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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
(AMENDMENT NO. 2)
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
EBIZ ENTERPRISES, INC.
(Name of Small Business Issuer in its Charter)
COMMISSION FILE NUMBER: 0-27721
NEVADA 84-1075269
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15695 NORTH 83RD WAY
SCOTTSDALE, ARIZONA 85260
(Address of principal executive offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER: (480) 778-1000
SECURITIES TO BE REGISTERED UNDER SECTION 12(b) OF THE ACT: NONE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(Title of class)
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PART I
Except for historical information contained herein, this Form 10-SB/A
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Ebiz
Enterprises, Inc. ("Ebiz") intends that such forward-looking statements be
subject to the safe harbors created by these statutes to the extent they apply.
Wherever possible, we have identified these forward-looking statements
by words such as "anticipates," "believes," "estimates," "expects," "intends"
and similar expressions. Such forward-looking statements involve risks and
uncertainties and include, but are not limited to, statements regarding future
events and Ebiz's plans and expectations. Our actual results may differ
materially from such statements. Factors that may cause or contribute to such
differences include those discussed in "ITEM 1. DESCRIPTION OF BUSINESS -
FACTORS AFFECTING FUTURE PERFORMANCE" and "ITEM 6. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," as well as those
discussed elsewhere in this Form 10-SB/A and in the exhibits attached or
incorporated by reference.
Although we believe that the assumptions underlying the forward-looking
statements are reasonable, any of the underlying assumptions could prove
inaccurate. There can be no assurance that the results contemplated will be
realized. In addition, as disclosed under "ITEM 1. DESCRIPTION OF BUSINESS -
FACTORS AFFECTING FUTURE PERFORMANCE," the business and operations of Ebiz are
subject to substantial risks which increase the uncertainties inherent in the
forward-looking statements included in this Form 10-SB/A. The inclusion of such
forward-looking information should not be regarded as a representation by Ebiz
or any other person that the future events, plans or expectations contemplated
by Ebiz will be achieved.
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Ebiz develops and operates Internet e-commerce Web sites, and designs,
manufactures and distributes high-value, low-cost computer systems. Our computer
systems are intended to appeal to, and we believe will capture leadership
positions within, specific, rapidly-growing segments of the computer industry.
These segments include the business, small-office/home-office and consumer
markets. Our vision is to "Accelerate the Alternatives"(TM) in personal and
business computing by focusing primarily on the benefits and opportunities
provided by utilizing the Linux operating system.
We address these high-growth markets through an integrated business
strategy that utilizes our Vertical Service Portals ("VSPs"), which are Internet
Web sites targeted to a specific vertical market audience. See the sections
captioned "BUSINESS OBJECTIVES AND STRATEGIES" and "MARKETING" for more
information regarding our business and marketing strategies. Our VSPs provide
meaningful content, value-added free services, resources, communication, links,
training, support and information, combined with commercial product sales
specifically focused to what we believe will be the targeted audience's
interests. See the section captioned "OUR VERTICAL SERVICE PORTALS (VSPs)" below
for a more complete discussion of our VSPs.
We distribute our Element-L(TM) and M2 Systems(TM) brands, as well as
many other vendors' products through our e-commerce VSPs. The Element-L(TM) and
M2 Systems(TM) lines are also distributed through authorized resellers such as
egghead.com, Fred Meyer Food Stores, Computer Renaissance Stores, and
Onsale.com. We anticipate distributing our new PIA(TM) (Personal Internet
Application) line through our newly developed VSP, PlanetPIA.com, and other
distribution channels by mid-December. We also distribute third party products
including systems, components, peripherals and software from leading industry
manufacturers and developers through our VSPs. See the sections captioned "OUR
VERTICAL SERVICE PORTALS (VSPs)" and "OUR VALUE PRICED PC BRANDS" below for a
more detailed discussion of our distribution methods and branded computer
systems.
We believe Ebiz is ideally positioned to develop and deploy e-commerce
Internet VSPs and branded computer products to these markets because of our
management's experience in developing similar Web sites and in marketing other
branded computer products. We are also directing our primary focus on
utilization of the Linux operating system. Our Element-L(TM) and our new PIA(TM)
lines utilize this system. Our VSPs, TheLinuxStore.com, and PlanetPIA.com when
launched, offer these branded systems as well as other Linux based products.
While we believe we have the capability to succeed with our business
plan, we are still an early stage company with limited operating history. Our
prior two years of operations have resulted in losses. As a growing, early stage
company, our ability to raise capital as well as increase our sales revenue will
be critical to our success. We are also concentrating the focus of our business
on utilization of the Linux operating system and away from some of our prior
e-commerce efforts. See the sections captioned "FACTORS AFFECTING FUTURE
PERFORMANCE" and "ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," for a discussion of capital constraints
and other risks of our business.
Ebiz is a Nevada corporation incorporated in June, 1998. Our
predecessor, Genras, Inc., was incorporated in Arizona in May 1995. On June 1,
1998, Vinculum Incorporated, a non-operating company with an estimated 700
shareholders, acquired all the operating assets and liabilities of Genras for
5,000,000 shares of Vinculum common stock. Vinculum was incorporated in Colorado
in May, 1984 as VDG Capital Corporation and changed its name to Vinculum
Incorporated in December, 1994. Vinculum filed for bankruptcy protection under
Chapter 11 of the Bankruptcy Code in August, 1991 and was discharged when its
plan of reorganization was approved in July, 1994. Immediately following the
acquisition of the Genras assets, the former Genras stockholders held
approximately 87% of the outstanding shares of Vinculum's common stock. For
financial accounting purposes, the acquisition was treated as a recapitalization
with Genras as the acquirer. Ebiz was incorporated as a wholly owned subsidiary
of Vinculum. Ebiz was originally incorporated with the name Vinculum
Incorporated, changed its name to CPU MicroMart, Inc. in June, 1998 and later
changed its name to Ebiz Enterprises, Inc. in May, 1999. In August 1998 Vinculum
merged into Ebiz. All information below prior to June 1998 reflects the
operations of Ebiz's predecessor, Genras.
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THE MARKET AND INDUSTRY
The E-Commerce Computer System Market
The Internet has emerged as the significant interactive medium for
communications, information and commerce. In its 1999 report, The Global Market
Forecast for Internet Usage and Commerce, International Data Corporation
("IDC"), a market research firm, estimated that the number of users making
purchases over the Web will jump from 31 million in 1998 to more than 183
million in 2003. This will represent only 36% of all Web users, resulting in
potential for even greater market penetration.
Business-to-business trade on the Internet in the United States is
predicted to increase from $43 billion in 1998 to $1.3 trillion in 2003,
according to a December 1998 report from Forrester Research, Inc., a leading
independent research firm. As intercompany e-commerce accelerates within
industry supply chains, Forrester expects on-line business trade to surpass 9%
of total U.S. business sales by 2003. Computing and electronic equipment are
expected to remain one of the largest categories of goods traded between
businesses, estimated to reach $395 billion in revenue by 2003.
Lower-priced personal computers and the demand to connect to the
Internet have had a strong impact on the U.S. consumer segment, according to a
Dataquest, Inc. report. In 1998 a total of 50 percent of U.S. households had a
PC. In 1995, just 27 percent of U.S. households had a PC. These percentages
increased to 36% in 1996 and 43% in 1997. Home offices with multiple PCs are
expected to increase from 7.8 million in 1998 to 12.1 million by 2002 per an IDC
bulletin released in February 1999. This expected growth is anticipated to
create enormous opportunities for computer system and product vendors.
The Linux Market
Overview. Linux is a free Unix-type operating system originally created
by Linus Torvalds at the University of Helsinki in Finland. He began his work in
1991 when he released version 0.02 and worked steadily until 1994 when version
1.0 of the Linux Kernel was released. The current full-featured version is 2.2
(released January 25, 1999), and development continues.
Linux is developed under the GNU General Public License and its source
code is freely available to everyone. This, however, does not mean that the
Linux operating system and its assorted distributions are free - companies and
developers may charge for the system and adaptations as long as the source code
remains available. Linux may be used for a wide variety of purposes including
networking, software development, and as an end-user platform. Linux systems are
considered a viable, low-cost alternative to other more expensive operating
systems.
Due to the functionality and availability of the Linux system, it has
become popular worldwide. A vast number of software programmers have taken the
Linux source code and adapted it to meet their individual needs. At this time,
there are numerous ongoing projects for porting Linux to various hardware
configurations and purposes.
The Rapidly Growing Linux Market. The Linux operating system is growing
beyond the early adopter phase and reaching the mainstream business market.
Active Linux users worldwide are estimated to be in excess of 10,000,000.
Numerous hardware and software manufacturers have announced and have deployed
Linux-based solutions.
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In a 1999 bulletin titled Linux Operating System Market Overview, IDC
presented its first-ever forecast for Linux. Through 2003, total Linux
commercial product shipments are predicted to grow faster than the total
shipments of all other client or server operating environments monitored by IDC.
IDC estimates Linux commercial shipments will increase at a compound annual
growth rate ("CAGR") of 25% from 1999 through 2003. This growth rate estimate
may be compared to an estimated 10% CAGR for all other operating environments
combined and a 12% CAGR for all other server operating environments combined.
IDC reports on only commercial shipments of Linux and is unable to track systems
downloaded from the Internet at no charge.
Linux has been used in academic and research environments since its
inception for applications such as e-mail, Web servers, bulletin boards and
research projects. In 1999, IDC expects more application vendors to port their
offerings to Linux and hardware vendors to continue to expand their available
product lines running Linux for server-side endeavors. Further, IDC believes
that some desktop initiatives including an improved graphical user interface and
increased desktop application availability have the ability to trigger interest
in Linux as a desktop operating system by 2003.
Linux servers are expected to have a larger impact on the worldwide
server appliance market, according to Dataquest Inc., a unit of Gartner Group,
Inc. in a July 1999 report. Dataquest estimates that by 2003, Linux servers will
account for approximately 24 percent of worldwide server appliance revenue, or
$3.8 billion, and 14 percent of server appliance shipments, or 1.1 million
units. Linux servers are projected to represent 3.4 percent of worldwide
traditional server revenue, or $1.9 billion and 8.1% of traditional server
shipments, or 450,000 units by 2003.
BUSINESS OBJECTIVES AND STRATEGIES
We currently develop and distribute two branded computer systems, the
Element-L(TM) and the M(2)System(TM) lines. We are also developing a new line,
the PIA(TM), which is expected to be released in mid-December, 1999. We market
our systems through our VSPs and other distribution channels.
Our strategic business objectives are to:
- Continue to develop comprehensive VSPs that combine product
marketing with community interests such as news, resources,
links and other incentives intended to build customer loyalty
and promote repeat visits;
- Utilize our Linux product development expertise to continue
product extensions within the Element-L(TM) and PIA(TM)
product lines;
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- Generate significant revenue to achieve financial targets
through product sales as well as through technical support,
service and training opportunities, customer services,
Internet advertising, marketing and Web links;
- Expand sales, marketing, production and distribution of our
Element-L(TM) and PIA(TM) lines until they are internationally
recognized leading PC brands; and
- Become a nationally recognized leader in e-commerce marketing
and distribution of computer hardware and software products in
the market niches we target.
In order to meet these objectives, we will require additional funding
to implement our planned sales, marketing and product development activities. We
intend to deploy a marketing program focused on building our brand recognition,
to add to our sales and service staff to increase customer satisfaction and to
enhance the performance capabilities of our products to provide us with
competitive advantages. We believe that our distribution facility and sales and
marketing expertise differentiates our operations by allowing us to provide true
merchant qualities and capabilities, such as conducting our own purchasing,
merchandising, order fulfillment, supply-chain management, vendor marketing
opportunities and product technical support functions.
Our concept of e-commerce sites (our VSPs) that offer the targeted
audiences with relevant content, free services and a quality shopping
experience is a significant element of our business plan to market both our
branded lines of systems and other products. We believe the key elements to
implement our plan include:
- Providing meaningful virtual community destination on the
Internet with our VSPs. By providing the broadest spectrum of
resource information, links and content to serve the needs of
the virtual community, we believe we will provide Internet
destination points for people with common interests as a
source for news and information as well as for to product
purchases.
- Offering free value-added services through our VSPs. These
services include e-mail forwarding, message boards, job and
resume postings, home page redirects and other services. By
providing free services with value to the community of
customers we target, we believe we will develop goodwill and
enhance both our VSP traffic and usefulness. Capturing
customer information in our database from providing these
services enables us to manage and track customer trends and
preferences, which we believe will enhance our ability to
respond quickly to consumer preferences.
- Ensuring a secure and convenient shopping experience. Our
e-commerce sites feature secure shopping facilities that are
open 24 hours a day, seven days a week. Our VSPs may be
reached from the customer's home or office and feature
extensive browsing and search capabilities.
- Supplying an extensive selection of high quality products. We
intend for customers to have a positive shopping experience
through our VSPs by ensuring that they find the product of
their choice, backed up by warranty and support services as
required.
- Providing efficiently priced products. We are committed to
providing products that are competitively priced. We are
continually seeking innovative ways to drive cost out of our
products and processes. We intend to pass the cost savings on
to customers, without sacrificing quality service.
- Delivering excellent customer service. We intend to provide
the highest level of customer service from ordering to
shipping, and offer pre-and post-sales support via the
telephone, e-mail and online, and also offer online order
tracking capabilities.
- Developing customer loyalty. We are focused on developing and
promoting customer loyalty, building repeat purchase
relationships with our customers and maximizing the number of
return visits by our customers.
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- Building brand leadership positioning. We are implementing
integrated online and offline marketing strategies to enhance
our brand recognition within the vertical markets we target,
which includes advertising, direct online marketing, trade
shows and public relations activities.
OUR VERTICAL SERVICE PORTALS (VSPS)
Our business strategy is to enhance sales of products through our
Vertical Service Portals (VSPs), which are Web site locations targeted to a
specific vertical market. Our VSPs are intended to provide a Web site
destination that will attract a user with content and value added services as
well as offer products.
As an e-commerce company we believe that our ability to effectively
develop, market and manage our VSP Web sites and develop our e-commerce
initiatives is critical to our success. By developing, marketing and managing
these sites, we believe we will more effectively market our branded computer
systems and other products. We have developed and are operating VSP sites and
are continually developing and updating these sites, as well as developing new
sites as market opportunities are identified. Our VSPs include:
TheLinuxStore.com
The vision for TheLinuxStore.com is to be the definitive source for
"Everything Linux," offering a large selection of Linux compatible technical
products and related items, including Linux computer systems and servers,
hardware components and peripherals, software, books, resource material,
apparel, training and support services. Through this VSP we distribute third
party products and our Element-L(TM) line. Revenue from TheLinuxStore.com is
generated from product sales as well as additional services that include
marketing fees paid by vendors, advertising, service, support and training.
As a VSP, this site provides free services and content that we believe
to be relevant, dynamic and timely, and that is designed to engage our customers
and facilitate an ongoing relationship. This site provides customers with a Web
destination where they can obtain news and information, purchase products,
download software or graphics, participate in messaging forums and other
community-related interaction. We attempt to motivate customers to return often
by providing new and different content. This content includes up-to-the-minute
Linux Headline News, Linux software downloads, a message board, job postings,
search engine, knowledgebase, TheLinuxLab test center, a registry of people,
jobs and projects, events and links to over 5,000 Web sites and resources
available on the Internet.
Our goal for this VSP is to combine the best of the community interests
with commercial business opportunities of Linux. We intend to enhance and
develop our Linux product offerings, but focus our near-term efforts on
developing partnerships and relationships with manufacturers and suppliers of
other Linux products and to distribute their products through this site.
With site traffic exceeding one million hits per month, there are
significant opportunities to generate advertising revenue on the site, primarily
from vendors whose products are sold on the site. Near-term revenue
opportunities also include charging a nominal fee for some of the services, such
as dynamic DNS, e-mail forwarding and Web hosting, which are now provided at no
charge.
TheLinuxStore.com has consistently increased traffic since its
inception in April 1999. We have received an average of over one million page
views per month and recently have had as many as one million in one week. Our
audience is comprised of IT and Web development professionals, software
programmers, hardware engineers and Linux enthusiasts, resellers, systems
integrators and VARs.
We are preparing to launch an aggressive marketing and promotion
campaign to increase awareness and traffic to our Web site. This includes online
and print media advertising in all key Linux media, online direct marketing,
public relations and trade show promotional activities. We have also implemented
a series of sales promotions, which will continue on an ongoing basis to develop
our
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customer database for marketing purposes. We intend to implement customer
loyalty programs offering additional benefits and incentives to frequent
customers.
We hope to provide customers of TheLinuxStore.com with a positive
online shopping experience, backed up by professional customer support. Our
professional tele-sales team offers pre-sale configuration and engineering
support. First-tier, post-sale technical support and return services are
provided online and toll-free over the telephone. More extensive technical
support may be referred to a specific vendor, although TheLinux Store.com can
provide this service for vendors if desired.
It is one of our fundamental values to participate as an active member
of the Linux community and support open source development projects whose goals
are to further market acceptance and to expand consumer awareness of the Linux
operating system. Since our founding, TheLinuxStore.com has supported the Linux
community, both locally and nationally. We are corporate sponsors of Linux
International and have key staff members who are vital contributors to various
open source projects, most notably, the Stampede Linux Development project. We
support the Debian Linux development efforts, as well as local Linux user
groups, the Arizona Software & Internet Association, Arizona Internet
Professionals Association and Linux expositions and conferences.
EBIZmart.com
The vision for EBIZmart.com is to provide "Everything for Business"
over the Internet. It is a business-to-business e-commerce portal dedicated to
facilitating the sale of products and services specifically for the business
customer. This includes computer systems, equipment and merchandise. The site
provides content, business news, travel services, stock quotes, weather, a
search engine, resources, links, events, calendar, education and training. This
site is unique and operates as a business-to-business clearinghouse, allowing
vendors to sell their product inventory direct to buyers over the Internet,
without disrupting their existing distribution channels or retail pricing
structures. This site encompasses three primary sales methodologies:
- Auctions - for suppliers to offer products and prospective
buyers to bid (place non-cancelable offers) for the
merchandise;
- Clearinghouse - for vendors to sell listed product inventory
directly to buyers at a specified, below-market price;
- Express Lane - for the sale of products that Ebiz has
purchased, inventoried and resells as in-stock items.
Products are indexed and categorized, promoted and highlighted in
various ways to keep the content dynamic. Currently, there are over 3,000
individual items listed on EBIZmart.com ranging from computer hardware and
software to office supplies, all at wholesale pricing direct to the business
buyer. Other areas of this VSP include distribution of our M2 Systems(TM)
products, e-commerce start-up services, Web development and hosting for start-up
e-commerce companies through the use of MyETool, an e-commerce site development
software kit, and EBIZ Travel, an in-house full service travel agency.
A key asset of this VSP is the membership registration, whereby users
of the site register and receive frequent site updates from us in the form of a
newsletter. They also receive various product and service incentives as rewards
for varying levels of purchases. We currently have a developed database of over
100,000 e-commerce/auction buyers.
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Revenue is generated from the sale of products that we purchase and
resell, from sales of our M2 Systems(TM) product line and from travel related
commissions from EBIZ Travel. We anticipate generating fees for product listings
for Auction and Clearinghouse items, as well as the Web hosting service through
MyETool. We also anticipate generating advertising revenue from banner ads and
links.
This VSP is being marketed to both vendors to list products as well as
potential purchasers through an integrated sales and marketing program, heavily
dependent upon our sales department's interaction with our current customer
base. To generate customer traffic, we promote the site through public
relations, online advertising on business-to-business Web sites (some via
reciprocal advertising and affiliate agreements), professional purchasing
associations, industry-related sites and through direct e-mail marketing.
PlanetPIA.com
This VSP is in the final stages of development. We have established
our site concept and design and are incorporating an ISP dial-up client,
content we believe will be relative to targeted PIA(TM) customers and links to
related Web sites. Based upon our development schedule, we anticipate that this
site will be launched in mid-December, 1999.
PlanetPIA.com is anticipated to provide the PIA(TM) user community with
special services and an interactive Internet experience, including games,
educational and family resources, chat rooms, and entertainment, sports and
shopping information.
