion of the outstanding principal
amount of this debenture plus any accrued interest into such
number of shares of common stock as shall equal the quotient
obtained by dividing the principal amount of this debenture
by the applicable conversion price.
6. Conversion price - Lower of eighty percent of the average of
the three lowest closing bid prices for a specified three
day or twenty-two day period.
7. Prepayment - The debenture may not be paid prior to
the maturity date without the consent of the holder.
8. The debenture is secured by 9,285,600 shares of common stock
owned by an officer of the Company and the Company paid the
officer $50,000 for pledging these shares.
Total debentures 3,315,800 1,750,000
Less current portion 500,000 0
----------------- --------------
Long-term portion $ 2,815,800 $ 1,750,000
================= ==============
See Accompanying Notes
F-44
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2001
(UNAUDITED)
NOTE 11 NOTE PAYABLE
April 30, October 31,
2001 2000
(Unaudited) (Audited)
Note payable to Community First National Bank due in monthly
payments of principal and interest of $545 with interest at 7
percent until March 7, 2004. The note is secured by an
automobile which costs $ 36,000 and
has a book value of $7,800. $ 17,220 $ 19,814
Less: current portion 5,692 5,335
----------------- -----------------
Net long-term debt $ 11,528 $ 14,479
================= =================
Maturities of long-term debt are as follows:
2001 $ 4,142 $ 5,476
2002 5,822 5,721
2003 6,243 6,135
2004 1,013 2,482
----------------- -----------------
$ 17,220 $ 19,814
================= =================
NOTE 12 REAL ESTATE LEASE
On June 1, 1999, Invnsys leased a new facility from a related
entity. The lease commenced on July 1, 1999, requires initial
annual rentals of $153,600 (with annual increases) plus taxes
and operating costs and expires on December 31, 2024. Invnsys
has also guaranteed the mortgage on the premises in the amount
of $935,052 and given a security interest in all of its assets,
(excluding $479,937 of inventory) in the amount of $3,060,558.
Future minimum lease payments, excluding taxes and expenses, are
as follows:
April 30, 2002 $ 168,000
April 30, 2003 176,404
April 30, 2004 185,226
April 30, 2005 194,488
November 1, 2005 - December 31, 2024 6,536,243
-----------------
Total $ 7,260,361
=================
See Accompanying Notes
F-45
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2001
(UNAUDITED)
Rent expense for the six months ended April 30, 2001 and 2000
was $80,433 and $76,931 respectively.
NOTE 13 ADVERTISING
All direct advertising costs are expensed as incurred. For the
six months ended April 30, 2001, the Company charged $58,159 in
advertising expenses less a $37,058 refund for a net advertising
cost of $21,101. For the six months ended April 30, 2000,
advertising costs were $282,277.
NOTE 14 INTEREST
The Company incurred interest expenses for the six months ended
April 30, 2001 and 2000 as follows:
April 30,
April 30, 2000
2001 (Unaudited)
(Unaudited) (Restated)
For operations $ 93,324 $ 29,221
For convertible debentures-beneficial
conversion feature 811,417 1,242,439
----------------- ----------------
Total $ 904,741 $ 1,271,660
================= ================
NOTE 15 PRODUCT WARRANTY PROVISION
Invnsys established a provision for product warranty to cover
any potential warranty costs on computer equipment that are not
covered by the computer manufacturer's warranty.
Warranty summary
April 30, April 30,
2001 2000
(Unaudited) (Unaudited)
Balance, beginning of period $ 20,000 $ 50,000
Reduction for the period 1,654 0
----------------- -----------------
Balance, end of period $ 18,346 $ 50,000
================= =================
See Accompanying Notes
F-46
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2001
(UNAUDITED)
NOTE 16 RESEARCH AND DEVELOPMENT
Invnsys incurred research and development cost for the six
months ended April 30, 2001 and 2000 of $5,871 and $2,798,
respectively.
NOTE 17 OFFICERS' COMPENSATION
At April 30, 2001, officers' compensation was as follows:
President and Chief Executive Officer $ 250,000
Vice President 150,000
Chief Financial Officer 150,000
Chief Operating Officer 150,000
NOTE 18 ECONOMIC DEPENDENCY
For the six months ended April 30, 2001, Invnsys had $487,865 of
sales to one customer.
Invnsys purchased approximately 24% of its PDA's from one
supplier.