We anticipate that this VSP will be a key marketing component of our
PIA(TM) systems. We intend to market this VSP extensively in online and offline
media.
OUR VALUE PRICED PC BRANDS
We believe we have certain advantages over our competitors in the value
price PC market, particularly:
- strict quality controls which assure fewer problems for the
end-user;
- competitive pricing below the $1,000 level; and
- technically proficient help desk for after sales service.
We currently manufacture and distribute two lines, the Element-L(TM)
and the M2Systems(TM) brands and are currently developing the PIA(TM) brand.
- Element-L(TM). Introduced in April 1998, our Element-L(TM)
line offers one of the most comprehensive families of
Linux-based systems on the market. The product line consists
of Linux-based, Internet-ready multimedia desktop and notebook
PCs, workstations, servers and high performance Alpha Systems.
The entry-level Element-L(TM) "Ion" system is believed to be
the lowest priced Linux-based computer system on the market.
- M2 Systems(TM). M2 Systems(TM), introduced in April, 1998, was
the first Internet-marketed sub-$1,000 Windows-based
multimedia PC. These systems, priced from $399-$899, provide
an alternative to expensive, brand-name computer systems and
continue to re-define the low-cost pricing landscape. In
addition to marketing M2 Systems(TM) on our EBIZmart.com and
cpumicromart.com e-commerce Web sites, we have received
production orders from several
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resellers including egghead.com, Fred Meyer Food Stores,
Computer Renaissance Stores and onsale.com. Our sales to all
resellers accounted for approximately 59% of revenue in fiscal
1999. We recently received distinction for our M2 Systems(TM)
as being among the top 100 PC manufacturers as determined by
Microsoft and we are in Microsoft's elite Member '99 program,
which honors the top 1% of the system builders in North
America.
- PIA(TM). Ebiz is developing and preparing to launch before
year-end a third product line, the PIA(TM), which targets
consumers and cost-conscious institutions such as schools and
libraries seeking a full-service Internet access device. The
PIA(TM) will be a highly-stylized fully-configured desktop
computer that will utilize the Linux operating system. The
PIA(TM) is designed to enable users to surf the Web quickly,
easily and affordably, exchange e-mail, play games, chat
online and do basic computing functions, such as word
processing and spreadsheets. Because of the flexibility of the
Linux operating system, the software pre-loaded on the PIA(TM)
provides compatibility with Microsoft Word, Excel and
PowerPoint documents. The targeted retail price is under $400,
placing the device well within the reach of most consumers and
institutions. The PIA(TM) product line extensions will include
additional configurations, upgrades and peripherals.
MARKETING
We accept sales orders directly via a secure shopping cart located on
each of our VSPs. In addition, we employ a dedicated direct sales force who
manage direct corporate and reseller sales opportunities. We also have a
complete inhouse tele-sales department that takes incoming customer calls,
referrals and inquiries generated by our various marketing activities or Web
sites.
Our marketing and promotion strategy is intended to:
- Create, merchandise and manage comprehensive VSPs.
- Build brand recognition and become market leaders with our VSP
sites.
- Generate significant market awareness for our products, our
sites and Ebiz through integrated marketing programs.
- Effectively position and promote our products and our VSP
sites to their target audiences to increase consumer traffic
to our sites, add new customers, stimulate demand and generate
revenue.
- Develop e-commerce and Internet service revenue from technical
support, service and training, advertising fees, links and
content providers.
- Leverage our strategic partnerships with vendors, industry
experts and distribution partners to effectively merchandise,
market and promote our initiatives.
- Establish a comprehensive database in excess of 1,000,000
customers, and build customer loyalty to maximize repeat
purchases.
- Establish evaluation and accountability processes to manage
our VSP sites and measure the results of marketing programs
and sales support activities.
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Establish Corporate and Brand Positioning. With our business interests
serving three diverse markets, we believe that it is necessary to quickly
establish and maintain a strong brand presence and communicate corporate and
brand positioning for each of our initiatives. We are implementing a
comprehensive sales and marketing program to promote Ebiz and our brand names.
Advertising in online and offline media will be utilized to support all
of our e-commerce initiatives and to build brand recognition. Print media
advertising campaigns are used in targeted trade, business and consumer
publications based on the perceived needs of the targeted customers.
Public and media relations activities have been used extensively,
targeting key online, print and broadcast media to generate visibility and
awareness of our VSP sites, our products and our brands. We distribute
newsworthy information on a timely, consistent basis and produce professional
electronic and printed press materials and manage an accurate media contact
database in-house.
Trade shows are used throughout our marketing program where appropriate
to create brand awareness, primarily among specific vertical market groups or
Internet industry associations. To enhance our corporate positioning and
perception, we intend to expand our presence at the select shows we attend,
providing a multimedia presentation theater format and individual demonstrations
and to interact extensively with the press and sales promotions to generate
traffic and consumer excitement. To ensure consistency of message, all trade
shows revolve around a central theme or concept that is key to the positioning
of our new and featured products.
Direct Marketing and Sales Promotion Programs. We intend to develop
targeted customer retention and promotion programs designed to reward frequent
customers. A Database/Direct Marketing Program has been established for each VSP
site to enable us to develop community databases, which can be marketed to
cross-sell, re-sell and up-sell our products. This will be accomplished through
product registrations, Web customer registrations and newsletter lists. Customer
information will be captured into an enterprise-wide customer database system,
which will then be able to be accessed by the sales team for follow-up and
reporting.
From this database, we intend to address many marketing activities,
including lead management and database marketing. Our goal will be to segment
this database and communicate with key segments on a weekly or bi-weekly basis
at a minimum. We will promote new products and enhancements, promotions,
training opportunities, sales events and other activities, through direct mail,
with a strong, compelling call to action that motivates a direct response that
can be effectively tracked.
Internet Marketing. To direct traffic to our VSP sites, we have created
inbound links that connect directly to our Web sites from search engines and
other sites. Potential customers can simply click on these links to become
connected to our VSPs from search engines and community and affinity sites. In
addition, in order to increase exposure on the Internet and directly generate
sales, we intend to develop an affiliates program, whereby we compensate our
registered affiliates for any sales generated via their link to our Web site.
CUSTOMER SERVICE
Our customer service department includes customer service and technical
support representatives. Our customer service representatives are available from
8:00 a.m. to 6:00 p.m. Mountain Standard Time, Monday through Friday to assist
customers in placing orders, finding desired products and registering credit
card information. Technical support representatives assist customers in setting
up, configuring and troubleshooting our branded products, and provide return
material authorizations for defective products. We provide technical support
over the telephone, via e-mail and online. We also provide comprehensive user
documentation, online tutorials and a detailed database of product-related
problems and solutions.
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Both customer service groups are a valuable source of feedback
regarding user satisfaction. Our VSP sites also contain customer service pages
that outline store policies and provide answers to frequently asked product
questions.
INFORMATION TECHNOLOGY
The market in which we compete is characterized by rapidly changing
technology, evolving industry standards, frequent service and new product
announcements, product enhancements and changing customer demands. Accordingly,
our success depends upon our ability to adapt to rapidly changing technologies,
to adapt our services to evolving industry standards, and to continually improve
the performance, reliability and features of our products and service. We have
implemented a broad array of scaleable site management, search, customer
interaction and distribution services systems that we use to process customers'
orders and payments. These systems use a combination of our own proprietary
technologies and commercially available licensed technologies. The systems that
we use to process customers' orders and payments are integrated with our
accounting and financial reporting systems. We focus our internal development
efforts on creating and enhancing the specialized, proprietary software that is
unique to our business.
Our systems have been designed on industry standard architectures and
have been designed to reduce downtime in the event of outages or catastrophic
occurrences. Our systems provide 24-hour-a-day, seven-day-a-week availability.
Our system hardware is located in our Scottsdale, Arizona facility.
PRINCIPAL SUPPLIERS, CUSTOMERS AND STRATEGIC ALLIANCES
Our principal suppliers have included Ingram Micro, Inc., Synnex
Information Technologies, Inc. and Elitegroup Computer Systems, Inc. As we focus
more on producing computer systems utilizing the Linux operating system, we
anticipate that supplies such as Super Micro Computer, Inc., Intelligent
Computer Peripherals, Cobalt Networks, Inc. and Corel Corporation will become
significant suppliers to Ebiz.
We have historically had a concentration of customers. In fiscal 1999,
recurring sales to two customers accounted for a total of 46% of our revenues. A
one time sale to another customer accounted for 19% of our total revenue for
this period. See "NOTES TO FINANCIAL STATEMENTS -- NOTE 2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES -- CONCENTRATIONS OF CREDIT RISKS." We believe
that in the future our customers will become more diverse and that the levels of
concentration will diminish.
We have entered into a distribution and licensing agreement with Corel
Corporation under which we will distribute the WordPerfect(R) 8 word processing
program pre-loaded onto certain of our Element-L and PIA systems. This agreement
is for a twelve month period which commenced September, 1999. The agreement may
be extended for additional 12 month terms or sooner cancelled under certain
conditions.
COMPETITION
The online commerce market is new, rapidly evolving and intensely
competitive. We expect competition to intensify in the future. We currently or
potentially compete with a variety of other companies in each of our targeted
market niches. Although we believe there may be opportunities for several
providers of products and services similar to ours, a single provider may
dominate any of our markets. We expect that additional companies will offer
competing e-commerce solutions in the future.
The Emergence of Linux Portals. Several Linux based Web site portals
which offer technical news, software downloads, Web site tools, resources, links
and services, as well as product marketing, have been recently developed. The
sites highlight the growing competition in the open-source world, and among
Linux operating system developers in particular. Our research indicates there
are currently 137 companies that have Linux-based Web sites, 49 of which
assemble and/or resell Linux computers, with only 9 offering desktop solutions.
There are numerous Linux portals offering information, software, services and
resources. The sites that offer some of the same content or services as
TheLinuxStore.com include justlinux.com, LinuxLinks.com, LinuxStart.com,
Linux.org, linux.com, Linuxmall.com, RedHat.com, FirstLinux.com; LinuxToday.com,
Slashdot.org, Freshmeat.com and linuxbandwagon.com.
Now considered a legitimate challenger to Windows and Unix,
particularly as dedicated single purpose servers (such as a Web server), Linux
itself is both free of charge and free to modify as any user desires. Several
companies are building business models around Linux by selling customer service,
technical support and applications with the system. Red Hat has dominated this
market by entering into distribution agreements with large hardware makers such
as IBM and Dell resulting in it accounting for approximately 56 percent of
operating systems of all Linux servers shipped last year, according to IDC.
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Low-cost PC/Appliances. In the emerging low-end PC and "appliance"
market, new competitors are emerging with frequency, primarily due to the
bundling and strategic partnerships with online service providers marketing
"free PC's" with a multi-year service commitment. Current market entrants
include Netpliance, E-Machines, Free PC, Free iMac and Microworkz. Major
competitors in the PC manufacturing segment include Dell Computers, Gateway
Computers, IBM, NEC, Compaq and others. Ebiz intends to compete in the value
priced range of PCs and believes it can be successful by offering uniquely
styled, quality products and effective technical support at competitive prices.
Business-to-Business Auctions, Clearinghouse/Wholesalers. In the
business-to-business clearinghouse market in which EBIZmart.com engages,
numerous sites offer products available for auction and numerous
business-to-business product reselling and resource Web sites are available.
Currently, there is no known e-commerce portal dedicated to providing content,
links, services and business-to-business sales of merchandise through all three
purchasing methods we provide, although we believe additional companies will
offer these solutions in the future. We believe that we are uniquely positioned
to make this VSP successful. Indirect competitors of EBIZmart.com in addition to
those above include a growing list of e-commerce content and merchant sites.
There is a growing number of purchasing utility and assistant programs and sites
attempting to establish themselves as procurement and distribution utilities.
These sites and programs are anticipated to compete with our VSP features and
tools.
We will also compete with several large computer product distributors
including CDW, Gateway Computers, Dell Computers and, to some degree, our
customers and suppliers such as Insight, Hamilton Avnet and others. We intend to
focus on our niche of procuring and merchandising surplus computer products and
believe that we can successfully compete with other distributors in this
segment.
INTELLECTUAL PROPERTY
We rely primarily on trademark and copyright laws to protect our
intellectual property. We also enter into confidentiality and nondisclosure
agreements with our employees and others, and generally control access to our
proprietary information.
We have filed with the United States Patent and Trademark Office for
trademark/service mark registration of "EbizMart," "M2 Systems," "CPU
MicroMart," and others. We are in the process filing registrations for
"Element-L Systems," "TheLinuxStore.com," "PIA," "PlanetPIA.com," "Accelerating
the Alternatives," "Performance to the Next Power" and other trademarks/service
marks used or anticipated to be used in our business. We have registered
Internet domain names for each of our current VSP sites as well as numerous
others. Additional filings and domain registrations are anticipated, including
variations of the above marks and names.
EMPLOYEES
As of September 30, 1999, we had a total of 70 full time employees,
including 33 administrative, 14 sales and 23 manufacturing employees. Our
employees are not covered by any collective bargaining agreements, and we
consider our relationship with our employees to be good.
FACTORS AFFECTING FUTURE PERFORMANCE
We are an early stage company with limited operating history making it difficult
to evaluate our future prospects.
We essentially re-engineered our operations through acquisition of
Genras' assets and rights to the "CPU MicroMart" name and operations in 1998.
We recently shifted our focus away from the Web auction channel, which comprised
over 90% of fiscal 1998 revenues, to our current business format. We have also
just recently entered the computer manufacturing industry and have limited
results of operations from this segment of our business. We have even more
recently focused on development of our Element-L(TM) brand of system and are
developing our new PIA(TM) brand, each utilizing the Linux operating systems,
and are devoting considerable resources to the development of these lines
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and to TheLinuxStore.com and PlanetPIA.com VSPs. Our revenues in the short term
may not increase as in prior periods, or may decrease as a result of this
strategy. We will encounter numerous risks and difficulties encountered by early
stage companies in the rapidly developing e-commerce markets as well as risks
associated with manufacturing and distributing PC computer systems. We may not
be successful in addressing these risks and there can be no assurance that our
business strategy will be successful.
We have a history of losses and anticipate future losses.
For the fiscal years ended June 30, 1998 and 1999, we sustained net
losses attributable to common shareholders of approximately $422,000 and
$1,954,000, respectively. Future losses are likely to occur. Our independent
auditors have noted that our success in obtaining additional capital funding
will determine our ability to continue as a going concern. While we have
demonstrated the ability to grow revenue, we have yet to generate and maintain
sufficient profitability to sustain or grow operations without additional
external funding. No assurances can be given that we will be successful in
continuing to grow our revenues or reaching or maintaining profitable
operations.
We are dependent upon the evolution of e-commerce and the growth of web usage.
We expect to derive significant revenues from our VSP "virtual stores"
and from the sales of our computer systems. This strategy anticipates continued
growth in consumer acceptance of on-line shopping and in the demand for our
value priced computer systems. While the trend appears to be toward rapid
expansion of e-commerce and for increased demand for value priced computer
systems, this market has not existed long enough to establish broad acceptance
or generate significant revenue. If this market fails to develop or develops
more slowly than we anticipate, our anticipated revenues may not materialize.
We are dependent upon corporate and consumer acceptance of the Linux system in
general and our branded PC systems in particular.
Our entry into the computer system manufacturing industry is a new line
of business in which we have no prior experience. While we believe the prior
experience of our management team will allow us to operate this business,
there can be no assurance that we will be successful. Our Element-L(TM) line has
just been developed and utilizes the Linux operating system. Acceptance of the
Linux system will be critical to the success of this product line and to our
PIA(TM) product line. Our M2 Systems(TM) line is relatively new and does not
have brand recognition to the same extent of most of our competitors. There can
be no assurance that our computer systems will meet with consumer acceptance.
If our systems are not met with the consumer acceptance we anticipate, our
revenues and operating results will likewise not reach the levels we anticipate.
We face intense competition in the e-commerce market and we can give no
assurances that we will be able to compete successfully.
The computer hardware and software distribution business is an
intensely competitive industry, and we face increasing competition in every
aspect of this business. E-commerce distribution is relatively new in the
industry and is anticipated to attract significant competition. We recently
entered the PC manufacturing market, which is also highly competitive. We plan
to create a growing presence in e-commerce distribution of product categories
and will face intense barriers to entry as the business of selling products via
the Internet experiences growth. This industry is characterized by rapid
technological and consumer preference change, massive capital infusions, and the
emergence of a large number of new and well established companies aspiring to
control market share in the Internet distribution process. A relatively small
number of these companies, including America Online, Yahoo!, MSN, Excite and
Lycos, currently control primary and secondary access to a significant
percentage of all Internet users and have a competitive advantage in marketing
to those users. Other large and established companies, such as major computer
manufacturers and distributors, have established relationships with large
customer databases and are rapidly expanding into Internet distribution.
Substantially all of these companies have financial, technological, promotional
and other resources much greater than ours. There can be no assurances that we
will be able to compete effectively in these marketplaces.
We have experienced rapid growth and can not guarantee that we will be able to
manage future growth.
We have recently experienced rapid growth in employees, sales,
customers and operations. This growth has brought many challenges and placed
additional pressure on our already limited resources and infrastructure. No
assurances can be given that we will be able to effectively manage this or
future growth. Our future growth may place a significant strain on our
managerial, operational, financial and other resources. Our success will depend
upon our ability to manage growth effectively, which will require that we
continue to implement and improve our operational, administrative
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and financial and accounting systems and controls and continue to expand, train
and manage our employees. Our systems, procedures and controls may not be
adequate to support operations and we may not be able to achieve the rapid
execution necessary to exploit the market for our business model. Our inability
to manage internal or acquisition-based growth effectively would cause a
significant strain on our resources and our resulting financial performance
would be materially adversely affected.
We carry a significant level of product inventory which can become outdated
rapidly.
Computer component inventory can become outdated due to rapid
technological and product advances. While we obtain our inventory at competitive
prices, if we are unable to dispose of this inventory for a profit due to a
shift in consumer demand or product advances or, if we liquidate this inventory
at low margins or below costs, our profitability will be adversely affected.
We must stock sufficient inventory to meet our customers needs.
It is also critical to our success that we stock sufficient inventory
to meet customer demand for both third party products and our PC systems. Our
inability to adequately stock inventory, due to capital constraints, procurement
difficulties or other reasons, would adversely affect our operating results both
on a quarterly and annual basis.
We have experienced difficulty in accurately forecasting our sales which results
in our inventory levels and sales revenues to vary from our estimates.
As a result of our limited operating history, it is difficult to
accurately forecast our net sales and we have limited meaningful historical
financial data upon which to base planned inventory purchases and operating
expenses. We base our current and future expense levels on our operating plans
and estimates of future net sales, and our expenses are to a large extent fixed.
Sales and operating results are difficult to forecast because they generally
depend on the volume and timing of the orders we receive. As a result, we may be
unable to adjust our spending in a timely manner to compensate for any
unexpected revenue shortfall. This inability could cause our net losses in a
given quarter to be greater than expected.
Our operating results are subject to significant fluctuations and may result in
continued losses.
As a result of our limited operating history, rapid growth and change
in business focus, and because of the emerging nature of the markets in which we
compete, our historical financial data is of limited value in planning future
operating expenses. Our expense levels will be based in part on expectations
concerning future revenues. Our revenue is derived primarily from product sales,
which are difficult to forecast accurately. We may be unable to adjust spending
in a timely manner to compensate for any unexpected shortfall in revenues. A
significant shortfall in demand for our products could have an immediate and
material adverse effect on our business, results of operations and financial
condition. Our business development and marketing expenses will increase
significantly as we expand our operations. To the extent that such expenses
precede or are not rapidly followed by increased revenue, our business, results
of operations and financial condition may be materially adversely affected.
Our quarterly operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside our
control. These factors include:
- the level of demand for our products;
- the level of demand for conventional and e-commerce marketing;
- the introduction of new products or services by us or our competitors;
- our ability to attract and retain personnel with the necessary
strategic, technical and creative skills required for effective
operations;
- the amount and timing of expenditures by customers;
- customer budgetary cycles;
- the amount and timing of capital expenditures and other costs relating
to the expansion of operations;
- our success in finding and acquiring suitable acquisition candidates;
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- pricing changes in the industry;
- technical difficulties with respect to the use of the Internet;
- economic conditions specific to Internet technology usage;
- government regulation and legal developments regarding the use of the
Internet; and
- general economic conditions.
As a strategic response to changes in the competitive environment, we
may from time to time make certain pricing, service, technology or marketing
decisions or business or technology acquisitions that could have a material
adverse effect on our quarterly results. We may also experience seasonality in
our business in the future, resulting in diminished revenues as a consequence of
decreased demand during certain periods of the year. Due to all of these
factors, our operating results may fall below the expectations of securities
analysts and investors in any future quarter. In such event, the trading price
of our common stock will likely be materially and adversely affected.
Our success is dependent upon our ability to raise additional capital and there
are no assurances we will find additional capital resources.
Since inception we have funded operations with debt and equity capital.
Our ability to operate profitably under our current business plan is largely
contingent upon success in obtaining additional sources of debt and equity
capital. There can be no assurance that sources of capital will be available on
satisfactory terms or at all. Under the terms of the Debenture and related
agreements, we are able to access limited capital upon conversions of the
Debenture into common stock. However, the timing of the access to or amount of
this capital is not assured because the Debenture is convertible solely at the
discretion of the holder of the Debenture. Without additional capital we may not
be able to fully implement our business, operating and development plans. No
assurance can be given that any such financing, if obtained, will be adequate to
meet our ultimate capital needs. If adequate capital can not be obtained or
obtained on satisfactory terms, our operations could be negatively impacted.
Security risks of e-commerce may deter purchases of our products.
Our relationship with our customers may be adversely affected if the
security measures that we use to protect their personal information, such as
credit card numbers, are ineffective. If, as a result, we lose many customers,
our net sales and results of operations would be harmed. We cannot predict
whether events or developments will result in a compromise or breach of the
technology we use to protect a customer's personal information. Furthermore, our
servers may be vulnerable to computer viruses, physical or electronic break-ins
and similar disruptions. We may need to expend significant additional capital
and other resources to protect against a security breach or to alleviate
problems caused by any breaches. We cannot give assurance that we can prevent
all security breaches.
Credit card fraud could harm our net sales results.
A failure to adequately control fraudulent credit card transactions
would decrease our net sales and results of operations because we do not carry
insurance against this risk.
Our inability to collect accounts receivable on a timely basis could cause our
cash flow to be impaired and reduce our profitability.
Our greatest difficulty in collections have historically been from the
auction Web site organizations. While we have reduced this line of distribution,
gained significant expertise in dealing with Internet distribution and
collection issues and instituted new credit review and approval procedures, no
assurances can be given that future unexpected problems and collection risks
will not develop from these and other customers which could reduce our
profitability or increase our losses.
Risks associated with manufacturing computer systems, such as technical support,
quality control and production problems, could result in significant product
returns and customer dissatisfaction.
Our revenues from manufacturing our own brand of computers have
increased. This activity creates a wide variety of risks associated with
manufacturing, including but not limited to defects and warranty costs exceeding
expectations. Also, customer service and technical support requirements could
exceed expectations and have severe adverse effects on operations. No assurances
can be given that we will be able to handle production and quality control
issues as we increase manufacturing activity. While we perform a substantial
amount of pre-delivery testing of our systems and
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believe we have a lower than industry average return of our manufactured
products, we may experience significant returns in the future that could
reduce our profitability and harm our reputation in the market.
If our supplier relationships are disrupted, our ability to manufacture
computer systems would be harmed.
We purchase components utilized in our computer manufacturing
operations from various suppliers. If we are unable to obtain sufficient
quantities of components our net sales would be adversely affected. We are also
subject to risks of fluctuations in our component prices. If prices charged by
our vendors escalate, our cost of goods sold and net income would be adversely
affected.
If our intellectual property protection is inadequate, competitors may gain
access to our technology and proprietary property which could undermine our
competitive position.
We deal in technically complex products and multi-layered supply and
distribution sources. We have limited proprietary property, and are relying
heavily on copyright, trademark, trade secret, nondisclosure and confidentiality
measures to protect these limited rights. Such protections may not preclude
competitors from developing similar technologies or services competitive with
ours. While we do not believe that any of our intellectual property infringes on
proprietary rights of third parties, no assurance can be given that infringement
claims may not be asserted. Litigation resulting from assertion of our rights or
from defense of a third party claim could be expensive and adversely affect our
operations even if we were ultimately successful. There is also no assurance
that we will have sufficient resources to sustain or defend protracted legal
actions to protect our proprietary rights.
Our success depends on our ability to continue to adapt to a rapidly changing
industry.
The computer industry is characterized by rapid change, frequent new
product introductions, changing customer demands, evolving standards, and many
other uncontrollable and unforeseeable trends and changes. Our future success
will greatly depend upon our ability to timely and effectively address changes
in this industry. No assurances can be given that we will be able to effectively
deal with these changes which could result in our operations being unprofitable.
If we do not adequately address "year 2000" issues, we may incur significant
costs and our business could suffer.
We have taken steps to ensure that we will not be adversely affected by
the Year 2000 equipment and software failures that may arise in software
applications and equipment with embedded logic where two-year digits are used to
define the applicable year. A review has been conducted in all of our computer
hardware, software and equipment with embedded logic to identify those areas.
The vendors for our software packages have indicated that our software is Year
2000 compliant. We do not believe the cost of any necessary upgrades will be
material. Contingency plans are being developed in the event that systems fail.
We have also communicated with our material suppliers, service providers and
customers regarding their compliance with Year 2000 requirements. As a result of
such inquiries, no significant deficiencies have been identified. We will
continue to monitor these third parties for Year 2000 compliance, but there can
be no assurance that all non-complying equipment and software will be identified
and upgraded on a timely basis. In addition, there can be no assurance that our
customers and suppliers will not be adversely affected by their own Year 2000
issues, which may indirectly adversely affect our business.
We have historically received substantial revenue from a small number of
customers which makes us vulnerable to significant revenue reduction if these
relationships are not maintained.
We have historically had a concentration of both customers and
suppliers. In fiscal years 1997 and 1998, two customers represented over 50% of
our sales. In the first quarter of 1999, one customer represented over 50% of
our sales and in the second quarter a different customer accounted for
approximately 35% of our sales. While we believe our customer base will become
more diverse, concentration may continue or re-occur in the future, exposing
our operations to material adverse consequences should disruptions or problems
be encountered with a major customer or supplier.
We may pursue acquisitions of complimentary businesses, products and
technologies which, if unsuccessfully implemented, could deter our operations
and growth.
We have been approached by entities that have proposed acquiring our
operations and by entities desiring to sell businesses to us. One or more
mergers or acquisitions may occur in the future which could have material
adverse consequences to our operations or to our stock value. A component of our
future growth strategy is possible acquisition of other companies that meet our
criteria for strategic fit, geographic location, revenues, profitability, growth
potential and operating strategy. Successful implementation of this strategy
depends on our ability to identify suitable acquisition candidates, acquire such
companies on acceptable terms and integrate their operations successfully with
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ours. Moreover, in pursuing acquisition opportunities we may compete with other
companies with similar growth strategies, certain of which may be larger and
have financial and other resources greater than ours. Competition for
acquisition targets likely could also result in increased prices of acquisition
targets and a diminished pool of companies available for acquisition.
Acquisitions involve a number of other risks, including adverse effects on
reported operating results from increases in goodwill amortization, the risks of
acquiring undisclosed or undesired liabilities, acquired in-process technology,
stock compensation expense and increased compensation expense resulting from
newly hired employees, the diversion of management attention, potential disputes
with the seller of one or more acquired entities and the possible failure to
retain key acquired personnel. Any acquired entity or assets could significantly
under-perform relative to our expectations. Our ability to meet these challenges
has not been established.
We depend upon our key personnel and skilled employees and they would be
difficult to replace.
While no assurances can be given that our current management resources
will enable Ebiz to succeed as planned, a loss of one or more of our current
officers or key employees could severely and negatively impact our operations.
We do not have employment contracts with any of our key employees. No assurances
can be given that we will not suffer the loss of key human resources for one
reason or another. Our future success also depends on our continuing ability to
attract, retain and motivate highly skilled employees. Competition for employees
in the industry is intense. We may be unable to retain our key employees or to
attract, assimilate or retain other highly qualified employees in the future. We
have experienced difficulty from time to time in attracting the personnel
necessary to support the growth of our business and we may experience similar
difficulties in the future.
Separate organization of PIA, Inc. may not result in a successful entity or add
value to Ebiz.
We have organized a wholly owned subsidiary, PIA, Inc., and may
transfer our PC manufacturing and marketing operations to this entity. We
believe that the organization of PIA may be a strategic move to bifurcate and
more clearly define our two areas of focus, e-commerce marketing of third party
products, and value price PC system manufacturing and distribution. However, we
have not determined to proceed with this strategy. We intend to explore
possibilities of capital raising through PIA directly. These efforts may lead to
PIA being owned by us with other shareholders, which would result in indirect
dilution of ownership of PIA by our shareholders. While we believe bifurcation
and eventual separation of our two areas of focus may prove to be in the best
interests of Ebiz and its shareholders, this strategy involves risks including
potential diversion of management resources, conflicts of interest with the
business relationship between the entities and increased costs of operations as
the two entities separate their operations. No assurance can be given that
separation of these operations will ultimately enhance the total probability or
value of Ebiz.
We may not have adequate insurance to cover all of our risks.
We anticipate the need to procure additional insurance coverage
related to product liability, key man insurance and other risks currently not
adequately covered. Failure to timely obtain additional insurance coverage
could have an adverse effect on our business.
Control of Ebiz is concentrated in the existing management which limits the
ability of other shareholders to influence corporate decisions.
Control of Ebiz is concentrated within a small number of stockholders,
who compromise our executive management. Such management, when acting in
concert, can effectively control the election of our Board of Directors. As a
practical matter, current management will continue to control Ebiz into the
foreseeable future.
The conversion price of the debenture is not fixed and could result in excessive
dilution.
The conversion price of our outstanding Debenture (as defined below) is
at the lesser of (a) $7.4953 or (b) the average of the three lowest closing bid
prices of Ebiz's common stock for the 15 consecutive trading days immediately
preceding the holder's election to convert. However, if the closing bid price of
the stock is less than $7.4953 at any time during the five trading days
preceding the date any portion of the Debenture is convertible, Ebiz has the
right to redeem for cash such conversion amount at a premium ranging from 105%
to 108%. See "ITEM 8 -- DESCRIPTION OF SECURITIES -- DEBENTURE AND WARRANT." We
believe that the right to redeem the Debenture for cash will allow Ebiz to
prevent excessive dilution of its shares through issuance of shares at prices we
do not believe to be adequate. While we intend to exercise the redemption for
cash feature as deemed appropriate to prevent what we consider to be excessive
dilution, there is no assurance that Ebiz will have sufficient cash reserves to
redeem the Debenture at any given time of conversion or at all. We currently do
not have any sources of cash reserves sufficient to redeem the amount of the
Debenture that is presently convertible into our common stock.
The price of our common stock is highly volatile.
Our stock is currently traded in the over the counter market. Our stock
is subject to high price volatility, low volumes of trades and large spreads in
bid and ask prices quoted by market makers. Due to the low volume of shares
traded on any trading day, prices of Ebiz common stock may be easily influenced
by persons buying or selling in relatively small quantities. This low volume of
trades could also cause the price of Ebiz stock to fluctuate greatly, with large
percentage changes in price occurring in any trading day session. Holders of
Ebiz common stock may also not be able to readily liquidate their investment or
may be faced to sell at depressed prices due to low volume trading. If high
spreads between the bid and ask prices of the Ebiz common stock exist at the
time of a purchase, the stock would have to appreciate substantially on a
relative percentage basis for an investor to recoup its investment.
Our common stock was recently delisted from the OTC Bulletin Board due
to our not meeting the deadline of being a company reporting under the Exchange
Act. Certain broker/dealers making a market in Ebiz's common stock have
indicated their willingness to relist the stock on the OTC Bulletin Board when
the stock is qualified. Management has also indicated its willingness to cause
the common stock to be listed on the NASDAQ SmallCap and National Markets when
qualified. However, no assurance can be given that any such listings will occur
or that an active market in the Ebiz common stock will develop or be sustained.
If an active market in Ebiz common stock does not develop, holders of our common
stock may be unable to readily sell the stock they hold or may not be able to
sell such stock at all.
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ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion provides information that we believe is
relevant to an assessment and understanding of Ebiz's results of operations and
financial condition for the fiscal years ended June 30, 1999, 1998 and 1997. The
following discussion should be read in conjunction with the Financial Statements
and related notes. See "INDEX TO FINANCIAL STATEMENTS" and the Financial
Statements referenced in the index.
BACKGROUND
Ebiz is an early stage operating company with limited operating history
in its current business line upon which an evaluation of its prospects can be
based. Until September of 1998 our Internet sales orders were generated from
third party "virtual store" Web sites such as Zauction.com and OnSale.com where
e-commerce shoppers purchased listed products on-line and orders were
electronically transmitted to us daily. We directly shipped to their customers
nationwide.
In September 1998 we launched our own Internet e-commerce Web site,
cpumicromart.com, and deployed our own sales staff to generate sales directly
and through third party resellers. In January 1999 we launched another
e-commerce VSP site, EBIZmart.com, which we believe was the first
business-to-business e-commerce clearinghouse portal creating a centralized
procurement location for large quantity liquidation of surplus products. In
April 1998 we began manufacturing our own "white box" PC systems under the brand
name of M2 Systems(TM) In April 1999 we began manufacturing a second brand of
PCs, Element-L(TM), which features the Linux operating system. Also in April,
1999, we launched TheLinuxStore.com, our first VSP which is a new type of
e-commerce site, that provides services and content as well as products to a
vertically targeted market.
Our objective is to become a leader in e-commerce marketing, providing
technical expertise and distribution of specialized products to fast growing
vertical markets, as well as a nationally recognized manufacturer of value
priced computer products. We have recently concentrated our strategic focus on
the Linux market and we have made the business decision to transition our
organization accordingly. We anticipate that this new focus will result in a
short term reduction in revenues as we shift away from the high volume, low
margin white box/clone business and towards the higher margin opportunities of
the Linux market. As a result, we anticipate that our expenses will plateau,
reflecting a related redirection of resources, and will then grow as we expand
our marketing and technical capabilities and increase our promotional
activities. We believe our
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<PAGE> 19
major competitive advantages include our proven customer databases, the
expertise of our management team and our internal programming and Web
development staff. We expect to utilize these strengths with our extensive
contacts and expertise in computer component and surplus merchandise procurement
and in e-commerce development, distribution and marketing.
RESULTS OF OPERATIONS
Year Ended June 30, 1999 Compared to Year Ended June 30, 1998. Net
revenue was $15,290,202 for the year ended June 30, 1999 compared to $6,824,967
for the year ended June 30, 1998. Revenue for the 1998 fiscal year was generated
by our predecessor, Genras. The $8,465,235 increase, approximately 124% over the
prior year, was due to the introduction of our Element-L(TM) and the growth in
sales of our M2Systems(TM) brands, the opening of our VSPs and the development
of our own sales force.
During fiscal 1999, we were able to substantially broaden our
distribution base and strategically position the company in the e-commerce
market with the launching of our VSP sites, EBIZmart.com and TheLinuxStore.com.
We have de-emphasized sales through third party auction Web sites, and increased
our sales directly to consumers, businesses and institutions through our own
sites. An increasing percentage of total sales in fiscal 1999 were generated
directly through our on-line "computer store" Web sites to end users, as well as
through our growing number of authorized resellers. In addition, we developed
our own sales capabilities to generate substantial sales volume for
M2 Systems(TM) and Element-L(TM) directly to corporate customers and through
selected value added resellers, retailers and major e-commerce Web sites such as
egghead.com. The cost of sales (which includes all direct manufacturing costs)
was $14,358,772 in 1999 compared to $6,157,794 in 1998. The increased sales
volume was the primary reason for the increase. Gross profit margins decreased
from 9.8% to 6.1% due to the wind down of the auction business during the first
quarter of 1999 and the ramp-up costs associated with the tripling of system
manufacturing during the second half of 1999.
Selling, general and administrative expenses were $2,512,415 for fiscal
1999, an increase of $1,830,845 from 1998. This increase was due to the building
of our information technology, sales, marketing and administrative
infrastructure and the related expenses required to begin implementing the
company's sales and manufacturing strategies.
Research and development expenses were approximately $190,000 in
fiscal year 1999 compared to minimal expenses for the prior period. The costs
to maintain our Web sites and our Web site tools are expensed as incurred.
The preceding operational factors resulted in a net loss of $1,877,124
for the fiscal year ending June 30, 1999 as compared to a net loss of $422,457
for the year ended June 30, 1998.
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<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES.
At June 30, 1999, the Company had cash and cash equivalents of
approximately $76,000, representing a decrease of approximately $393,000 from
approximately $469,000 at June 30, 1998. The decrease is primarily the result
of the Company's net loss and the growth of accounts receivable and inventory.
Operating Activities. The Company's net cash used in operating
activities was approximately $2,940,000 for fiscal 1999 and approximately $9,300
for fiscal 1998. In fiscal 1999, the cash was used for the selling, general and
administrative expenses and increased inventory and accounts receivable that
were the result of substantially higher sales and the implementation of the
Company's strategic programs. In fiscal 1998, the net cash used in operating
activities was primarily for increased inventory.
Investing Activities. The net cash used in the Company's investing
activities was $473,000 and $58,000 for fiscal 1999 and 1998, respectively. In
fiscal 1999, these activities included the acquisition and development of
software and equipment for the Company's Web sites and administrative
activities. In fiscal 1998, investing activities were primarily for equipment to
support operations.
Financing Activities. From inception until the transaction with
Vinculum, our predecessor financed its operations almost entirely from
internally generated working capital. Concurrent with the Vinculum transaction,
we obtained our first significant equity capital of approximately $450,000, net
of financing costs, due to the exercise of previously issued Vinculum warrants
for common stock. This equity capital, obtained in June 1998, was primarily
deployed during the quarter ended September 30, 1998 to pay the expenses of
moving into our new facility, building our manufacturing, technology and sales
infrastructure and financing the net loss from activity during that quarter,
including the losses generated from the auction business.
During fiscal 1999, the net cash provided by financing activities was
approximately $3,023,000, obtained from borrowings and common and preferred
stock issuances as discussed below.
In September 1998, we obtained our first credit facility, a $250,000
revolving line of credit, with a local banking institution. This facility was
later raised to $350,000. Borrowings under this line of credit accrued interest
at one percentage point above the lender's current prime rate. These funds were
utilized to finance increased purchasing requirements to meet demand for our M2
Systems(TM) PCs, finance the general expansion of our working capital and for
other development activity. This credit facility was paid off on August 25,
1999.
In December 1998, we obtained additional equity capital of
approximately $1,195,000 after financing expenses, as a result of additional
shareholder warrant exercises and the sale of additional common stock. These
proceeds were used to pay down the bank line of credit and other indebtedness,
finance increased production requirements, meet other operational needs and
finance the net loss from activity during that quarter. A significant amount of
these net proceeds remained in cash at December 31, 1998.
In April 1999, we obtained approximately $869,000 of net equity funds
through the sale of 10,895 shares of Series A Preferred Stock. The Series A
Preferred is convertible into shares of common stock at a conversion ratio of 16
2/3 shares of common for each share of Series A Preferred converted or one share
of common for each $6.00 of preference value of the Series A Preferred. These
proceeds were primarily used for increased inventory and accounts receivable.
On April 19, 1999, we borrowed $500,000 from Aztore Holdings, Inc. for
a one-year term at a fixed rate of 10%. The loan was evidenced by a note that
was convertible into shares of common stock at a rate of $6.00 principal per
share. We also issued Aztore Holdings a warrant to purchase 250,000 shares of
our common stock as a condition to obtain the loan. We utilized the proceeds of
this loan for inventory financing and accounts payable. This loan was repaid in
full on August 25, 1999. Under the terms of the repayment, the warrant was
cancelled.