NOTE 19 EMPLOYEE STOCK OPTIONS
On January 31, 1999, the corporation adopted a stock option plan
for the purpose of providing an incentive based form of
compensation to the officers, directors, key employees and
service providers of the Company.
The stock subject to the plan and issuable upon exercise of
options granted under the plan are shares of the corporation's
common stock, $.001 par value, which may be either unissued or
treasury shares. The aggregate number of shares of common stock
covered by the plan and issuable upon exercise of all options
granted shall be 5,000,000 shares, which shares shall be
reserved for use upon the exercise of options to be granted from
time to time.
The exercise price is the fair market value of the shares
(average of bid and ask price) at the date of the grant of the
options.
Vesting terms of the options range from immediately to ten
years.
See Accompanying Notes
F-47
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2001
(UNAUDITED)
The Company has elected to continue to account for stock-based
compensation under APB Opinion No. 25, under which no
compensation expense has been recognized for stock options
granted to employees at fair market value.
A summary of the option activity for the six months ended April
30, 2001 and 2000 pursuant to the terms of the plan is as
follows:
NOTE 19 EMPLOYEE STOCK OPTIONS (CONTINUED)
Shares Weighted
Under Average
Option Exercise Price
Options outstanding at November 1, 1999 2,350,000 $ 0.75
Granted 1,310,000 1.15
Exercised (70,000) .75
Canceled (180,000) .75
----------------- --------------------
Options outstanding at April 30, 2000 3,410,000 $ 0.95
================= ====================
Options outstanding at November 1, 2000 3,385,000 $ 0.92
Granted 0 .00
Exercised 0 .00
Canceled ( 282,500) 1.60
----------------- ---------------------
Outstanding at April 30, 2001 3,102,500 $ 0.90
================= =====================
2,932,500 shares are exercisable at April 30, 2001.
Information regarding stock options outstanding as of April 30,
2001 and 2000 is as follows:
2001 2000
------------------- ---------------------
Price range $0.75 - $2.00 $0.75 - $2.00
Weighted average exercise and grant
date prices $0.90 $0.95
See Accompanying Notes
F-48
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2001
(UNAUDITED)
Weighted average remaining
contractual life 8 years, 3 months 9 years, 3 months
Options exercised
Price range 0 0
Shares 0 0
Weighted average exercise price 0 0
The weighted average fair value of options granted were
estimated as of the date of grant using the Black-Scholes stock
option pricing model, based on the following weighted average
assumptions:
Dividend yield 0 0
Expected volatility 50 % 30 %
Risk free interest rate .13% - 6.65% 6.40 %
Expected life 5 - 10 years 5 - 10 years
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting
period. The Company's pro forma information follows:
NOTE 19 EMPLOYEE STOCK OPTIONS (CONTINUED)
April 30,
April 30, 2000
2001 (Unaudited)
(Unaudited) (Restated)
Net (loss)
As reported $ (2,393,158) $ (2,793,385)
Pro forma $ (2,563,752) $ (2,972,784)
(Loss) per share attributable to
common stock
As reported $ (.06) $ (.10)
Pro forma $ (.07) $ (.11)
See Accompanying Notes
F-49
NOTE 20 COMMON STOCK PURCHASE WARRANTS
As of April 30, 2001 the Company has issued the following common
stock purchase warrants:
Number Exercise
Date of Shares Term Price
May 13, 1999 100,000 3 years $ 1.00
May 7, 1999 80,000 10 years $ 0.75
May 13, 1999 100,000 10 years $ 1.00
November 9, 1999 100,000 4 years $ .94
December 14, 1999 75,000 3 years $ 1.66
December 28, 1999 200,000 4 years $ .94
January 10, 2000 281,250 5 years $ .99
March 27, 2000 615,000 5 years $ 1.45 - 2.05
May 17, 2000 125,000 5 years $ 1.04 - 5.00
June 16, 2000 150,000 1 year $ 1.50 - 2.00
August 30, 2000 34,125 5 years $ .937
August 30, 2000 250,000 3 years $ .50
August 30, 2000 250,000 3 years $ .75
August 30, 2000 36,364 3 years $ 1.00
September 3, 2000 109,000 3 years $ 1.00
September 27, 2000 278,750 3 years $ .90
October 31, 2000 500,000 2 years $ .4755
NOTE 20 COMMON STOCK PURCHASE WARRANTS (CONTINUED)
Number Exercise
Date of Shares Term Price
December 20, 2000 400,000 5 years .2275
December 20, 2000 150,000 5 years .2275
April 26, 2001 1,500,000 5 years $ .1225
-------------------
5,334,489
===================
3,614,489 shares are exercisable at April 30, 2001.