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<PAGE> 21
From time to time during fiscal 1999 we borrowed amounts from
individuals, including Jeffrey I. Rassas, our Chief Executive Officer, and
Stephen C. Herman, our President. The loans from Mr. Rassas and Mr. Herman were
used primarily for working capital and did not exceed $30,000 from each at any
time during this period.
On August 25, 1999, we issued a $7,100,000 9% Subordinated Convertible
Debenture ("Debenture") and a Warrant to Purchase Common Stock ("Warrant") to
JEM Ventures EBIZ, LLC for a total of $7,100,000. The Debenture is convertible
into shares of Ebiz common stock at a conversion price of the lesser of (a)
$7.4953 per share or (b) the average of the three lowest closing bid prices
of the common stock during the 15 consecutive trading days prior to conversion.
The Warrant is exercisable at any time prior to August 22, 2004 for the pur-
chase of 60,000 shares of Ebiz's common stock at $7.4723 per share, 60,000
shares at $8.6219 per share and 125,000 at $6.3227 per share. The proceeds were
used to secure a $5,000,000 letter of credit in favor of the holder of the
Debenture, debt repayment and working capital. As the outstanding balance of the
Debenture decreases, the amount of the letter of credit and corresponding cash
collateral required to secure the letter of credit decrease, resulting in
additional proceeds being available for working capital. Our ability to
decrease the cash collateral for the letter of credit and obtain additional
funds for working capital is contingent upon the holder converting the Deben-
ture, which may occur at the holder's discretion, or our ability to pay down
the Debenture with cash from other sources.
Net Operating Loss Carryforwards. We have a net operating loss carry
forward of approximately $3 million, over $2 million of which pertains to
operations of Vinculum prior to the acquisition via reverse merger with Ebiz in
June 1998. The utilization of the net operating loss incurred prior to June 1998
is subject to limitations, however, and the net operating loss may not be fully
usable prior to its expiration. No deferred tax asset has been recognized in the
Financial Statements due to the uncertainty of utilization.
Fiscal 2000 Liquidity. We anticipate that our concentrated focus on our
branded computer systems utilizing the Linux operating system will result in
less revenue growth on a short-term basis than we have experienced historically.
The anticipated decrease is a result of our expected shift away from high
volume/low margin production and towards what we perceive to be higher margin
opportunities of the Linux market. We expect both our revenue and margins to
increase over the long-term as a result of our focus on the Linux based market.
Our expenses are anticipated to ultimately increase as a result of
expanded marketing and promotional activities and as we expand our technical
capabilities. We anticipate financing these increased costs primarily through
cash made available as the Debenture is converted into shares of common stock
and from other capital raising activities. While we intend to take actions as
necessary to manage our liquidity requirements, there is no assurance we will be
successful. Our ability to meet our liquidity requirements through fiscal 2000
is dependent upon timely conversion of the Debenture (which is at the sole
discretion of the holder), obtaining additional capital or both.
YEAR 2000 "Y2K" CONSIDERATIONS
Ebiz has addressed possible remedial efforts in connection with
computer software that could be affected by the Year 2000 "Y2K" problem. The Y2K
problem is the result of computer programs being written using two digits rather
than four to define the applicable year. Any programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculations.
The Y2K problem can affect any modern technology used by a business in
the course of its day. Any machine that uses embedded computer technology is
susceptible to this problem, including for example, telephone systems, postage
meters and scales and of course, computers. The impact on a company is
determined to a large extent by the company's dependence on these technologies
to perform their day-to-day operations.
Internally, Ebiz has reviewed all such equipment and has determined
that many of our systems are Y2K compliant. This includes our telephone systems,
postage equipment and our software. We anticipate that all systems and software
will be fully reviewed and brought into compliance by November 1999. If certain
systems are not brought up to Y2K compliance by the end of November 1999, then
the non-compliant technology will be disabled so as not to have an impact on the
systems that are compliant. We would not anticipate that any such events would
have a serious impact on our day-to-day operations, or that any valuable
information would be lost. We back up all computer systems daily to protect
against data loss.
The costs of bringing our technology up to Y2K compliance is expected
to be less than $50,000. This is because the majority of the "patches" or
programs designed to make software Y2K compliant can be obtained over the
internet from manufacturers for little or no cost and we do not expect to rely
heavily on outside consultants to upgrade our systems as most of the work can be
performed in-house.
Externally, the Year 2000 problem may impact other entities with which
we transact business. We cannot predict the effect of the Year 2000 problem on
such entities or Ebiz. With regard to those companies with which we do business
on a daily basis, we cannot guarantee that they will be vigilant about their Y2K
plan of action. Many, but not all of our suppliers and customers have advised us
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<PAGE> 22
of their Y2K readiness. We do not have any direct links with any of their
systems. Should any of our suppliers or customers experience a disruption due to
the Y2K problem, the most significant impact may be a delay in receiving
inventory or delays in the collection of accounts receivable. In a worst case
scenario, the former may ultimately cause us to delay production or shipments
to customers while the latter may become an obstacle for timely collection of
accounts receivable.
In these unlikely events, we have identified alternative suppliers for
our critical components and our collections staff has discussed contingency
plans with our larger customers. We have also prepared alternate scenario cash
management plans to estimate the potential requirements for additional funding.
We have not yet determined the source of such funds.
In the event that Ebiz does experience Y2K problems, it could result in
a decrease of Ebiz's revenues. A decrease of revenues could result in material
losses from operations and a reduction in our working capital. Management is
unable at this time to quantify the impact that the Y2K problem could have on
our results of operations and financial condition.
ITEM 3. DESCRIPTION OF PROPERTY
We currently lease 30,000 square feet of office and warehouse
facilities located in Scottsdale, Arizona. Approximately 10,000 square feet of
the facility are utilized for administrative and sales offices and the remaining
20,000 square feet are utilized for warehouse and manufacturing. The lease on
the facility is for a term through July 2001, with a current annual rental
payment of approximately $175,000.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 30, 1999, the ownership
of each person known by Ebiz to be the beneficial owner of five percent or more
of Ebiz's Common Stock, each officer and director individually, and all officers
and directors as a group. Ebiz has been advised that each person has sole voting
and investment power over the shares listed below unless otherwise indicated.
<TABLE>
<CAPTION>
PERCENT OF
NAME AND ADDRESS OF OWNER NUMBER OF SHARES BENEFICIAL OWNERSHIP(1)
<S> <C> <C>
Jeffrey I. Rassas(2) 1,828,212 24.83%
15695 North 83rd Way
Scottsdale, Arizona 85260
Stephen C. Herman(3) 1,834,212 24.91%
15695 North 83rd Way
Scottsdale, Arizona 85260
Michael S. Williams(4) 377,128 5.12%
3710 East Kent Drive
Tempe, Arizona 85044
All Directors and Officers as a Group
(2 persons) 3,662,424(2) 49.38%
</TABLE>
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<PAGE> 23
(1) Based upon 7,364,115 shares of common stock being issued and
outstanding or committed to be issued as of September 30,
1999.
(2) Mr. Rassas holds his shares beneficially through Hayjour
Family Limited Partnership.
(3) Mr. Herman holds his shares beneficially through Kona
Investments Limited Partnership.
(4) Mr. Williams holds 15,227 shares personally and, as its
president, controls the voting of 360,710 shares held by
Aztore Holdings, Inc. Barbara Williams, his wife, holds 1,191
shares. Mr. Williams disclaims beneficial ownership of the
shares held by Aztore in excess of his percentage ownership of
Aztore.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The directors and executive officers of Ebiz are:
NAME AGE POSITION
Jeffrey I. Rassas 37 Director and Chief Executive Officer
Stephen C. Herman 45 Director and President
Donald B. Altvater 54 Vice President and Controller
Elizabeth Perrine 35 Vice President, Marketing
Larry Phillips 33 Vice President, Sales
DIRECTORS AND EXECUTIVE OFFICERS
Jeffrey I. Rassas, Director and Chief Executive Officer, is the founder
of Ebiz and has been its Chief Executive Officer since its inception in 1995.
Between 1989 and 1995, Mr. Rassas owned and operated The Wilsaac Group, Inc.,
d/b/a DLC Consulting, an employee leasing and office services outsourcing firm
with offices in Phoenix, Tucson, Los Angeles, Century City and Irvine. He
arranged the sale of the Arizona offices to Dynamex, a division of Air Canada,
in 1993 and the California offices to another buyer in 1995. Prior to DLC
Consulting, from 1985 to 1989, Mr. Rassas co-founded ITS Travel Group, Inc.,
which grew into the third largest travel agency in Arizona before it was sold in
1989. From 1982 to 1985, Mr. Rassas held the position of Magnetics Engineer at
CTM Magnetics. Mr. Rassas holds an Associates degree in electrical engineering.
Stephen C. Herman, Director and President, joined Ebiz in September of
1997. Mr. Herman has approximately 20 years of computer and electronics
distribution and sales experience. Between 1995 and 1997 he was a Vice President
and Divisional General Manager for Globelle Incorporated. From 1992 to 1995, he
was the Vice President of Sales for Insight Direct. His responsibilities
included three specialty divisions. Between 1989 and 1992, Mr. Herman was the
Director of Sales for Technology Marketing Group, a predecessor to Globelle.
Between 1987 and 1989, Mr. Herman also was President and founder of Computer
Solutions, Inc. ("CSI"), a five location corporate reseller servicing Fortune
1000 customers, which grew to $80 million in revenues by its second year. CSI
was sold to Valcom in 1989, and Mr. Herman became President of Valcom Southwest,
a wholly-owned subsidiary of Valcom.
Donald B. Altvater, Vice President and Controller, joined the Ebiz in
January 1999. Mr. Altvater has over 20 years of experience in financial,
operations and marketing management in the electronics and communications
industries with GTE and Fujitsu. He began his career with GTE International in
1971 and held a series of increasingly responsible positions with GTE companies
that culminated in his appointment in 1987 as Vice President - Finance of
Fujitsu GTE Business Systems, a joint venture between those two corporations. In
1989, Mr. Altvater was named Vice President and Chief Financial
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<PAGE> 24
Officer of Federal Business Systems, a Fujitsu subsidiary. After electing early
retirement in 1992, he managed two private companies in which he had an
ownership interest. In 1996, Mr. Altvater became Controller of Refrac Systems, a
privately held metallurgical engineering company and continued in that position
until joining Ebiz in 1999. He holds a Bachelor of Science degree in Mathematics
(magna cum laude) and Economics (cum laude) from Tufts University and an M.B.A.
from the University of Chicago Graduate School of Business.
Larry Phillips, Vice President, Sales, joined Ebiz in May 1999 and
brings over a decade of experience in developing sales teams as well as
lucrative business opportunities. He is responsible for developing and managing
sales and customer service operations. Mr. Phillips was the General Sales
Manager of PC Wholesale, Inc., a computer hardware and software distributor from
1997 until he joined Ebiz. Mr. Phillips was responsible for over $60 million in
revenue and recruited, hired and trained staff and ran the day-to-day
operations, including product sourcing and P & L, for the Minneapolis office.
From 1992 to 1997 he served as Director of Sales for Globelle Incorporated,
where he was responsible for nearly $170 million in sales and oversaw five
branch offices. Mr. Phillips began his career with Piper Jaffrey in 1989, where
he was responsible for corporate pension plans and individual investor
portfolios. He holds a Bachelors of Science Degree in Finance and Economics from
St. Cloud State University in Minnesota.
ITEM 6. EXECUTIVE COMPENSATION
The following table is based upon compensation for the calendar years
ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1) (2)
NAME
SALARY BONUS
<S> <C> <C> <C>
Jeffrey Rassas,(2) 1998 $ 72,000 $ 10,000
Chief Executive 1997 1997 $ 72,000 $ 60,000
Officer 1996 $ 36,000 $ --
Stephen Herman,(3) 1998 $ 72,000 $ 10,000
President 1997 $ 12,000(3) --
1996 -- --
</TABLE>
(1) Excludes distributions for payment of personal income taxes resulting
from Ebiz electing Subchapter S status, which election was terminated
in June, 1998.
(2) Mr. Rassas and Mr. Herman have received base annual salary of $96,000,
commencing January 1, 1999. Bonuses and other compensation incentives
are anticipated.
(3) Based on employment from September through December 1997.
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<PAGE> 25
STOCK OPTION PLAN
Ebiz's Board of Directors adopted, and its shareholders approved,
effective August 1998, the 1998 Equity Incentive Plan (the "Plan"). The purpose
of the Plan is to promote the interests of Ebiz and to motivate, attract and
retain the services of persons upon whose judgment, efforts and contributions
the success of Ebiz's business depends. A further purpose of the Plan is to
align the personal interests of such persons with the interests of shareholders
of Ebiz through equity participation in its growth and success. The Plan
provides for granting options, incentive stock options and restricted stock
awards, or any combination of the foregoing for up to 1,000,000 shares of Ebiz's
common stock. As of September 30, 1999, a total of 427,000 stock options were
outstanding under the Plan of which 145,500 were vested. A total of 100,000
options to purchase shares under the Plan have been exercised.
EMPLOYMENT AGREEMENTS
Ebiz has no employment agreements with its executive officers.
DIRECTOR COMPENSATION
All authorized out-of-pocket expenses incurred by a director on behalf
of Ebiz are subject to reimbursement. Ebiz is currently negotiating compensation
packages for additional non-management directors to join the Board.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective as of June 1, 1998, Ebiz's predecessor, Vinculum, acquired
substantially all of the assets and assumed the liabilities of Genras in
exchange for 5,000,000 shares of its common stock. The 5,000,000 shares were
distributed by Genras to its shareholders as follows: Jeffrey I. Rassas -
2,250,000 shares, Stephen C. Herman - 2,250,000 shares and Thomas A. Cifelli -
500,000 shares. Ebiz also agreed to reimburse, on a net after-tax basis, any
income tax liability of the Genras shareholders related to the period of January
1, 1998 through the date of acquisition. Fox & Company Investments, Inc., a NASD
registered broker-dealer with which Mr. Cifelli was affiliated, received 187,500
shares of common stock in connection with this transaction for investment
banking advice and services related to the transaction. Aztore Holdings, Inc.,
the majority shareholder of Vinculum prior to the acquisition, entered into an
agreement with Ebiz to be compensated in the event Ebiz obtains benefit from a
prior net operating loss of Vinculum.
Michael S. Williams, then a director of Ebiz, and Lanny Lang provided
consulting services to Ebiz commencing in November, 1998. The consulting
services were performed by the individuals in their capacities as employees of
Aztore. Aztore was compensated $84,600 in cash and stock grants ($22,700 cash
and 31,325 shares) for these services and Messrs. Williams and Lang were granted
options to purchase 30,000 and 20,000 shares, respectively, of Ebiz common stock
at $1.00 per share. The grant was made under the Ebiz 1998 Equity Incentive Plan
for consulting services performed. The options were assigned upon issuance to
Aztore.
In April, 1999, Aztore, whose president, Michael S. Williams, was then
a director of Ebiz, loaned $500,000 to Ebiz, which was evidenced by a Secured
Convertible Subordinate Note ("Note"). The Note was issued at a 10% interest
rate, was secured by the grant of a security interest in certain of Ebiz's
assets and was convertible into shares of common stock at one share per $6.00
amount of principal obligation. Ebiz also issued Aztore a warrant certificate
which entitled Aztore to purchase 250,000 shares of Ebiz's common stock at $6.00
per share. In August 1999, Ebiz and Aztore agreed to cancel the warrant and to
full payment of the Note with interest for total consideration of $629,165.
Aztore also exercised the option, as assigned to it by Messrs Williams and Lang,
to acquire 50,000 shares of Ebiz's common stock for $1.00 per share.
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From time to time Ebiz has borrowed funds from Jeffrey I. Rassas and
Stephen C. Herman to meet working capital needs. These loans generally bear
interest of 10% and were no greater than $30,000 during the 1999 fiscal year.
Ebiz's general policy for entering into transactions with directors,
officers and affiliates of the company that have a financial interest in the
transaction is to adhere to Nevada corporate law regarding the approval of such
transactions. In general, a transaction between a Nevada corporation and a
director, officer or affiliate of the corporation in which such person has a
financial interest is not void or voidable if the interest is disclosed and
approved by disinterested directors or shareholders or if the transaction is
otherwise fair to the corporation.
ITEM 8. DESCRIPTION OF SECURITIES
Ebiz is a Nevada corporation and is authorized to issue 70,000,000
shares of common stock, $.001 par value, and 5,000,000 shares of preferred
stock, $.001 par value. As of September 30, 1999, 7,366,197 shares of common
stock were outstanding, 50,000 shares of common stock were pending issuance and
60,000 shares of preferred stock had been designated as Series A Preferred, of
which 10,895 shares were issued and outstanding and convertible into 181,583
shares of common stock.. The rights, preferences, privileges and limitations of
the undesignated preferred stock may be determined by the Board of Directors,
and may be issued in more than one series. As of September 30, 1999, Ebiz had a
total of 427,000 options granted under the Plan outstanding, of which 145,500
were vested, each option and warrant entitling the holder thereof to acquire one
share of Ebiz's common stock. As of September 30, 1999, Ebiz had outstanding
warrants to purchase 461,711 shares of its common stock which were exercisable
at prices ranging from $2.10 to $8.6219 per share, and a debenture which is
convertible into a minimum of 947,260 shares.
COMMON STOCK
The holders of the common stock are entitled to one vote per share on
all matters submitted to a vote of shareholders of Ebiz. In addition, holders
are entitled to ratably receive dividends, if any, as declared from time to time
by the Board of Directors out of funds legally available for payment of
dividends. No dividends are payable on the common stock until all accrued but
unpaid dividends on the outstanding Series A Preferred shares have been paid. In
the event of the dissolution, liquidation or winding up of Ebiz, the holders of
common stock are entitled to share ratably in all assets remaining after payment
of all liabilities of Ebiz and the preference amount distributable to the
holders of the Series A Preferred Shares. The holders of common stock do not
have any subscription, redemption or conversion rights, nor do they have any
preemptive or other rights to acquire or subscribe for additional, unissued or
treasury shares.
Under the terms of Ebiz's bylaws, except for any matters which,
pursuant to Nevada law, require a greater percentage vote for approval, the
holders of a majority of the outstanding common stock, if present in person or
by proxy, are sufficient to constitute a quorum for the transaction of business
at meetings of Ebiz's shareholders. Except as to any matters which, pursuant to
Nevada law, require a greater percentage vote for approval, the affirmative vote
of the holders of a majority of the common stock present in person or by proxy
at any meeting (provided a quorum is present) is sufficient to authorize, affirm
or ratify any act or action, including the election of the Board of Directors.
The holders of the common stock do not have cumulative voting rights.
Accordingly, the holders of more than half of the outstanding shares of common
stock can elect all of the directors to be elected in any election, if they
choose to do so. In such event, the holders of the remaining shares of common
stock would not be able to elect any directors. The Board of Directors is
empowered to fill any vacancies on the Board created by the resignation, death
or removal of directors.
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<PAGE> 27
In addition to voting at duly called meetings at which a quorum is
present in person or by proxy, Nevada law and Ebiz's bylaws provide that
shareholders may take action without the holding of a meeting by written consent
or consents signed by the holders of a majority of the outstanding shares of the
capital stock of Ebiz entitled to vote on the action. Prompt notice of the
taking of any action without a meeting by less than unanimous consent of the
shareholders will be given to those shareholders who do not consent in writing
to the action. The purposes of this provision are to facilitate action by
shareholders and to reduce the corporate expense associated with special
meetings of shareholders.
PREFERRED STOCK
Under Ebiz's Articles of Incorporation, additional shares of preferred
stock may, without any action by the shareholders of Ebiz, be issued by the
Board of Directors from time to time in one or more series for such
consideration and with such relative rights, privileges and preferences as the
Board may determine. Accordingly, the Board of Directors has the power, without
shareholder approval, to fix the dividend rate and to establish the provisions,
if any, relating to voting rights, redemption rate, sinking fund, liquidation
preferences and conversion rights for any series of preferred stock (subject to
the preferences of the Series A Preferred shares discussed below) issued in the
future, which could adversely affect the voting power or other rights of the
holders of common stock.
The Board's authority to issue preferred stock provides a convenient
vehicle in connection with possible acquisitions and other corporate purposes,
but could have the effect of making it more difficult for a person or group to
gain control of Ebiz. Ebiz has no present plans to issue any shares of preferred
stock other than the Series A Preferred.
SERIES A 10% CONVERTIBLE PREFERRED STOCK
The holders of the Series A Preferred have preference in payment of
dividends and in liquidation distributions (to the extent of $100 per share)
over Ebiz's common stock.
Each share of Series A Preferred is convertible into shares of Ebiz's
common stock at a conversion ratio of one share of Series A Preferred to 16 2/3
shares of common stock ($6.00 of preference value per share). The conversion
ratio of the Series A Preferred is to be adjusted to prevent dilution in the
event of any stock splits, stock dividends (except dividends payable on the
Series A Preferred) or other adjustments to Ebiz's capital structure. Ebiz may
redeem the shares of Series A Preferred at $100 each, plus accrued and unpaid
dividends, if the closing bid of Ebiz's common stock is in excess of $9.00 for
20 out of 30 consecutive trading days. In the event the closing bid of the
common stock is at a price equal to or in excess of $13.50 for 20 out of 30
consecutive trading days, the shares of Series A Preferred shall automatically
convert into common stock of Ebiz.
Each share of Series A Preferred has a $10 (10%) annual, cumulative
dividend accruing each January 1, April 1, July 1 and October 1, commencing on
April 1, 1999. Ebiz may, in its discretion, pay dividends in whole or in part in
common stock. If dividends are paid in Ebiz's common stock, the value is be
based on the five-day average closing bid price ending on the trading day
immediately preceding the accrual date.
In the event of any "Liquidation Event," the holders of the Series A
Preferred will be entitled to receive $100 per share, plus any cumulative but
unpaid dividends accrued thereon before the holders of common stock receive any
distributions. Ebiz may not establish a series of preferred superior to the
Series A Preferred. A "Liquidation Event" means any liquidation, dissolution or
winding-up of Ebiz and, unless approved by the holders of the Series A Preferred
as a class, any consolidation or merger of Ebiz where the holders of Ebiz's
common stock (on a fully diluted basis) own less than a majority of the
outstanding voting stock of the entity resulting from the merger or
consolidation.
27
<PAGE> 28
Holders of shares of Series A Preferred will generally vote with the
holders of common stock as a class on all matters except for matters where vote
as a class is specified. The holders of the Series A Preferred are entitled to
16 2/3 votes per share when voting on matters as a class with the holders of the
common stock into which such shares are convertible.
Ebiz is prohibited, unless approval of the holders of a majority of the
Series A Preferred shares are obtained, from (a) entering into any sale, lease
or assignment of substantially all of Ebiz's assets, any consolidation or
merger, any reclassification or recapitalization of its capital stock or any
dissolution, liquidation or winding-up unless the holders receive value equal to
200% of the liquidation preference plus accrued dividends; (b) effectuating any
purchase or redemption of common stock other than purchases upon termination of
employment or affiliation with Ebiz; (c) issuing any shares superior to or on
parity with the Series A Preferred as to liquidation and dividend preferences;
(d) declaring or paying dividends or making any other distribution (other than a
dividend payable on shares of common stock) to holders of the common stock; or
(e) changing the authorized capital stock of Ebiz.
DEBENTURE AND WARRANT
Ebiz has outstanding a $7,100,000 9% Subordinated Convertible Debenture
("Debenture") and a Warrant to Purchase Common Stock ("Warrant").
The Debenture is due February 24, 2002. The Debenture is convertible
into a minimum of 947,260 shares of Ebiz's Common Stock . The holder may convert
up to $394,444 face amount of the Debenture upon issuance and up to $394,444 on
each monthly anniversary date thereafter (each, a "Due Date"). Any amount not
converted accumulates and may be converted thereafter. However, the holder is
prohibited from converting any amount of the Debenture which would cause the
holder's total ownership of common stock to equal five percent or more of the
total shares outstanding. The per share conversion price is equal to the lesser
of (a) $7.4953 or (b) the average of the three lowest closing bid prices of
Ebiz's common stock for the 15 consecutive trading days ending on the trading
day immediately preceding submission of a notice to convert by the holder. In
the event the closing bid price of Ebiz's Common Stock is less than $7.4953 per
share at any time during the five trading days preceding a Due Date, Ebiz has
the right to redeem for cash the monthly conversion amount of the Debenture (in
lieu of allowing the holder to convert such amount) at premiums ranging from
105% to 108%. The Debenture is secured by a letter of credit issued by Bank One
Arizona, NA in the initial amount of $5,000,000. The required amount of the
letter of credit decreases by $.7042 for every $1 of principal reduction of the
Debenture whether the reduction occurs by conversion or redemption.
The Warrant is exercisable for the purchase of 245,000 shares of Ebiz's
Common Stock, 60,000 at $7.4723 per share, 60,000 at $8.6219 per share and
125,000 at $6.3227 per share. The Warrant is exercisable at any time prior to
August 22, 2004.
Ebiz is obligated to register for resale all common stock issuable upon
conversion of the Debenture and exercise of the Warrant. Certain penalty
provisions apply if a registration statement covering the shares is not filed by
October 24, 1999 or is not declared effective by the SEC by February 6, 2000.
OPTIONS AND OTHER WARRANTS
As of September 30, 1999, 216,711 warrants in addition to the Warrant
described above were outstanding, which consist of 110,981 Series F Warrants
expiring December 1, 1999 with a $3.00 per share exercise price, and 10,000
warrants expiring on December 21, 2003 with a $3.00 per share exercise price,
86,644 warrants expiring December 10, 2000 with exercise prices ranging from
$2.10 to $3.00 per share, and 9,086 warrants expiring February 28, 2002
exercisable at $7.20 per share. As of September 30, 1999, Ebiz had outstanding
427,000 options granted to employees and consultants with exercise prices
28
<PAGE> 29
ranging from $1.00 to $6.00 per share, of which 145,500 had vested. Each
outstanding warrant and option is exercisable for one share of Ebiz's common
stock.
TRANSFER AGENT
The transfer agent for Ebiz's common stock is American Securities
Transfer & Trust, Inc., 12039 West Alameda Parkway, Suite Z-2, Lakewood,
Colorado 80228.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
Our common stock has been traded in the over-the-counter market under
the symbol "EBIZ" since November 4, 1999. Prior to November 4, 1999, our stock
was traded on the OTC Bulletin Board, but was delisted on this date due to our
not meeting the new reporting requirements. Our market makers have indicated
their willingness to relist our stock for trading on the OTC Bulletin Board when
this Form 10-SB/A is effective and we meet all applicable listing criteria.
However, there is no assurance as to when the criteria will be met or that the
listing criteria will continue to be met in the future.
The following table sets forth the high and low bid prices for Ebiz's
common stock as reported by the OTC Bulletin Board in the periods indicated. The
quotations set forth below reflect inter-dealer prices, without retail mark-up,
markdown or commission, and may not reflect actual transactions. Ebiz commenced
its current line of business in June 1998 with the acquisition of Genras. The
stock prices for periods before June 1998 are of our predecessor, Vinculum,
which had no business operations during these periods.
<TABLE>
<CAPTION>
Fiscal 1997 High Low
<S> <C> <C>
First Quarter ended September 30, 1996 $6.2500 $1.2500
Second Quarter ended December 31, 1996 5.0000 5.0000
Third Quarter ended March 31, 1997 5.0000 5.0000
Fourth Quarter ended June 30, 1997 5.0000 0.6250
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1998 High Low
<S> <C> <C>
First Quarter ended September 30, 1997 $3.5000 $0.1000
Second Quarter ended December 31, 1997 2.5000 0.1000
Third Quarter ended March 31, 1998 3.1250 0.3125
Fourth Quarter ended June 30, 1998 3.4375 0.3125
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1999 High Low
<S> <C> <C>
First Quarter ended September 30, 1998 $ 2.1250 $0.7500
Second Quarter ended December 31, 1998 11.6250 0.5000
Third Quarter ended March 31, 1999 10.5000 4.5000
Fourth Quarter ended June 30, 1999 9.9375 3.3125
</TABLE>
As of September 30, 1999, there were an estimated 700 beneficial owners
of Ebiz's common stock.
Holders of Ebiz's Common Stock are entitled to receive ratably
dividends, if any, as declared from time to time by the Board of Directors out
of funds legally available for payment of dividends. No dividends are payable on
the common stock until all accrued but unpaid dividends on the outstanding
Series A Preferred shares have been paid. Ebiz has not paid, and does not
currently intend to declare or pay
29
<PAGE> 30
dividends on its Common Stock in the foreseeable future. The current policy of
Ebiz's Board of Directors is to retain all earnings, if any, to provide funds
for operation and expansion of Ebiz's business. The declaration of dividends, if
any, will be subject to the discretion of Ebiz's Board of Directors, which may
consider such factors as results of operations, financial condition, capital
needs and acquisition strategies, among others.
ITEM 2. LEGAL PROCEEDINGS
Certain unresolved disputes remain with miscellaneous product
manufacturers or supply vendors involved previously with Genras, and with a
prior Internet auction site partner which are currently being negotiated.
Management believes that all such matters are within ordinary levels for an
organization of our size and nature, and that these disputes will be resolved
without a materially adverse consequence to Ebiz.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
In June, 1998, our predecessor Vinculum, issued 5,000,000 shares of its
common stock to the three shareholders' of Genras in exchange for all of the
assets, subject to liabilities, of Genras. Fox & Company Investments, Inc., a
NASD registered broker-dealer received an additional 187,500 shares of common
stock for investment banking services related to the transaction. The value of
these services was recorded at $187,500 for the shares issued. The shares were
issued in reliance on the exemption from registration provided under Section
4(2) of the Securities Act. These shares were issued solely to the three former
shareholders and to Fox & Company and were restricted securities as defined
under Rule 144 under the Securities Act. An appropriate legend was placed on the
certificates representing such shares.
In June, 1998, a total of 14 persons exercised their outstanding
Vinculum warrants to purchase a total of 506,706 shares of common stock at $1.00
per share. The warrants had been issued by Vinculum under its bankruptcy plan of
reorganization. The shares were issued under the exemption from registration
provided under Section 1145 of the Bankruptcy Code.
In July, 1998, Vinculum issued a total of 317,943 E Warrants and
317,943 F Warrants to 26 persons for nominal consideration. The persons
receiving these warrants were existing shareholders of Ebiz or otherwise had a
pre-existing relationship with Ebiz or its officers and directors at the time of
issuance. The E Warrants were exercisable at $2.00 per share with expiration
date of December 1, 1998 and the F Warrants were exercisable at $3.00 per share
with expiration date of June 1, 1999. In December, 1998, Ebiz repriced the E
Warrants to $0.75 per share and allowed the holders to exercise an amount of F
Warrants equal to the E Warrants exercised, also at $0.75 per share. A total of
390,956 E Warrants and F Warrants were exercised and 390,956 shares of common
stock issued. The remaining outstanding E Warrants expired. In May, 1999, Ebiz
extended the expiration date of the remaining F Warrants to December 1, 1999.
The issuance of the E Warrants and F Warrants and the common stock issued upon
exercise of the warrants were issued in reliance on the exemption from
registration of such securities provided by Section 4(2) of the Securities Act.
These shares were restricted securities as defined in Rule 144 and an
appropriate legend was placed on the certificates representing these shares.
In December, 1998, Ebiz issued a total of 455,781 shares of common
stock for total consideration of approximately $985,000. The issuance was made
in reliance on Rule 504 of Regulation D as promulgated under the Securities Act.
The common stock was sold solely to "accredited investors" as defined under
Regulation D of the Securities Act and primarily to investors in the securities
industry. First Financial Equity Corporation, a NASD broker-dealer, and Fox &
Company Investments, Inc. served as the placement agents in the offering and
received placement agent fees of approximately $86,000 and warrants to purchase
86,644 shares of common stock at $2.10 to $3.00 per share.
In March and April, 1999, Ebiz issued 10,895 shares of its Series A 10%
Convertible Preferred Shares for total consideration of $1,089,500. First
Financial Equity Corporation served as the placement agent and received a
placement fee of $108,950 and warrants to purchase 9,086 shares of common stock
at $7.20 per share. The Series A 10% Convertible Preferred
30
<PAGE> 31
Shares were sold only to "accredited investors" as defined in Regulation D in
reliance on the exemption from registration provided under Rule 506 of
Regulation D.
In April, 1999, Ebiz issued a Secured Convertible Subordinated Note
("Note") and Warrant to Aztore Holdings, Inc. The face amount of the Note was
$500,000 and was convertible into shares of Ebiz common stock. The Warrant
entitled the holder to purchase 250,000 shares of Ebiz's common stock. Ebiz
received a total of $500,000 for the Note and Warrant with no commissions or
discounts. The Note was paid and the Warrant cancelled in August, 1999. The Note
and Warrant were issued in reliance on the exemption from registration provided
by Section 4(2) and Section 4(6) of the Securities Act.
On August 25, 1999, the Company issued a $7,100,000 9% Subordinated
Convertible Debenture ("Debenture") and a Warrant to Purchase Common Stock
("Warrant") to JEM Venture EBIZ, LLC, an affiliate of J.E. Matthew, LLC. The
total consideration received was $7,100,000 with no commissions or discount. The
issuance was made in reliance upon the exemption from registration of the
securities provided under Section 4(2) and Section 4(6) of the Securities Act
and Rule 506 of Regulation D as promulgated under the Securities Act.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Articles of Incorporation and bylaws require that we indemnify each
of our officers and directors against liabilities and reasonable expenses
incurred in any action or proceeding, including stockholders' derivative
actions, by reason of such person being or having been an officer or director of
Ebiz, to the fullest extent permitted by Nevada law. Under Nevada law, Ebiz has
adopted provisions in its Articles of Incorporation that eliminate, to the
fullest extent possible, the personal liability of our directors and officers
for monetary damages incurred as a result of the breach of their duty of care.
These provisions neither limit the availability of equitable remedies nor
eliminate directors' or officers' liability for engaging in intentional
misconduct or fraud, knowingly violating a law or unlawfully paying a
distribution.
We have been advised that it is the position of the Securities and
Exchange Commission ("SEC") that insofar as the foregoing provision may be
invoked to disclaim liability for damages arising under the Securities Act, such
provision is against public policy as expressed in the Securities Act and is
therefore unenforceable.
31
<PAGE> 32
PART F/S
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report 33
Balance Sheets at June 30, 1999 and 1998 34
Statements of Operations for the Years Ended 35
June 30, 1999 and 1998
Statements of Stockholders' Equity for the Years 36
Ended June 30, 1999 and 1998
Statements of Cash Flows for the Years Ended 37
June 30, 1999 and 1998
Notes to the June 30, 1999 and 1998 38
Financial Statements
Schedule II - Valuation and Qualifying Accounts and 50
Reserves for the Years Ended June 30, 1999
and 1998
32
<PAGE> 33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EBIZ Enterprises, Inc.:
We have audited the accompanying balance sheets of EBIZ Enterprises, Inc., a
Nevada corporation, (the Company) as of June 30, 1999 and 1998, and the related
statements of operations, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of EBIZ Enterprises, Inc. as of
June 30, 1999 and 1998, and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of the
financial statements is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not a required part of the
basic financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly states in all material repsects the financial data required to
be set forth therin in relation to the basic financial statements taken as a
whole.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company incurred net losses and had negative cash flow
from operations in 1999 and 1998 and has not obtained sufficient funds to
achieve management's plans or support its operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from this
uncertainty.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
September 10, 1999
33
<PAGE> 34
EBIZ ENTERPRISES, INC.
BALANCE SHEETS
JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 76,366 $ 468,651
Accounts receivable, net of allowance for doubtful accounts
of $40,000 and $9,548 in 1999 and 1998, respectively 1,669,816 272,829
Inventory, net of allowance of $10,000 and $0 in 1999 and
1998, respectively 1,568,148 324,531
Prepaid expenses and other current assets 128,184 95,265
Due from officers -- 3,432
------------- -------------
Total current assets 3,442,514 1,164,708
FURNITURE AND EQUIPMENT, net 474,778 53,437
------------- -------------
$ 3,917,292 $ 1,218,145
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,423,178 $ 525,124
Accrued expenses 468,549 --
Line of credit 350,000 --
Notes payable 610,000 --
------------- -------------
Total current liabilities 2,851,727 525,124
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Convertible preferred stock; $.001 par value; 5,000,000 shares authorized;
10,895 and 0 shares issued and outstanding at June 30, 1999 and 1998,
respectively; liquidation value $100 per share 868,599 --
Common stock; $.001 par value; 70,000,000 shares authorized;
7,261,715 and 6,256,450 shares issued and outstanding at
June 30, 1999 and 1998, respectively 7,262 6,256
Additional paid-in capital 2,343,762 886,642
Accumulated deficit (2,154,058) (199,877)
------------- -------------
Total stockholders' equity 1,065,565 693,021
------------- -------------
$ 3,917,292 $ 1,218,145
============= =============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
34
<PAGE> 35
EBIZ ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
<S> <C> <C>
NET REVENUE $ 15,290,202 $ 6,824,967
COST OF SALES 14,358,772 6,157,794
-------------- -------------
Gross profit 931,430 667,173
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 2,512,415 681,570
ACQUISITION ADVISORY FEES -- 372,805
DEPRECIATION AND AMORTIZATION 68,483 6,093
-------------- -------------
LOSS FROM OPERATIONS (1,649,468) (393,295)
OTHER INCOME (EXPENSE):
Interest expense (119,291) (32,702)
Interest income 2,538 1,263
Other (110,903) 2,277
-------------- -------------
NET LOSS (1,877,124) (422,457)
DIVIDENDS ON PREFERRED STOCK 77,057 --
-------------- -------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (1,954,181) $ (422,457)
============== =============
NET LOSS PER COMMON SHARE, BASIC AND DILUTED $ (0.29) $ (.08)
============== =============
WEIGHTED AVERAGE COMMON SHARES,
BASIC AND DILUTED 6,821,083 5,619,911
============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<PAGE> 36
EBIZ ENTERPRISES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Total
---------------- ----------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
------ -------- --------- ------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, June 30,1997 -- $ -- 5,562,044 $5,562 $ -- $ 250,510 $ 256,072
Common stock issued for services rendered
in connection with reverse acquisition -- -- 187,500 187 352,313 -- 352,500
Common stock issued for warrants exercised -- -- 506,906 507 506,399 -- 506,906
Net loss -- -- -- -- -- (422,457) (422,457)
Constructive contribution due to
termination of S corporation election -- -- -- -- 27,930 (27,930) --
------ -------- --------- ------ ---------- ----------- -----------
BALANCE, June 30, 1998 -- -- 6,256,450 6,256 886,642 (199,877) 693,021
Sale of common stock, net of offering costs
of $80,000 -- -- 455,781 457 900,845 -- 901,302
Sale of preferred stock, net of offering
costs of $220,901 10,895 868,599 -- -- -- -- 868,599
Common stock issued for services and products
received -- -- 158,528 158 218,593 -- 218,751
Common stock issued for warrants exercised -- -- 390,956 391 293,057 -- 293,448
Deemed dividend on preferred stock for
beneficial conversion feature -- -- -- -- 44,625 (44,625) --
Accrued dividends on preferred stock -- -- -- -- -- (32,432) (32,432)
Net loss -- -- -- -- -- (1,877,124) (1,877,124)
------ -------- --------- ------ ---------- ----------- -----------
BALANCE, June 30, 1999 10,895 $868,599 7,261,715 $7,262 $2,343,762 $(2,154,058) $ 1,065,565
====== ======== ========= ====== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE> 37
EBIZ ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,877,124) $ (422,457)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 68,483 6,093
Common stock issued for services 80,599 352,500
Changes in assets and liabilities:
Accounts receivable (1,396,987) 52,113
Due from officers 3,432 (3,432)
Inventory (1,122,551) (324,531)
Prepaid expenses and other current assets (32,919) (90,440)
Accounts payable 898,054 420,893
Accrued expenses 436,117 --
----------- -----------
Net cash used in operating activities (2,942,896) (9,261)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (472,738) (57,721)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 350,000 --
Borrowings under notes payable 610,000 --
Issuance of common stock, net 1,194,750 506,906
Issuance of preferred stock, net 868,599 --
----------- -----------
Net cash provided by financing activities 3,023,349 506,906
----------- -----------
NET (DECREASE) INCREASE IN CASH (392,285) 439,924
CASH, beginning of year 468,651 28,727
----------- -----------
CASH, end of year $ 76,366 $ 468,651
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 108,765 $ 32,702
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES:
Issuance of common stock for services rendered in connection
with reverse acquisition $ -- $ 352,500
Dividends accrued on preferred stock 32,432 --
Deemed dividend on preferred stock for beneficial
conversion feature 44,625 --
Issuance of common stock for inventory, furniture and
equipment, and services rendered 218,751 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE> 38
EBIZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(1) ORGANIZATION AND OPERATIONS:
NATURE OF THE BUSINESS
Ebiz Enterprises, Inc. (the Company) is a developer and distributor of computer
systems, components and accessories for personal and business computing. The
systems include the Company's Element-L Systems, which are based on the Linux
operating system and M2 Systems which utilize the Windows operating system.