See Accompanying Notes
F-50
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2001
(UNAUDITED)
NOTE 21 COMMON STOCK AVAILABLE FOR ISSUANCE
Total share authorized 100,000,000
Less shares issued and outstanding (38,017,966)
-----------------
61,982,034
Less
Reserved for employee stock options (3,102,500)
Reserved for purchase warrants (5,334,489)
Convertible debentures (2,700,000)
------------------
Common stock available for issuance 50,845,045
==================
NOTE 22 FINANCIAL PROJECT MANAGEMENT AGREEMENTS
In May 2000, the Company entered into a fourteen month agreement
with Silverman Heller Associates to promote financial and
corporate communication activities.
The project manager will be compensated as follows:
1. A monthly fee of $5,500 beginning on May 17, 2000.
2. In connection with the services the project manager
will provide, warrants to purchase 75,000 shares of
common stock at the closing price on May 17, 2000
and an additional 50,000 shares at $5.00 per share.
These warrants and the shares to be issued upon the
exercise of the warrants will vest and be
exercisable as of May 17, 2000 and expire five
years from the issue date. The warrants will be
granted registration rights on the next stock
registration within the five-year term.
NOTE 22 FINANCIAL PROJECT MANAGEMENT AGREEMENTS (CONTINUED)
The individuals will be compensated as follows:
1. 80,000 shares of common stock valued at $.80 per
share on or before June 15, 2000.
2. 400,000 shares of common stock valued at $.80 per
share on or before June 15, 2000.
See Accompanying Notes
F-51
NOTE 23 CASH IN BANK
The Company has $456,533 deposited in one banking institution.
Only $200,000 of the balance is insured by the Federal Deposit
Insurance Corporation.
NOTE 24 SETTLEMENT OF LAWSUIT
Invnsys settled its lawsuit with Epson America, Inc. for $2,500
which generated $101,369 of income on the settlement.
NOTE 25 CANCELLATION OF DEBT
The Company negotiated a cancellation of a $122,000 account
payable with a supplier. This cancellation resulted in $122,000
of cancellation of debt income.
NOTE 26 RESTATEMENT OF APRIL 30, 2000 NET (LOSS), PAID IN CAPITAL, RETAINED
EARNINGS AND NET (LOSS) PER SHARE
The April 30, 2000 financial statements did not record the
interest expense - convertible debentures - beneficial
conversion feature in the amount of $1,242,439. The statements
are restated as follows:
Net (loss)
As previously reported $ (1,550,946)
Adjustment
Interest expense -convertible debentures- beneficial
conversion feature (1,242,439)
-------------------
As restated $ (2,793,385)
===================
Paid-in capital
As previously reported $ 3,309,799
Adjustment
Interest expense -convertible debentures- beneficial
conversion feature 1,242,439
------------------
As restated $ 4,552,238
===================
See Accompanying Notes
F-52
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2001
(UNAUDITED)
NOTE 26 RESTATEMENT OF APRIL 30, 2000 NET (LOSS), PAID IN CAPITAL, RETAINED
EARNINGS AND NET (LOSS) PER SHARE (CONTINUED)
Retained earnings
As previously reported $ (3,192,109)
Adjustment
Interest expense -convertible debentures- beneficial
conversion feature (1,242,439)
------------------
As restated $ (4,434,548)
===================
Net (loss) per share
As previously reported $ (.06)
Adjustment
Interest expense -convertible debentures- beneficial
conversion feature (.04)
------------------
As restated $ (.10)
===================
NOTE 27 SECURITIES AND EXCHANGE PROCEEDING
On February 28, 2001, the Securities and Exchange Commission
commenced an administrative proceeding against the Company. The
Company has negotiated and submitted a settlement offer, which
has been formally approved by the Commission. Pursuant to this
settlement agreement, an administrative order has been issued
which orders the Company to cease and desist from committing or
causing any future violations of Section 10(b) of the Securities
and Exchange Act of 1934 and Rule 10b-5 thereunder. No other
relief against the Company is being sought.