These products are sold directly to end users via the Company's own internet
sites www.EBIZmart.com and www.TheLinuxStore.com and to corporate customers by
the Company's own sales force. The Company also sells its systems through
retailers, resellers and major e-commerce web sites such as egghead.com and
onsale.com.
TheLinuxStore.com was opened in April 1999, and has become an e-commerce
distributor of Linux-based systems and accessories. Its products include the
Company's Element-L desk and laptop systems and products from other Linux
manufacturers. TheLinuxStore.com has become a primary focus of the Company as
the Linux operating system has emerged as the low-cost, high-performance
alternative to conventional computing systems.
The Company was originally incorporated in Colorado in May 1984, as VDG Capital
Corporation. Following a reorganization, the Company's name was changed to
Vinculum Incorporated (Vinculum) in August 1994. In June 1998, the Company
acquired the operating assets and liabilities of Genras, Inc. (an Arizona
corporation) and reincorporated in Nevada as CPU Micromart, Inc. In May 1999,
the Company changed its name to Ebiz Enterprises, Inc. The Company's stock is
listed on the Over the Counter Bulletin Board under the symbol EBIZ.
ACQUISITION OF ASSETS AND ASSUMPTION OF LIABILITIES
On June 1, 1998, Vinculum, a publicly-held shell company, acquired all of the
operating assets and liabilities of the Company for 5,000,000 shares of Vinculum
common stock. Immediately following the transaction, the stockholders of the
Company held approximately 87% of the outstanding shares of common stock of
Vinculum. For accounting purposes, the acquisition was treated as a
recapitalization of the Company with the Company as the acquirer (the Reverse
Acquisition). Accordingly, the historical financial statements prior to June 1,
1998, are those of the Company. The Reverse Acquisition is treated as an
issuance of shares for net assets by Vinculum and not as a business combination.
As a result, no pro forma information is presented for the Reverse Acquisition.
In connection with the Reverse Acquisition, the Company issued 187,500 shares of
its common stock, valued at $352,000, for acquisition advisory services. In
addition, the Company paid $20,305 in legal fees associated with the
transaction. The aggregate of $372,805 has been expensed and is included as
acquisition advisory fees in the accompanying statements of operations.
38
<PAGE> 39
MANAGEMENT PLANS
The Company has directed its primary strategic thrust towards the Linux
operating system segment of the market. Management believes that Linux is a fast
growing operating system and that the demand for Linux-based products and
services represent a rapidly growing business opportunity for the Company. The
Company began its entry into the Linux market with the opening of
TheLinuxStore.com and the introduction of its Element-L Systems in 1999. The
Company also plans to continue the sales of its M2 systems, and components and
accessories to strengthen and broaden its distribution capabilities.
During fiscal year 2000, the Company plans to position TheLinuxStore.com as a
vertical service portal. As such, it will offer daily Linux news, software
downloads, a knowledge base of Linux information and links to other Linux
oriented Internet sites in addition to sales of a large selection of Linux
compatible technical products and related merchandise, including its own systems
and servers.
In the summer of 1999, the Company announced the development of its third
product line, the PIA (or Personal Internet Appliance) which targets
cost-conscious consumers or institutions seeking a full service Internet access
device. The Company plans to introduce the PIA during the fall of 1999. The PIA
is a stylized desktop computer that utilizes the Linux operating system and is
designed to enable users to surf the Web easily, exchange e-mail and perform
basic functions such as word processing and spreadsheets.
To continue the development of its products and the execution of its strategies,
in August 1999, the Company completed a private placement of a $7.1 million
convertible debt facility (the Debenture). In connection with the issuance of
the $7.1 million Debenture, the Company issued warrants to acquire 245,000
shares of common stock; 60,000 at $7.4723 per share, 60,000 at $8.6219 per share
and 125,000 at $6.3227 per share. The warrants are exercisable at any time prior
to August 22, 2004. The fair value of the warrants, as calculated using the
Black-Scholes pricing model ($7.625 fair market value, 80% volatility, two year
expected life, 5.53% interest rate, 0% yield rate), was estimated to be
approximately $796,000 and is recorded as a debt discount. In addition, loan
costs of approximately $197,000 were paid and recorded as deferred loan fees.
Discounts and deferred loan fees are amortized using the straight-line method
(which approximated the effective interest method) as additional interest
expense over the term of the loan. The Company received an initial infusion of
$2.1 million from the Debenture which was utilized to repay the Company's
outstanding debt at June 30, 1999, and to provide working capital. The remaining
$5 million was deposited as a letter of credit with a bank to serve as
collateral for the Debenture. The Debenture is convertible, at the holder's
option, into as minimum of 947,260 shares of common stock over an 18 month
period. The holder may convert up to $394,444 face amount of the Debenture upon
issuance and up to $394,444 on each monthly anniversary date thereafter (each, a
"Due Date"). Any amount not converted accumulates and may be converted
thereafter. The per share conversion price is equal to the lesser of
(a) $7.4953 or (b) the average of the three lowest closing bid prices of the
Company's common stock during the 15 consecutive trading days immediately
preceding submission of a notice to convert by the holder. The Company's ability
to reduce the cash collateral required for the letter of credit and to have
these amounts available for working capital is contingent upon the holder
converting the Debenture or the Company's ability to pay down the Debenture with
cash from other sources. If the holder converts the Debenture, at its sole
discretion, the Company can draw approximately $275,000 per month on the letter
of credit to fund operations. Although management believes this funding will be
sufficient to fund operations through 2000, the Company will need to raise
additional capital to fund its operations and continue the execution of its
strategy. However, there can be no assurances that the Company will be
successful in obtaining additional capital.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed, the Company incurred
losses and had negative cash flow from operations in 1999 and 1998 and has not
obtained sufficient capital needed to achieve management's plans and support its
operations. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from this uncertainty.
INDUSTRY ENVIRONMENT
Successful future operations are subject to certain risks and uncertainties
including, among others, actual and potential competition by entities with
larger customer bases, greater financial resources, longer operating histories,
greater name recognition and more established relationships in the industry than
the Company. The Company's future success will greatly depend on its ability to
timely and effectively address the rapid changes in the computer product
industry and customers' acceptance of the Linux system in general and the
Company's PC systems in particular. As a result, certain of these competitors
may be able to develop and expand their network infrastructures more quickly,
and take advantage of acquisitions more readily than can the Company. The
Company's future operating results will depend substantially on the ability of
its officers and key employees to manage changing business conditions. Further
risks and uncertainties relate to technological advancements, the regulatory
environment and the ability of the Company to generate sufficient revenue and
obtain additional financing to fund current operating losses.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
39
<PAGE> 40
For purposes of the statements of cash flows, all highly liquid investments with
a maturity of three months or less at the time of purchase are considered to be
cash equivalents.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or net realizable
value. Reserves of $10,000 and $0 at June 30, 1999 and 1998, respectively, are
established against Company-owned inventory for excess, slow-moving, and
obsolete items and for items where the net realizable value is less than cost.
Inventory consists of the following:
<TABLE>
<CAPTION>
June 30,
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
Components $1,155,981 $ 183,418
Work-in-process 44,947 --
Finished goods 367,220 141,113
---------- ----------
$1,568,148 $ 324,531
========== ==========
</TABLE>
40
<PAGE> 41
FURNITURE AND EQUIPMENT
Furniture and equipment consists primarily of computer equipment and office
furniture. Furniture and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets.
Furniture and equipment at June 30 consists of the following:
<TABLE>
<CAPTION>
Useful
Life 1999 1998
-------- -------- -------
<S> <C> <C> <C>
Furniture, fixtures and office equipment 3 years $295,566 $29,702
Software 3 years 200,495 29,427
Leasehold improvements 2 years 53,293 401
-------- -------
549,354 59,530
Less - accumulated depreciation (74,576) (6,093)
-------- -------
$474,778 $53,437
======== =======
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates the carrying value of long-lived assets in
accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of. Under SFAS No. 121, long-lived assets and certain identifiable
intangible assets to be held and used in operations are reviewed for impairment
whenever events or circumstances indicate that the carrying amount of an asset
may not be fully recoverable. An impairment loss is recognized if the sum of the
expected long-term undiscounted cash flows is less than the carrying amount of
the long-lived assets being evaluated. In management's opinion, no such amounts
or changes in circumstances have occurred.
ACCOUNTS PAYABLE
Included in accounts payable is approximately $215,000 and $0 of bank overdrafts
at June 30, 1999 and 1998, respectively.
ACCRUED EXPENSES
Accrued expenses consist primarily of amounts accrued for employee compensation,
customer deposits, professional fees, interest and advertising.
REVENUE RECOGNITION
The Company recognizes revenue from the sale of computer hardware products upon
shipment from the vendor to the end user, or when shipped from the Company,
whichever is appropriate. Provision is made for an estimate of product returns
and doubtful accounts and is based on historical experience. Software revenue
is recognized in accordance with SOP 97-2, Software Revenue Recognition, and
SOP 98-9, Software Revenue Recognition, with Respect to Certain Transactions.
Accordingly, revenue from software licensing is recognized when delivery has
occurred and any remaining obligations under the license agreement are
insignificant. Revenues from separately priced extended warranty programs are
deferred and recognized over the extended warranty period. Computer hardware
and software sales are final and are subject to repair and replacement only.
System component and replacement costs are generally covered under third-party
manufacturer's warranty. The Company had an allowance for warranty repair costs
of approximately $8,000 and $0 at June 30, 1999 and 1998, respectively, related
to the sales of its M(2) Systems computers.
41
<PAGE> 42
ADVERTISING COSTS
Advertising costs are expensed as incurred and are included in sales and
marketing expenses in the accompanying statements of operations. Advertising
expense was approximately $100,000 and $8,000 for the years ended June 30, 1999
and 1998, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
LOSS PER SHARE
During 1998, the Company adopted SFAS No. 128, Earnings Per Share. Pursuant to
SFAS No. 128, basic earnings per common share are computed by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding during the year. No outstanding options or warrants were assumed to
be exercised for purposes of calculating diluted earnings per share for the
years ended June 30, 1999 and 1998, as their effect was anti-dilutive. Below are
the disclosures required pursuant to SFAS No. 128 for the years ended June 30,
1999 and 1998. All per share amounts have been adjusted to give effect to the
one for ten reverse stock split effected in June 1998 (in thousands, except per
share data):
<TABLE>
<CAPTION>
For the Years Ended
June 30,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Basic loss per share:
Loss attributable to common stockholders $ (1,954) $ (422)
Weighted average common shares 6,821 5,620
----------- -----------
Loss per common share $ (0.29) $ (.08)
========== ===========
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended
June 30,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Diluted loss per share:
Loss attributable to common stockholders $ (1,954) $ (422)
Weighted average common shares 6,821 5,620
----------- -----------
Total common shares plus assumed conversions 6,821 5,620
----------- -----------
Diluted per share amount $ (0.29) $ (.08)
=========== ===========
</TABLE>
42
<PAGE> 43
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 required a change from the deferred
method of accounting for income taxes to the asset and liability method of
accounting for income taxes. Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to be recovered or
settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations of
credit risk, as defined by SFAS No. 105, Disclosure of Information About
Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk, consist primarily of trade accounts receivable.
The Company does not require collateral upon delivery of its products or
services. The Company derives a significant portion of its total revenue from
relatively few customers. The Company's business is moving towards a more
diversified customer base. The percentage of total revenue of customers to whom
sales exceed 10% of total revenue for the years ended June 30 were as follows:
<TABLE>
<CAPTION>
Accounts
Receivable
Outstanding
at June 30, Sales
------------------------ ----------------------
1999 1998 1999 1998
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Customer #1 $ 441,000 $ -- 26% 32%
Customer #2 -- -- 19 39
Customer #3 930,000 -- 15 --
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 1999 and 1998, the carrying value of cash, accounts receivable,
accounts payable and accrued expenses approximate fair values since they are
short-term in nature or payable upon demand. Notes payable approximate fair
value as they are short-term in nature or have stated interest rates based on
current market rates. It is not practical to estimate fair value of the notes
payable to related parties as the agreements are between related parties.
The Company estimates fair values of financial instruments by using available
market information. Considerable judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates may not
be indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions or valuation methodologies
could have a material effect on the estimate fair value amounts.
43
<PAGE> 44
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT
In March 1998, the American Institute of Certified Public Accountants released
Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, which establishes guidance on
accounting for the costs of computer software developed or obtained for
internal use. The Company adopted this statement in fiscal 1999 and there was
no cumulative catch up upon adoption. The Company amortizes its software on a
straight-line basis over its estimated useful life of three years.
During 1999, the Company adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, which established revised standards for the
reporting of financial and descriptive information about operating segments in
financial statements. The Company has determined that it has one reportable
operating segment. As a result, the Company has determined that it is
appropriate to aggregate its operating segments into one reportable segment
consistent with the guidance in SFAS No. 131. Accordingly, the Company has not
presented separate financial information for its operating segments as the
Company's financial statements present its one reportable segment.
RECENTLY ISSUED ACCOUNTING STATEMENT
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. The Company
is required to adopt this statement for the year ending June 30, 2000. SFAS No.
133 establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. The Company has not determined the effect, if any, that adoption
will have on its financial position or results of operations.
(3) RELATED PARTY TRANSACTIONS:
AMOUNTS DUE FROM AFFILIATED COMPANY
During fiscal year 1998, members of senior management of the Company
participated in the development and formation of an Internet catalog company
with an unaffiliated corporation. During 1998, the Company advanced the
Internet catalog company an estimated $57,500 in the form of overhead expenses
and accrued compensation. This amount was recorded as a receivable from
affiliate. At June 30, 1998, the Company could not determine the amount, if any,
it will be reimbursed by the parties involved. As a result, the Company wrote
off the receivable.
The Company contracted with a consulting company, controlled by an outside
director of the Company, to supply financial consulting services related to
accounting and financial systems. Under this agreement, as of June 30, 1999 and
1998, the Company had paid an aggregate of $22,700 and $-0-, respectively, and
issued 31,325 and -0- common shares, respectively, of common stock for services
rendered. This agreement ended February 1999.
EXODUS GROUP, LLC
During 1999, certain of the Company's employees and officers purchased a total
of 65% of the available membership units in The Exodus Group, LLC, a franchisee
that purchases products from the Company. Sales to this customer were
approximately $36,000 and $-0- for the years ended June 30, 1999 and 1998,
respectively.
(4) INCOME TAXES:
The Company has cumulative net operating losses as of June 30, 1999, in excess
of $3,500,000. The Company's ability to utilize its net operating losses to
offset future taxable income may be limited under the Internal Revenue Code
Section 382 change in ownership rules. The Company has established a valuation
reserve as it has not determined that it is more likely than not that the
deferred tax asset is realizable.
No provision for income taxes has been presented in the accompanying statements
of operations for the year ended June 30, 1999 as the Company has net losses.
No provision for income taxes has been presented for the year ended June 30,
1998 as the Company was conducting business as a S corporation during 1998 and
all income has been reported by the stockholders on their individual tax
returns. On June 1, 1998, the Company terminated its S corporation status when
it was acquired by Vinculum Incorporated (see Note 1).
44
<PAGE> 45
The components of the provision for (benefit from) income taxes consist of the
following:
<TABLE>
<CAPTION>
June 30,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Current income taxes:
Federal $ -- $ --
State and Provincial -- --
------------ ------------
-- --
------------ ------------
Deferred income taxes:
Federal -- --
State and Provincial -- --
------------ ------------
Total provision for (benefit from)
income taxes $ -- $ --
============ ============
</TABLE>
Differences between the financial statement and tax bases of the Company's
assets and liabilities are not material.
A reconciliation of the federal statutory rate to the Company's effective tax
rate for the years ended June 30 are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Statutory federal rate (34)% (34)%
State taxes, net of federal benefit (6) (6)
Change in valuation allowance 40 40
-------- --------
Total -- % -- %
======== ========
</TABLE>
(5) BANK LINE OF CREDIT:
In September 1998, the Company obtained a line of credit from a bank for
borrowings in an amount up to $250,000. Interest accrues at prime (8.75% at June
30, 1999) plus 1% and is payable monthly. Principal is due at maturity. In May
1999, the bank increased the line of credit from $250,000 to $350,000 with the
additional $100,000 maturing in May 2000. The line of credit is guaranteed by
the Company's two largest stockholders and is secured by the Company's accounts
receivable and inventory. Availability under this line of credit at June 30,
1999, was $0. The weighted average interest rate on amounts outstanding was
8.75% during the year ended June 30, 1999. $250,000 of the line of credit
expires September 1999. The Company had borrowings under the line of credit of
$350,000 as of June 30, 1999. During August 1999, the Company used proceeds from
the $7.1 million Debenture (see Note 1) to repay the outstanding balance on the
line of credit.
(6) NOTES PAYABLE:
Notes payable at June 30 consist of the following:
45
<PAGE> 46
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Note payable to a stockholder, interest at 10%, due on
demand, unsecured. $ 30,000 $ --
Note payable to a stockholder, interest at 10%, due on
demand, unsecured. 30,000 --
Note payable to related party, interest at 10%, principal and interest, due
April 19, 2000, secured by the Company's assets, convertible into
shares of common stock at a rate of $6.00 of note principal convert. 500,000 --
Note payable to an individual, interest at 10%, principal and interest due
September 25, 1999, secured by the Company's assets. 50,000 --
------------- -------------
$ 610,000 $ --
============= =============
</TABLE>
In connection with the $500,000 note above, the Company issued a warrant to
purchase 250,000 common shares at an exercise price substantially in excess of
the then fair market value. The fair value of the warrant as estimated using the
Black Scholes option pricing model was not significant primarily because the
exercise price was in excess of the then fair value of the common stock. This
warrant was exercisable at any time during its term and expires April, 2002.
As of August 1999, all the notes payable above were repaid in full using
proceeds obtained from the $7.1 million private placement (see Note 1). Also,
the warrant to purchase 250,000 shares was cancelled in connection with the
payment of the $500,000 note.
(7) STOCKHOLDERS' EQUITY:
REVERSE STOCK SPLIT
Share amounts in the accompanying financial statements and notes to the
financial statements give retroactive effect to a one-for-ten reverse stock
split effective June 1998.
CAPITALIZATION
The Company amended its Articles of Incorporation in 1999 to authorize the
issuance of up to 70,000,000 shares of Class A common stock. In addition, the
Articles of Incorporation authorize the issuance of up to 5,000,000 shares of
preferred stock. The Board of Directors of the Company, at its sole discretion,
may establish par value, divide the shares of preferred stock into series, and
fix and determine the dividend rate, designations, preferences, privileges,
ratify powers, if any, and determine the restrictions and qualifications of the
shares of each series of preferred stock as established.
PREFERRED STOCK
The Board of Directors has designated 100,000 shares of Series A Convertible
Preferred Stock, (Preferred Stock) and during 1999, the Company issued 10,895
shares of Preferred Stock, at $100 per share. Net proceeds from the issuance of
Preferred Stock was approximately $869,000. These shares have a liquidation
preference of $100 per share, and are entitled to a $10 per share cumulative
annual dividend, accrued quarterly commencing April 1, 1999, and payable at the
discretion of the Company. The Company, at its discretion, may redeem the
Preferred Stock whenever the price of its common stock is equal to or greater
than $9.00 per share 20 out of 30 consecutive trading days. Each share of
Preferred Stock may be converted, at the option of the holder, into common stock
at a conversion rate of one share for every $6.00 of principal converted. In
addition, the Preferred Stock automatically converts it to common stock whenever
the price of the Company's common stock is equal to or greater than $13.50 per
share 20 out of 30 consecutive trading days.
46
<PAGE> 47
WARRANTS TO PURCHASE COMMON STOCK
As of June 30, 1998, the Company had three series of warrants outstanding
totaling 665,553. Each warrant entitles the holder thereof to purchase one share
of common stock. The 665,553 warrants outstanding at June 30, 1998 comprised of
29,667, 317,943, and 317,943 series C, E and F warrants, respectively. Series C,
E and F had exercise prices of $15.00, $2.00, and $3.00, respectively, and
expired at June 15, 1999, December 1, 1998, and June 1, 1999, respectively. All
three series of warrants are callable by the Company under certain conditions.
In December 1998, Series E and F holders exercised 183,994 and 206,962,
respectively, of the outstanding warrants to purchase common stock for a total
of $293,448. In June 1999, the Company extended the expiration date of the
Series F warrants to December 1, 1999. As of June 30, 1999, 110,981 Series F
warrants are outstanding.
At June 30, 1999, the Company had outstanding warrants, issued in connection
with financing transactions, to purchase 86,644 shares of common stock through
December 2000, at prices ranging from $2.10 to $3.00 per share. In addition, the
Company had an outstanding warrant, issued in connection with the $500,000 note
payable, to purchase 250,000 shares of common stock expiring in April 2002 (see
Note 6).
SALE OF COMMON STOCK
In December 1998, the Company sold 455,781 shares of common stock in a private
placement. Net proceeds from the issuance of common stock was approximately
$901,000.
STOCK OPTION PLAN
In November 1998, the Company adopted the CPU MicroMart 1998 Equity Incentive
Plan (the Plan). The Plan will terminate 10 years after the effective date. The
Plan authorizes awards of incentive stock options to employees and non-qualified
stock options to officers, directors, employees, and consultants of the Company.
A total of 1,000,000 shares of common stock was reserved for issuance under the
Plan. Stock options have been granted with an exercise price equal to or greater
than the fair value of the Company's common stock on the date of grant.
Compensation expense related to stock options granted to consultants is based on
fair value in accordance with SFAS No. 123 and is amortized to expense over the
vesting period. Compensation expense associated with these awards for fiscal
1999 was not material.
The Plan is administered by a committee appointed by the Board who have the
exclusive authority to administer and interpret the Plan. The committee has the
power to, among other things, designate participants, determine types of awards
to be granted and the price, timing, terms and duration of awards.
The following summarizes the activity under the Company's stock option plan:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------
1999
-------------------------
Weighted
Average
Number Option Price
of Shares Per Share
--------- ------------
<S> <C> <C>
Options outstanding, beginning of year -- $ --
Granted 663,000 1.96
Canceled/expired -- --
Exercised -- --
--------- ------------
Options outstanding, end of year 663,000 $ 1.96
========= ============
Options exercisable, end of year 140,000 $ 1.28
Options available for grant 337,000
Weighted average fair value of options granted $ 1.29
</TABLE>
Options outstanding and exercisable by price range as of June 30, 1999:
47
<PAGE> 48
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- ---------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.00 522,000 9.13 $1.00 130,000 $1.00
$4.88 30,000 9.59 4.88 10,000 4.88
$5.50-$6.00 111,000 9.92 5.70 -- --
</TABLE>
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
During 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which defines a fair value based method of accounting for an
employee stock option or similar equity instrument and encourages all entities
to adopt that method of accounting for all of their employee stock compensation
plans. However, it also allows an entity to continue to measure compensation
cost related to stock options issued to employees under these plans using the
method of accounting prescribed by Accounting Principles Board Opinion No. 25
(APB No. 25), Accounting for Stock Issued to Employees. Entities electing to
continue accounting for stock-based compensation under in APB No. 25 must make
pro forma disclosures of net income (loss) and earnings (loss) per share, as if
the fair value based method of accounting defined in SFAS No. 123 has been
applied.
The Company has elected to account for its stock-based compensation plans under
APB No. 25; therefore, no compensation cost is recognized in the accompanying
financial statements for stock-based employee awards. However, the Company has
computed for pro forma disclosure purposes the value of all options and Purchase
Plan shares granted during fiscal 1999, using the Black-Scholes option pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1999
Options
-----------
<S> <C>
Risk free interest rate 5.26%
Expected dividend yield --
Expected lives 3-5 years
Expected volatility 80%
</TABLE>
The total value and compensation expense which would have been recorded of
options granted was computed to be the following approximate amounts, which
would be amortized on the straight-line basis over the vesting period:
<TABLE>
<CAPTION>
Compensation
Fair Value Expense
---------- ------------
<S> <C> <C>
Year ended June 30, 1999 $ 858,394 $ 143,564
</TABLE>
If the Company had accounted for its stock-based compensation plans using a fair
value based method of accounting, the Company's net loss and basic and diluted
loss per common and common share equivalent would have been as follows (in
thousands, except per share data):
48
<PAGE> 49
<TABLE>
<CAPTION>
Year Ended
June 30,
1999
----------
<S> <C>
Net loss:
As reported $ (1,954)
Pro forma (2,098)
Loss per common and common share equivalent:
As reported - basic (.29)
As reported - diluted (.29)
Pro forma - basic (.31)
Pro forma - diluted (.31)
</TABLE>
The effects of applying SFAS No. 123 for providing pro forma disclosures for
1999 are not likely to be representative of the effects on reported net loss and
loss per common and common share equivalent for future years, because options
vest over several years and additional awards generally are made each year.
(8) COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company entered into a two-year lease in June, 1999 for its office facility
in Scottsdale, Arizona. The Company leases its offices and warehouse space under
leases expiring in April and July 2001, with extension options, and are
cancelable with six months notice. Rental expense related to these leases
amounted to approximately $165,000 and $36,000 for the years ended June 30, 1999
and 1998, respectively.
Future minimum lease payments under these noncancelable leases are approximately
as follows:
<TABLE>
<CAPTION>
Year Ended
June 30,
----------
<S> <C>
2000 $ 291,000
2001 275,000
-----------
$ 566,000
===========
</TABLE>
LITIGATION
In the normal course of its business, the Company is subject to certain
contractual obligations and litigation. In management's opinion, upon
consultation with legal counsel, there is no current litigation which will
materially affect the Company's financial position or results of operations.
49
<PAGE> 50
SCHEDULE II
EBIZ ENTERPRISES, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED JUNE 30, 1999 AND JUNE 30, 1998
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING END OF
DESCRIPTION OF PERIOD ADDITIONS(1) DEDUCTIONS(2) PERIOD
-------------------------------- ---------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Year ended June 30, 1999 9,548 86,520 56,068 40,000
Year ended June 30, 1998 0 9,548 0 9,548
</TABLE>
-----------
(1) Charged to Selling, General and Administrative Expense
(2) Write-off of uncollectable amounts.
50
<PAGE> 51
PART III
ITEM 1. INDEX TO EXHIBITS
2.1(1) Asset Exchange Agreement by and among Genras, Jeffrey I.
Rassas, Vinculum and Aztore Holdings, dated as of March 18,
1998
3.1(1) Articles of Incorporation of Ebiz
3.2(1) Certificate of Amendment to Articles of Incorporation of Ebiz
3.3(1) Second Certificate of Amendment to the Articles of
Incorporation of Ebiz
3.4(1) Certificate of Designation / Resolution of Designation -
Series A 10% convertible Preferred Stock
3.45(1) Bylaws of Ebiz
4.1(1) Specimen common stock certificate
10.1(1) Office Building Lease, dated April 16, 1999, between Ebiz and
Van Wagner Properties
10.2(1) Ebiz 1998 Equity Incentive Plan, Effective December 23, 1998
10.3(1) Securities Purchase Agreement dated as of August 25, 1999, by
and between JEM Ventures Ebiz, LLC ("JEM") and Ebiz.
10.4(1) Subordinated Convertible Debenture, dated August 25, 1999, in
the amount of $7,100,000, made by Ebiz in favor of JEM
10.5(1) Warrant to Purchase Common Stock, dated August 25, 1999,
issued by Ebiz to JEM, for 245,000 shares
10.6(1) Registration Rights Agreement, dated as of August 25, 1999, by
and between Ebiz and JEM, LLC
10.7 OEM Agreement between Corel Corporation and Ebiz Enterprises,
Inc. dated September 13, 1999
11.1(1) Statement re: computation of per share earnings
21.1(1) Subsidiaries
23.1 Consent from Arthur Andersen LLP
27.1 Financial Data Schedule
(1) Incorporated by reference from Ebiz's Form 10-SB as
filed with the Securities and Exchange Commission on
October 19, 1999.
51
<PAGE> 52
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
EBIZ ENTERPRISES, INC.
(Registrant)
Dated: November 29, 1999 By: /s/ Jeffrey I. Rassas
-------------------------------
Jeffrey I. Rassas
Chief Executive Officer
51
<PAGE> 53
INDEX TO EXHIBITS
2.1(1) Asset Exchange Agreement by and among Genras, Jeffrey I.
Rassas, Vinculum and Aztore Holdings, dated as of March 18,
1998
3.1(1) Articles of Incorporation of Ebiz
3.2(1) Certificate of Amendment to Articles of Incorporation of Ebiz
3.3(1) Second Certificate of Amendment to the Articles of
Incorporation of Ebiz
3.4(1) Certificate of Designation / Resolution of Designation -
Series A 10% convertible Preferred Stock
3.45(1) Bylaws of Ebiz
4.1(1) Specimen common stock certificate
10.1(1) Office Building Lease, dated April 16, 1999, between Ebiz and
Van Wagner Properties
10.2(1) Ebiz 1998 Equity Incentive Plan, Effective December 23, 1998
10.3(1) Securities Purchase Agreement dated as of August 25, 1999, by
and between JEM Ventures Ebiz, LLC ("JEM") and Ebiz.
10.4(1) Subordinated Convertible Debenture, dated August 25, 1999, in
the amount of $7,100,000, made by Ebiz in favor of JEM
10.5(1) Warrant to Purchase Common Stock, dated August 25, 1999,
issued by Ebiz to JEM, for 245,000 shares
10.6(1) Registration Rights Agreement, dated as of August 25, 1999, by
and between Ebiz and JEM, LLC
10.7 OEM Agreement between Corel Corporation and Ebiz Enterprises,
Inc., dated September 13, 1999
11.1(1) Statement re: computation of per share earnings
21.1(1) Subsidiaries
23.1 Consent from Arthur Andersen LLP
27.1 Financial Data Schedule
(1) Incorporated by reference from Ebiz's Form 10-SB as
filed with the Securities and Exchange Commission on
October 19, 1999.
<PAGE> 1
OEM AGREEMENT
This Agreement made as of this 13th day of September, 1999, by and between Corel
Corporation ("COREL") having its principal place of business at 1600 Carling
Avenue, Ottawa, Ontario, K1Z 8R7 (Tel: 613-728-8200 Fax: 613-728-9790) and Ebiz
Enterprises, Inc. ("Distributor"), having its principal place of business at
15695 North 83rd Way, Scottsdale, Arizona, 85260 (Tel: 480-778-1000, Fax:
480-778-1001).
BACKGROUND:
1. COREL desires to secure distribution of certain of its software; and
2. Distributor desires to obtain certain software from COREL for
distribution with Distributor's products.
NOW THEREFORE, in consideration of the mutual promises, covenants and
obligations contained herein the parties agree as follows:
1. INTERPRETATION
1.01 Definitions. As used herein:
(i) "Agreement" means this agreement and any schedules attached
hereto.
(ii) "COREL Authorized Replicator" means a replicator of the
Software who has entered into an Authorized Replicator
Agreement with COREL and who is in good standing under such
Agreement.
(iii) "COREL Marks" means the trade names and trade-marks related to
the Software.
(iv) "Customer" means any entity, including but not limited to a
sub-distributor, reseller, end user or OEM, which purchases
Software from Distributor.
(v) "Software Prices" means the amount payable by Distributor
pursuant to Section 7 of this Agreement and according to the
pricing schedule set out in Schedule "B" for each copy of the
Software which is reproduced for Distributor.
(vi) "Distributor Products" means any one of the PIA and Element-L
personal computers produced and marketed by Distributor during
the term of this Agreement.
(vii) "End User License" means COREL's End User License as modified
by COREL from time to time.
(viii) "Software" means the object code version of the Software
listed in Schedule "B" hereto.
(ix) "Territory" means worldwide subject to Section 5.03.
1.02 Schedules. The following Schedules are appended to and form part of
this Agreement:
Schedule "A" - Guidelines for Using Corel Trade-Marks and
Guidelines for using Corel Logos
Schedule "B" - Software and Software Prices
Schedule "C" - Logo Link Usage Guidelines
2. LICENSE
2.01 License. Subject to the terms and conditions hereof, COREL hereby
grants to Distributor and Distributor accepts from COREL:
2.01.1 Reproduction - a non-exclusive license to have the Software
reproduced only by a COREL Authorized Replicator;
2.01.2 Pre-loading - a non-exclusive right to pre-load the Soft-
ware onto Distributor Products provided that Distributor
distributes one copy of the Software with each of the Dis-
tributor Products on which the Software has been pre-loaded;
and
2.01.3 Distribution - a non-exclusive license to distribute the
Software bundled with Distributor Products within the
Territory. Distributor agrees not to distribute the Soft-
ware on a stand alone basis.
<PAGE> 2
2
2.02 Intellectual Property. Distributor acknowledges that COREL is the owner of
all intellectual property, including, without limitation, patents and
copyright, relating to the Software and the COREL Marks. Distributor shall
have no rights in respect of such intellectual property, patents or
copyright other than to act as a distributor of the Software to deliver
the Software subject to the End User Licenses.
2.03 End User License Agreement. Distributor shall ensure that each copy of the
Software is distributed with a copy of the End User License.
2.04 Distribution Agreements. All Customers of Distributor, other than end
users, must be subject to binding written agreements with Distributor that
include provisions consistent with the material substance of Sections 2,
4, 5.02, 5.03, 5.04, 8, 9, 10 and 11 of this Agreement, and such
agreements must be materially no less protective of COREL's rights in the
Software than are the terms and conditions of this Agreement.
2.05 Master. To enable Distributor to exercise those rights granted under
Section 2.01.2, COREL shall deliver to Distributor a master copy of the
Software in accordance with the estimated availability as determined by
COREL, in COREL's sole discretion, for the Software as set out in Schedule
"B".
3. TRADE-MARKS
3.01 COREL Marks. During the term of this Agreement, COREL hereby grants
Distributor a license to display the COREL Marks solely in the form
provided by COREL and only in connection with the distribution and
marketing of the Software.
3.02 Non-alteration. Distributor agrees not to alter the COREL Marks, copyright
notices or designs of any Software. Distributor acknowledges and agrees
that COREL retains all of its right, title and interest in the COREL
Marks, and all use of the COREL Marks by Distributor shall enure to the
benefit of COREL.
3.03 Mark Policies and Standards. Distributor shall display the COREL Marks in
accordance with COREL's Guidelines for Using COREL Trademarks and
Guidelines for Using COREL Logos as set forth in Schedule "A" or as
otherwise in effect from time to time. COREL retains the right to specify
and approve the quality and standards of all materials on which the COREL
Marks are displayed and to inspect samples of such materials from time to
time. Failure of Distributor to adhere to such standards of quality shall
be grounds for COREL to terminate Distributor's rights to use such COREL
Marks and to terminate this Agreement. In order to enable COREL to protect
its rights in the COREL Marks, Distributor will advise COREL of every
country in which it markets or distributes the Software or uses the COREL
Marks.
3.04 Validity and Enforceability of Marks. Distributor shall not at any time
during or after the term of this Agreement assert any claim or interest in
or to anything which may adversely affect the validity or enforceability
of any of the COREL Marks. Distributor shall not register, seek to
register, or cause to be registered any of COREL's trademarks, logos,
copyrights, including the COREL Marks without COREL's prior written
consent. Distributor shall not adopt or use such trade-marks, trade names,
logos or insignia or any confusingly similar work or symbol, as part of
Distributor's company or partnership name.
3.05 Infringement and Further Assurances. Distributor agrees to report all
infringement or improper or unauthorized use of COREL's trade-marks, trade
names, logos or insignia, including the COREL Marks which come to the
attention of Distributor. Distributor further agrees to execute all
documents and further assurances required by COREL to register or protect
COREL's rights.
4. TERM OF AGREEMENT
4.01 Effective Date. This Agreement shall be effective as of the date first
written above.
<PAGE> 3
3
4.02 Initial Term. The initial term of this Agreement shall commence upon
the date first written above and shall continue for a period of twelve
(12) months from such date, subject to Section 13.
4.03 Renewal. Subject to Section 13, this Agreement shall be renewed for
subsequent periods of twelve (12) months at the end of the prior
twelve (12) month term unless either party notifies the other prior to
the expiry of the term that it does not wish to renew the Agreement
for a further twelve (12) month term.
5. RESPONSIBILITIES OF DISTRIBUTOR
5.01 Support for Customers. Distributor shall be solely responsible for
providing all maintenance and technical support of the Distributor
Products to its Customers.
5.02 Restrictions. Distributor shall have the Software reproduced only by
a COREL Authorized Replicator and only in the form provided by COREL
and shall not alter the Software or any part thereof. Distributor
shall resell the Software only in the form agreed to by COREL and
shall not alter the Software, Software packaging or End User License
or any part thereof. COREL retains the right to specify and approve
the quality and standards of the Software and to inspect samples of
such Software from time to time. Distributor shall not rent the
Software or knowingly resell to anyone who rents same or infringes
COREL's rights. Distributor shall impose this same restriction on all
Customers, other than end users, who purchase Software from
Distributor.
5.03 Compliance with Laws. Distributor shall comply with all laws, rules,
regulations and industry standards existing with respect to the
Software and the performance by the Distributor of its obligations
hereunder existing in the jurisdictions where the Distributor carries
on activities under this Agreement and where the Software is resold
or distributed from time to time. Distributor shall not export the
Software unless such export complies with any applicable export laws
and regulations as they apply to the Software. In particular,
Distributor shall not export or re-export the Software, either
directly or indirectly, to countries to which the United States
has prohibited export, including, but not limited to, Cuba, Iran,
Iraq, Libya, North Korea, Syria and Sudan. If Distributor wishes to
distribute the Software to Customers outside of Canada, the United
States, the United Kingdom, the European Community or Australia,
Distributor shall notify COREL in writing prior to such distribution.
COREL reserves the right to withhold its consent to the distribution
of the Software in any country other than those listed above, if the
laws of the target country do not adequately protect the intellectual
property rights of COREL in the Software.
5.04 Marketing. Any advertising or marketing materials prepared by or for
Distributor shall advertise the Software as being available only as a
bundled product with Distributor Products and shall quote only the
bundled price, without disclosing a separate price for the Software,
unless required by law.
5.05 Press Releases. Distributor agrees that all information released to
the media or the general public regarding this Agreement or the
relationship between the parties including, but not limited to press
releases, shall require prior written approval by COREL.
5.06 Reports. Distributor will provide to COREL monthly reports within ten
(10) days at the end of each month regarding the number of
reproductions of the Software made, the number of copies of the
Software released for distribution to Customers, and the total amount
owning for the Software Prices for the released Software. The monthly
report shall also track the Distributor's inventory levels of the
Software. All Distributor reports or other Software sales
information, including, but not limited to, market share information
regarding the Software or COREL, in Distributor's possession or under
its control shall be considered confidential information subject to
Section 8 herein.