NOTE 28 BUSINESS SEGMENT INFORMATION
The Company has elected to organize its business based
principally upon products and services.
The Company operates in three reportable business segments:
internet sales, product sales and services and other. The
internet sales segment has responsibility for providing
co-location and DSL income. The product sales segment has
responsibility for sales of co-location equipment, software and
licenses, computer equipment and PDA's. The service segment
provides
See Accompanying Notes
F-53
IBIZ TECHNOLOGY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2001
(UNAUDITED)
NOTE 28 BUSINESS SEGMENT INFORMATION (CONTINUED)
miscellaneous services to Invnsys' customers and absorbs all
general and administrative expenses that are not allocated to
internet sales and product sales.
Summary of business segment for the six months ended April 30,
2001 is as follows:
Internet Product Services General and
Sales Sales and Other Administrative
Consolidated
Sales ................. $ 338,449 $ 1,086,315 $ 184,921 $ 0 $ 1,609,685
Operating profit (loss) (366,332) 71,809 (2,098,635) 0 (2,393,158)
Identifiable assets ... 1,815,499 0 402,803 1,322,193 3,540,495
Depreciation .......... 94,875 0 25,648 0 120,523
Expenditures for long- 96,020 0 2,812 0 98,832
lived assets
NOTE 29 UNAUDITED FINANCIAL INFORMATION
The accompanying financial information as of April 30, 2001 is
unaudited. In managements opinion, such information includes all
normal recurring entries necessary to make the financial
information not misleading.
See Accompanying Notes
F-54
Part II. Information Not Required In Prospectus
Item 24. Indemnification of Directors and Officers.
iBIZ's Articles of Incorporation, as amended, provide to the fullest
extent permitted by Florida law, a director or officer of iBIZ shall not be
personally liable to iBIZ or its shareholders for damages for breach of such
director's or officer's fiduciary duty. The effect of this provision of iBIZ's
Articles of Incorporation, as amended, is to eliminate the right of iBIZ and its
shareholders (through shareholders' derivative suits on behalf of iBIZ) to
recover damages against a director or officer for breach of the fiduciary duty
of care as a director or officer (including breaches resulting from negligent or
grossly negligent behavior), except under certain situations defined by statute.
iBIZ believes that the indemnification provisions in its Articles of
Incorporation, as amended, are necessary to attract and retain qualified persons
as directors and officers.
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 registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question 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.
Item 25. Other Expenses of Issuance and Distribution.
The follow table sets forth the estimated costs and expenses incurred
by the selling security holders in connection with this Offering.
SEC Registration Fee $332.00
Legal Fees and Expenses $ 10,000.00
Accounting Fees and Expenses $3,000.00
Printing Expenses $ 3,000.00
TOTAL(1) $ 16,332.00
(1) Except for the SEC registration fee, all fees and expenses are
estimates.
Item 26. Recent Sales of Unregistered Securities.
The securities described below represents certain securities of iBIZ
sold by iBIZ that were not registered under the Securities Act, all of which
were issued by iBIZ pursuant to exemptions under the Securities Act.
Underwriters were involved in none of these transactions. In each case, the
securities were sold to accredited investors, as determined by an investor
questionnaire executed in conjunction with the respective subscription
agreements.
44
In January 1999, the Company issued an aggregate of 640,318 shares of
common stock to five purchasers for $.35 per share. The sales were made to
accredited investors in reliance on Rule 506 or Section 4(2) under the
Securities Act.
On March 10, 1999, the Company issued an aggregate of 16,000,000 shares
of common stock to seven persons or entities in exchange for the outstanding
stock of iBIZ by the Company. The sales were made in reliance on Section 4(2)
under the Securities Act with respect to such sales.
From March to July 1999, the Company sold an aggregate of 1,732,475
shares of Common Stock at $.50 per share. In connection with services in selling
such shares, the Company issued warrants to purchase 100,000 shares of Common
Stock, exercisable for five years at $1.00 per share. The shares and warrants
were issued in reliance on Section 4(2) of the Securities Act to accredited
investors.
In May 1999, the Company sold an aggregate of $200,000 of convertible
debentures to four purchasers. In connection with such sale, the Company issued
warrants to four individuals and entities to purchase an aggregate of 700,000
shares of common stock at prices ranging from $.30 to $1.00. The warrants are
exercisable for a period of five years. The debentures and warrants were issued
in reliance on Section 4(2) of the Securities Act to accredited investors.
In October and December 1999, the Company sold an aggregate of 505,000
shares of common stock to two purchasers at a price of $.50 per share. The sales
were made to accredited investors in reliance on Rule 506 or Section 4(2) under
the Securities Act.
In November 1999, the Company sold an aggregate of $1,600,000 of
convertible debentures. In connection with such sale, the Company issued
warrants to purchase an aggregate of 540,000 shares of Common Stock for a period
of three years, at prices from $.94 to $.99 per share. The debentures and
warrants were issued in reliance on Section 4(2) of the Securities Act to
accredited investors.
In November 1999, the Company issued a warrant to purchase 75,000
shares of Common Stock for a period of five years, exercisable at $1.66 per
share. The warrant was issued to one entity in connection with public relations
services provided to the Company. The warrant was issued in reliance on Section
4 (2) of the Securities Act to an accredited investor.
In January 2000, the Company sold 250,000 shares of Common Stock to one
purchaser at $1.10 per share. In connection with such sale, the Company issued
warrants to purchase 41,250 shares of Common Stock, exercisable for a period of
three years at $.99 per share. The shares and warrants were issued in reliance
on Section 4(2) of the Securities Act to an accredited investor.
In February 2000, the Company issued a warrant to purchase 100,000
shares of Common Stock for a period of five years, exercisable at $.75 per
share. The warrant was issued to one person in connection with the execution of
a lease for the Company's property. The warrant was issued in reliance on
Section 4 (2) of the Securities Act to an accredited investor.
45
In March 2000, the Company sold an aggregate of $1,600,000 of
convertible debentures. In connection with such sale, the Company issued
warrants to purchase an aggregate of 615,000 shares of Common Stock for a period
of three years, at prices from $1.45 to $2.05 per share. The debentures and
warrants were issued in reliance on Section 4(2) of the Securities Act to
accredited investors.
In May 2000, the Company issued warrants to purchase 125,000 shares of
Common Stock for a period of five years, of which 75,000 are exercisable at
$1.04 per share and 50,000 are exercisable at $5.00 per share. The warrant was
issued to one entity in connection with public relations services provided to
the Company. The warrant was issued in reliance on Section 4 (2) of the
Securities Act to an accredited investor.
In June 2000, the Company issued an aggregate of 150,000 shares of
Common Stock to three entities in exchange for financial consulting services.
The shares were issued in reliance on Section 4(2) of the Securities Act to
accredited investors.
In September 2000, the Company sold 650,000 shares of Common Stock to
one purchaser at $.35 per share. In connection with such sale, the Company
issued warrants to purchase 34,125 shares of Common Stock, exercisable for a
period of three years at $.937 per share. The shares and warrants were issued in
reliance on Section 4(2) of the Securities Act to an accredited investor.
During 2000, the Company issued an aggregate of 5,680,713 shares of
common stock to seven purchasers upon conversion of convertible debentures at
effective prices between $.30 and $.805 per share. The sales were made to
accredited investors in reliance on Rule 506 or Section 4(2) under the
Securities Act.
In September 2000, the Company issued an aggregate of 368,364 shares of
common stock to four individuals or entities at prices ranging from $.45 and
$.55 per share. the Securities Act. In connection with such sale, the Company
issued warrants to purchase 424,114 shares of Common Stock, exercisable for a
period of three years at prices between $.90 and $1.00 per share. The shares and
warrants were issued in reliance on Section 4(2) of the Securities Act to an
accredited investor.
During 2000, the Company issued an aggregate of 620,000 shares of
common stock to four purchasers upon exercise of warrants at $.75 per share. The
sales were made to accredited investors in reliance on Rule 506 or Section 4(2)
under the Securities Act.
The Company entered into a certain stock purchase agreement with
various individuals and institutions in which they agreed to purchase an
aggregate of $5 million of 8% Convertible Notes (the "Notes"). The Conversion
Price for all of the Notes is the lesser of (i) 80% of the average of the three
lowest closing bid prices of the Common Stock on the Principal Market for the
twenty-two (22) trading days prior to the Closing Date, or (ii) 80% of the
average of the five lowest closing bid prices of the Common Stock on the
Principal Market for the sixty (60) trading days prior to the Conversion Date,
as defined in the Note. The maximum share of the Company that any Subscriber may
own after conversion at any given time is 4.99%, unless the Subscriber gives 75
days prior notice. In connection with the issuance of the Notes, the Company
issued an aggregate of 1,050,000 warrants to purchase common stock to two
institutions. The warrants are exercisable for a period of five years at prices
ranging from $.2275 to $.4755. All of the foregoing securities were issued in
reliance on Section 4(2) of the Securities Act of 1933 to accredited investors.
46
In January 2000, the Company issued 250,000 shares of common stock to
one investor at a price of $1.10 per share. The sale was made to an accredited
investor in reliance on Rule 506 or Section 4(2) under the Securities Act.
During September and October 2000, the Company issued an aggregate of
3,237,252 shares of common stock to 12 investors at prices ranging from$.30 to
$.55 per share. The sales were made to accredited investors in reliance on Rule
506 or Section 4(2) under the Securities Act.
During September 2000, the Company issued an aggregate of 48,888 shares
of common stock at an effective price of $.45 per share to four individuals in
payment of outstanding invoices totaling $22,000. The sales were made in
reliance on Rule 506 or Section 4(2) under the Securities Act.
During December 2000 and January 2001, the Company issued an aggregate
of 205,542 shares of common stock to five entities in connection with conversion
of or interest payments on convertible debentures. Such shares were issued at
effective prices ranging from $.12 to $.21 per share. The sales were made to
accredited investors in reliance on Rule 506 or Section 4(2) under the
Securities Act.
Item 27. Exhibits.
- ----------------- -------------------------------------------------------------------------------------------
Exhibit No. Description
- ----------------- -------------------------------------------------------------------------------------------
2.01(1) Plan of Reorganization and Stock Exchange Agreement dated January 1, 1999
3.01(1) Articles of Incorporation, as amended
3.02(1) Bylaws
5.01 Opinion of Sichenzia, Ross, Friedman & Ference LLP
10.01(1) Citrix Business Alliance Membership Agreement dated February 10, 1999, between INVNSYS
and Citrix Systems, Inc.
10.02(1) Client Software License Agreement dated December 30, 1998, between INVNSYS and Citrix
Systems, Inc.
10.03(1) IBIZ Technology Corporation Distributed Software License Agreement dated June 2, 1999,
between iBIZ and Jeremy Radlow
10.04(1) 3Com Designed for Palm Computing Platform Logo License Agreement, between iBIZ and Palm
Computing, Inc.
10.05(1) IBIZ Technology Corp. Stock Option Plan dated January 31, 1999
10.06(1) Form of Stock Option
10.07(1) Lease Agreement dated June 1, 1999, between iBIZ and Lone Cactus Capital Group, L.L.C.
47
10.08(1) Strategic Teaming and Marketing Agreement dated February 18, 1999, between iBIZ and
Global Telephone Communication, Inc.
10.09(1) Form of iBIZ Technology Corp. Common Stock Purchase Warrant
10.10(1) Form of iBIZ Technology Corp. Convertible Debenture
10.11(1) Employment Agreement dated March 5, 1999, as amended, between iBIZ, INVNSYS and Kenneth
Schilling
10.12(1) Employment Agreement dated March 5, 1999, as amended, between iBIZ, INVNSYS and Terry
Ratliff
10.13(1) Employment Agreement dated March 5, 1999, as amended, between iBIZ, INVNSYS and Mark
Perkins
10.14(2) Securities Purchase Agreement dated November 9, 1999, between iBIZ and Globe United
Holdings, Inc.
10.15(2) 7% Convertible Debenture Due November 9, 2004, between iBIZ and Globe United Holdings,
Inc.
10.16(2) Warrant dated November 9, 1999
10.17(2) Registration Rights Agreement dated November 9, 1999, between iBIZ and Globe United
Holdings, Inc.
10.18(3) Securities Purchase Agreement dated December 29, 1999, between iBIZ and Globe United
Holdings, Inc.
10.19(3) 7% Convertible Debenture Due December 29, 2004, between iBIZ and Globe United Holdings,
Inc.
10.20(3) Warrant dated December 29, 1999
10.21(3) Registration Rights Agreement dated December 29, 1999, between iBIZ and Globe United
Holdings, Inc.
10.22(3) Subscription Agreement for Common Stock of iBIZ Technology Corp.
10.23(4) Master Distribution Agreement dated January 12, 2000, between iBIZ and Harsper Co. Ltd.
10.24(5) Letter Agreement dated December 14, 1999, between iBIZ and Josephthal & Co., Inc.
10.25(5) Financial Project Management Agreement dated January 20, 2000, between iBIZ and Equinet,
Inc.
10.26(6) Securities Purchase Agreement dated March 27, 2000, between iBIZ and Lites Trading, Co.
10.27(6) 7% Convertible Debenture Due March 27, 2000, between iBIZ and Lites Trading, Co.
10.28(6) Warrant dated March 27, 2000
10.29(6) Registration Rights Agreement dated March 27, 2000, between iBIZ and
Lites Trading, Co.
10.30(6) Letter Agreement dated March 27, 2000, from Globe United Holdings to iBIZ
10.31(7) Financial Consulting Services Agreement dated June 16, 2000 with Travis Morgan Securities.
48
10.32(7) Agreement with the Partnership of Sklar and Ruzycki dated July 6, 2000.
10.33(10) Form of Warrant dated August 30, 2000 (six warrants by and between iBIZ Technology Corp.,
and various warrant holders)
10.34(10) Form of Warrant dated May 17, 2000 (four warrants by and between iBIZ Technology Corp.,
and various warrant holders)
10.35(8) Subscription Agreement for Notes Convertible into Common Stock of iBIZ Technology Corp.
10.36(8) Form of 8% Convertible Notes Due Oct. 30, 2002
10.37(8) Funds Escrow Agreement
10.38(8) Form of Warrant dated Oct. 30, 2000.
10.39 Modification and Waiver by and among iBIZ Technology and Subscribers to 8% Convertible
Notes Agreement, dated as of April 17, 2001
10.40 Subscription Agreement for Notes Convertible into Common Stock of iBIZ Technology Corp.,
dated as of April 26, 2001
10.41 Form of 8% Convertible Notes Due April 26, 2003
10.42 Form of Warrant dated April 26, 2001, 2000
21.01(1) Subsidiaries of Company
23.01 Consent of Moffitt & Company
23.02 Consent of Sichenzia, Ross, Friedman & Ference LLP (contained in opinion filed as Exhibit
5.01)
99.019 Press Release dated January 12, 2001
---
(1) Incorporated by reference from iBIZ's Form 10-SB, File No. 000-27619, filed with the SEC on October 13, 1999
(2) Incorporated by reference from iBIZ's Form 10-SB/A, File No. 000-27619, filed with the SEC on November 30, 1999.
(3) Incorporated by reference from iBIZ's Form SB-2, File No. 333-94409, filed with the SEC on January 11, 2000.
(4) Incorporated by reference from iBIZ's Form 10-KSB, File No. 000-027619, filed with the SEC on January 7, 2000.
(5) Incorporated by reference from iBIZ's Form 10-QSB, File No. 000-027619, filed with the SEC on March 16, 2000.
(6) Incorporated by reference from iBIZ's Form SB-2, File No. 333-34936, filed with the SEC on April 17, 2000.
(7) Incorporated by reference from iBIZ's Form SB-2, File No. 333-42414, filed with the SEC on July 28, 2000.
(8) Incorporated by reference from iBIZ's Form SB-2, File No. 333-50564, filed with the SEC on November 22, 2000.
(9) Incorporated by reference from iBIZ's Form 8-K, File No. 000-027619, filed with the SEC on January 19, 2001.
(10) Incorporated by reference from iBIZ's Form 10-KSB, File No. 000-027619, filed with the SEC on January 29, 2001.
(11) Previously filed.
49
Item 28. Undertakings.
The undersigned registrant hereby undertakes to:
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
Securities 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; and Notwithstanding the forgoing, any increase or
decrease in volume of securities offered (if the total dollar value 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 prospects filed with the Commission 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.
4. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question 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.
49
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of an amendment to a filing on Form SB-2 and authorized this
amendment to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Phoenix, State of Arizona on June 22, 2001.
iBIZ TECHNOLOGY CORP.
By:/s/ KENNETH W. SCHILLING
Kenneth W. Schilling, President,
Director
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities stated, on June 22, 2001.
By:/s/ KENNETH W. SCHILLING
Kenneth W. Schilling, President,
Director
By:/s/ TERRY S. RATLIFF
Terry S. Ratliff,
Vice President,
Comptroller, Director
By:/s/ MARK H. PERKINS
Mark H. Perkins, Vice President
of Operations, Director
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