5.07 Audits. Distributor agrees to maintain complete and accurate records
relating to its promotion, marketing, use and distribution of the
Software. COREL shall have the right no more often than once each
twelve (12) month
<PAGE> 4
4
period to appoint an independent third party to examine Distributor's
books and records in order to verify Distributor's compliance with the
terms of this Agreement. Any such audit shall be at the expense of COREL
unless the audit reveals a non-compliance by Distributor with the terms
of this Agreement of greater than five percent (5%) in which case the
audit shall be at the expense of Distributor.
5.08 No Distribution of Counterfeits. Distributor agrees that: (i) it shall
not engage in the manufacture or use of counterfeited, pirated or
illegal Software; (ii) it shall not knowingly engage in the
distribution, supply or transfer of counterfeited, pirated or illegal
Software; and (iii) it shall not knowingly supply any Software to
Customers who engage in the use, manufacture, distribution or other
supply or transfer of counterfeited, pirated or illegal Software.
5.09 Anti-Piracy Efforts. Distributor agrees to report all occurrences of
counterfeited, pirated or illegal Software of which it becomes aware and
to provide reasonable assistance to COREL in the investigation of
counterfeited, pirated or illegal Software.
5.10 Web Marketing. Distributor agrees to provide a COREL logo link on the
main page of Distributor's website linking to COREL's website in
accordance with the Logo Link Usage Guidelines set out in Schedule "C"
hereto.
6. RESPONSIBILITIES OF COREL
6.01 Promotional Materials. COREL shall furnish Distributor, at no charge,
with sales aids, product briefs, brochures and similar literature and
materials with respect to the Software which COREL generally makes
available to other OEM's without charge.
6.02 Support for Customers. COREL shall be responsible for providing
maintenance and technical support for the Software to its customers in
accordance with COREL's standard policies and procedures as may be in
effect from time to time.
6.03 Royalty Report. Within six (6) days of the end of each month, COREL
shall provide Distributor with a royalty report detailing the number of
copies of Software replicated by the COREL Authorized Replicator for
Distributor in the immediately preceding month. Distributor shall have
five (5) days from the date of receipt of the royalty report from COREL
to provide COREL with written notice disputing the number of copies of
Software replicated for Distributor. In the event that COREL does not
receive any notice of dispute from Distributor in such five (5) day
period, the royalty report shall be deemed accepted by Distributor and
payment for such replicated Software shall be due and payable in
accordance with Section 7.01 herein.
7. PAYMENTS
7.01 Amounts Payable. Within thirty (30) days from the date of the invoice
Distributor shall pay to COREL Software Prices for each copy of the
Software reproduced for Distributor during the month just ended.
7.02 Taxes. Distributor shall pay, in addition to all amounts specified in
this Agreement, all duties and foreign, federal, state, provincial,
county or local income taxes, value added taxes, use, personal,
property, sales taxes and other taxes whatsoever, or amounts in lieu
thereof, and interest thereon, paid or payable or collectible by COREL
(exclusive of taxes based on COREL's net income) and levied or based on
amounts chargeable to or payable by Distributor pursuant to this
Agreement. In the event any payments required to be made by Distributor
under this Agreement are subject to applicable withholding tax that
Distributor is required to deduct from such payments, Distributor shall
promptly deliver to COREL receipts issued by appropriate government
authorities for all such taxes withheld or paid by Distributor and
Distributor shall fully and promptly cooperate with COREL to provide
such information and records as COREL may require in connection with any
application by COREL to obtain available tax credits.
<PAGE> 5
5
7.03 Late Payment. If Distributor is in arrears under this Agreement, COREL
will give written notice to Distributor that Distributor is responsible
for payment of all outstanding amounts and finance charges. If the
outstanding amounts are not paid within ten (10) days of such notice,
COREL has the right to terminate this Agreement. Late payments will be
assessed a 1% finance charge per month (12% per annum) or the highest
finance charge permitted by applicable law, whichever is less. All such
finance charges shall automatically begin to accrue on overdue amounts
starting on the thirty-first (31st) day after payment of such amounts was
due. Distributor shall pay all costs including reasonable attorney's fees,
incurred by COREL in collecting overdue amounts.
7.04 U.S. Currency. All payments to COREL pursuant to this Agreement shall be
made in the lawful currency of the United States of America and all
amounts referred to in this Agreement are in the lawful currency of the
United States of America.
8. CONFIDENTIALITY
8.01 Confidentiality. Each of the parties hereto agrees to keep confidential
any and all information with respect to the other party which it has
received or may in the future receive in connection with this Agreement
which is not otherwise available to the general public without
restriction. Notwithstanding the foregoing, each of the parties shall be
entitled to disclose such information (i) to its agents, employees or
representatives who have a need to know such information for the purpose
of performance under this Agreement and exercising the rights granted
under this Agreement, or (ii) to the extent required by applicable law, or
(iii) during the course of or in connection with any litigation,
arbitration or other proceeding based upon or in connection with the
subject matter of this Agreement provided that Distributor shall give
COREL reasonable notice prior to such disclosure and shall comply with any
applicable protective order or equivalent. Distributor shall not
disassemble, decompile, reverse engineer or attempt to disassemble,
decompile, reverse engineer the Software, except to the extent this
restriction is not permitted by applicable law. Confidential Information
shall not include that information defined as Confidential Information
which the receiving party can conclusively establish (i) was in the
possession of the receiving party at the time of disclosure; (ii) prior to
or after the time of disclosure became part of the public domain without
the act or omission of the party to whom it was disclosed; (iii) was
disclosed to the receiving party by a third party under no legal
obligation to maintain the confidentiality of such information; (iv) was
independently developed by the receiving party.
9. WARRANTS AND OTHER REPRESENTATIONS
9.01 Warranty. The storage medium for the gold master for the Software or
Software is warranted against defects in workmanship and materials for a
period of ninety (90) days from the date it is delivered to Distributor.
In the event that the storage medium for the gold master for the Software
is defective COREL will replace it free of charge with another copy of the
gold master for the Software. Replacement of the storage medium for the
gold master for the Software shall be COREL's sole obligation and
Distributor's sole remedy for a breach of the warranty in this section.
9.02 Limitation. OTHER THAN AS PROVIDED IN SECTION 9.01, THE SOFTWARE, AND
STORAGE MEDIA ARE PROVIDED AND LICENSED BY COREL ON AN "AS IS" BASIS AND
THERE ARE NO WARRANTIES, REPRESENTATIONS OR CONDITIONS, EXPRESS OR
IMPLIED, WRITTEN OR ORAL, ARISING BY STATUTE, OPERATION OF LAW, COURSE OF
DEALING, USAGE OF TRADE OR OTHERWISE, REGARDING THEM OR ANY OTHER PRODUCT
OR SERVICE PROVIDED HEREUNDER OR IN CONNECTION HEREWITH BY COREL. COREL
DISCLAIMS ANY IMPLIED WARRANTIES OR CONDITIONS OF MERCHANTABLE QUALITY,
SATISFACTORY QUALITY, MERCHANTABILITY, DURABILITY OR FITNESS FOR
PARTICULAR PURPOSE. NO REPRESENTATION OR OTHER AFFIRMATION OF FACT,
INCLUDING BUT NOT LIMITED TO STATEMENTS REGARDING PERFORMANCE OF THE
SOFTWARE, OR STORAGE MEDIA, WHICH IS NOT CONTAINED IN THIS
<PAGE> 6
6
AGREEMENT, SHALL BE DEEMED TO BE A WARRANTY, CONDITION OR
REPRESENTATION BY COREL.
9.03 No Variation. NO AGREEMENTS VARYING OR EXTENDING THE TERMS OF SECTION
9.01 OR 9.02 WILL BE BINDING ON COREL UNLESS IN WRITING AND SIGNED BY
AN AUTHORIZED SIGNING OFFICER OF COREL.
9.04 Distributor not to Bind. Distributor will give and make no warranties
or representations on behalf of COREL as to quality, merchantable
quality, satisfactory quality, merchantability, fitness for a
particular use or purpose or any other features of the Software; and
Distributor shall not incur any liabilities, obligations or
commitments on behalf of COREL, including, without limitation, a
variation of the End User License.
10. INFRINGEMENT
10.01 Defense and Settlement. If notified promptly in writing of any action
(and all prior related claims) brought against Distributor alleging
that Distributor's resale, distribution or other disposition of the
Software under this Agreement infringes any valid copyright, COREL
will defend that action at its expense and will pay the costs and
damages finally awarded against Distributor in the action, provided:
that Distributor provides COREL with prompt written notice of such
claim(s); that COREL shall have sole control of the defense of any
such action and all negotiations for its settlement or compromise;
that Distributor, and where applicable, those for whom Distributor is
in law responsible, cooperate fully with COREL in its defense of the
action; and that COREL shall have no liability if (a) the action
results from (i) the use of the Software for purposes or in an
environment for which it was not designed; (ii) modification of the
Software by anyone other than COREL or bundling of the Software with
Distributor Product(s); (iii) distribution of any Software or display
or use of any COREL Mark after COREL's notice to Distributor that it
should cease distribution or use of such Software and/or COREL Mark
due to a possible infringement; or (b) Distributor is otherwise in
breach of the terms and conditions of this Agreement.
10.02 Options Where Claim. If a final injunction is obtained in such action
against Distributor's distribution of the Software or if in COREL's
opinion the Software is likely to become the subject of a claim of
infringement, COREL may at its sole option and expense either procure
for Distributor the right to distribute the Software or replace or
modify the Software so that it becomes non-infringing or grant
Distributor a credit for the Software Prices paid by Distributor to
COREL in respect of any Software remaining in the inventory of
Distributor.
10.03 Entire Liability. The foregoing states the entire liability of COREL
and exclusive remedy of Distributor with respect to any intellectual
or industrial property infringement.
11. LIMITATION OF LIABILITY
11.01 Limitation. IN NO EVENT WILL COREL BE LIABLE FOR ANY INCIDENTAL,
INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES, OR ANY DAMAGES WHATSOEVER
RESULTING FROM LOSS OF USE, DATA OR PROFITS, ARISING OUT OF OR IN
CONNECTION WITH THIS AGREEMENT OR THE USE OR PERFORMANCE OF THE
SOFTWARE OR STORAGE MEDIA, OTHER COREL PROVIDED MATERIAL OR THE
PERFORMANCE OF COREL WHETHER SUCH ACTION IS BASED IN CONTRACT OR IN
TORT INCLUDING BUT NOT LIMITED TO NEGLIGENCE AND WHETHER OR NOT COREL
HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR SUCH DAMAGES
ARE FORESEEABLE.
11.02 Aggregate Liability. Other than as provided in Section 10, COREL's
aggregate liability to Distributor whether for negligence, breach of
contract, misrepresentation or otherwise shall, in respect of a
single occurrence or a series of occurrences, in no circumstances
exceed the Software Prices paid by Distributor to COREL over the
twelve (12) month period immediately preceding the claim by
Distributor.
<PAGE> 7
7
12. DISTRIBUTOR INDEMNIFICATION
12.01 Indemnification. Except as set forth in Section 10, Distributor agrees
to indemnify and save COREL harmless from and against any and all
claims, demands, costs and liabilities (including all reasonable legal
and attorney fees and expenses) of any kind whatsoever, arising directly
or indirectly out of claims by Distributor's Customers or any third
party relating to: (i) Distributor's Products; (ii) Distributor's
performance or non-performance, including but not limited to negligence,
of its obligations hereunder; or (iii) Distributor's pre-loading of the
Software.
13. TERMINATION
13.01 Termination. This Agreement will terminate in the event of any of the
following:
13.01.1 written notice of termination from COREL, effective
immediately, under Section 7.03;
13.01.2 on the thirtieth (30th) day after one party gives the other
written notice of breach by the other of any material term or
condition of this Agreement unless the breach is cured before
that day;
13.01.3 written notice of termination by one party, effective
immediately, after a receiver has been appointed in respect of
the whole or a substantial part of the other's assets or a
petition in bankruptcy or for liquidation is filed by or
against that other, or if the other has been dissolved or
liquidated or is insolvent;
13.01.4 written notice of termination, effective immediately, by the
non-defaulting party; if Distributor or COREL has breached its
obligation under Section 8; or
13.01.5 upon the expiry of ninety (90) days following receipt by either
party of written notice from the other party terminating this
Agreement for convenience.
13.02 No Compensation. Distributor acknowledges and agrees that it has no
expectation that its business relationship with COREL will continue for
any minimum period of years or that Distributor shall obtain any
anticipated amount of profits by virtue of this Agreement. The parties
agree that the termination provisions herein, in terms of both notice
and default events are reasonable and agree not to contest same by way
of wrongful termination proceedings or otherwise. COREL shall not be
liable, by reason of any termination of this Agreement, for
compensation, reimbursement or damages on account of the loss of
prospective profits on anticipated orders or on account of expenditures,
investments, leases or commitments whatsoever in connection with the
business or goodwill of Distributor.
14. EFFECT OF TERMINATION
14.01 Distributor. In the event of termination Distributor shall:
14.01.1 perform with respect to COREL all payment and other obligations
of Distributor arising under this Agreement within thirty (30)
days of termination;
14.01.2 immediately cease to have the Software reproduced, immediately
cease to use the COREL Marks in any manner whatsoever and
immediately cease to act as a distributor of the Software and
to represent itself as such; and
14.01.3 immediately return the gold master of the Software to COREL, at
Distributor's sole cost and expense.
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8
14.02 Survival. Sections 2.02, 3.02, 3.04, 5, 7, 8, 9, 10, 11, 12, 13.02, 14
and 15 shall survive the termination of this Agreement.
14.03 No Prejudice. Except as provided in Section 13.02, termination
hereunder shall be without prejudice to any other right or remedy to
which either party may be entitled hereunder in law.
14.04 Destroy or Deliver Up. At termination, COREL shall have the option to
require Distributor to destroy and certify that it has destroyed or to
deliver to COREL any property of COREL, including the golden masters
for the Software, then in its possession or under its control.
15. MISCELLANEOUS
15.01 Entire Agreement. This Agreement constitutes the entire agreement
between the parties concerning the subject matter hereof and
supersedes all prior statements, representations, discussions,
negotiations and agreements, both oral and written, including all
pre-printed terms and conditions appearing on Distributor's order
forms, COREL's acknowledgement of order forms and COREL's invoice
forms.
15.02 Amendment or Waiver. COREL expressly reserves the right to modify
Schedule "A" from time to time. Except as specifically provided for
herein, all other modifications and/or amendments require a mutual
written agreement signed by authorized signing officers of both
parties. No order, invoice or similar document will affect this
Agreement even if accepted by the receiving party.
15.03 Illegal or Unenforceable Provisions. If any one or more of the
provisions of this Agreement shall be found to be illegal or
unenforceable, this Agreement shall nevertheless remain in full force
and effect, and such term or provision shall be deemed severed.
15.04 Independent Contractors. The parties to this Agreement are independent
contractors. No relationship of principal to agent, master to servant,
employer to employee or franchisor to franchisee is established
between the parties. Neither party has the authority to bind the
other or incur any obligation on its behalf.
15.05 Force Majeure. Unless continuing for a period of ninety (90)
consecutive days, or unless involving the payment of amounts due under
this Agreement, no default, delay or failure to perform on the part of
either party shall be considered a breach of the Agreement if such
default, delay or failure to perform is shown to be due entirely to an
event of force majeure, or to causes beyond the reasonable control of
the defaulting party including without limitation, strikes, riots,
civil disturbances, actions or inactions concerning governmental
authorities, epidemics, war, embargoes, severe weather, fire,
earthquakes, acts of God or the public enemy or default of a common
carrier, always provided that the party so relieved of its obligations
shall take reasonable steps to prevent, correct or amend such act or
event which renders such obligations impossible.
15.06 No Waiver. Neither of the party's rights to enforce provisions of this
Agreement shall be affected by any prior course of dealing, waiver,
delay, omission or forbearance.
15.07 Assignment. This Agreement and the rights granted hereunder shall not
be assigned, encumbered by security interest or otherwise transferred
by Distributor without the prior written consent of COREL. An
amalgamation or merger of Distributor or COREL with any person who is
not a party to this Agreement shall be deemed to result in an
assignment of this Agreement. COREL may assign this Agreement at any
time upon notice to this effect to Distributor.
15.08 Enurement. This Agreement shall enure to the benefit of and be binding
upon the parties and their respective successors and permitted
assigns.
<PAGE> 9
9
15.09 Notices. Any notice or other communication to the parties shall be sent
to the addresses set out above, or such other places as they may from
time to time specify by notice in writing to the other party. Notices to
COREL shall be sent to the attention of the legal department. Any such
notice or other communication shall be in writing, and, unless delivered
to a responsible officer of the addressee, shall be given by registered
mail, facsimile or telex and shall be deemed to have been given when such
notice should have reached the addressee in the ordinary course, provided
there is no strike by postal employees in effect or other circumstances
delaying mail delivery, in which case notice shall be delivered or given
by facsimile or telex.
15.10 Further Assurances. The parties agree to do all such things and to
execute such further documents as may reasonably be required to give full
effect to this Agreement.
15.11 Time. Time shall be of the essence.
15.12 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Province of Ontario, Canada, excluding
that body of law applicable to choice of law and excluding the United
Nations Convention on Contracts for the International Sale of Goods and
any legislation implementing such Convention, if otherwise applicable.
Distributor hereby consents and attorns to the jurisdiction of the courts
of such province. If either party employs attorneys to enforce any rights
arising out of or relating to this Agreement, the prevailing party shall
be entitled to recover reasonable attorney's fees. Each party waives any
right, and agrees not to apply to have any disputes under this Agreement
tried or otherwise determined by a jury, except where required by law.
15.13 Non-Conflict. No director or officer of Corel Corporation (and/or its
subsidiaries and affiliates) shall be admitted to any share or part of
this Agreement or to any benefit arising therefrom.
15.14 Language. The original of this Agreement has been written in English and
Distributor waives any right it may have under the laws of Distributor's
Territory to have the Agreement written in any other language.
Distributor represents that it has the ability to read and write in
English and has read and understands this Agreement. If this Agreement is
translated into a language other than English, the English version and
interpretation shall govern and prevail. All communications between the
parties hereunder shall be in English.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives as of the date first above
written.
EBIZ ENTERPRISES, INC.
PER: /s/ Stephen Herman
-----------------------
Name: Stephen Herman
Title: President
COREL CORPORATION
PER:
-----------------------
Name:
Title:
<PAGE> 10
10
SCHEDULE "A"
GUIDELINES FOR USING COREL TRADE-MARKS AND GUIDELINES FOR USING COREL LOGOS
This page left blank. Corel Trade-Marks and
Logos Guidelines provided on following page.
<PAGE> 11
GUIDELINES FOR USING COREL LOGOS & TRADEMARKS
Corel permits you to use its logos and trademarks in both plain word and
stylized form (the "Marks") for the purpose of promoting and advertising Corel
products or services, provided you comply with the following guidelines:
- The Marks may only be used in relation to Corel products or services.
This means that you may not display the Marks on any non-Corel product
or service including any associated packaging, documentation,
advertising or other materials in a manner that suggests that such
product or service is a Corel product or service, that Corel or any of
the Marks are associated with such product or service or that Corel is
affiliated with, endorses or sponsors you or any of such products or
services. Use of Corel partner program logos and trademarks, such as
the Corel Solutions Partner and Corel Training Partner logos, are
subject to the terms and conditions of the respective partner program
and no permission to use such logos is granted herein. Please contact
a Corel representative or visit corel.com for further details.
- Corel will provide you with the artwork for the Marks. This artwork
may not be altered in any way.
- When displayed, the Marks must be substantially less prominent than
your trademark, trade name, logo or product name. The Marks may not be
used as, or as part of, a company name.
- When displayed, the Marks must stand alone. A minimum amount of empty
space must be left between the Marks and any other object such as
type, photography, borders, edges, etc. The required border of empty
space around the Marks must be 1/2x wide where x is the height of the
Mark.
- You may not combine the Marks with any other feature including, but
not limited to, other logos, words, graphics, photos, slogans,
numbers, design features, or symbols. Further, you may not display
your own logos or marks or other text or graphics in the same or
similar get-up, graphics, look, or trade-dress as the Marks.
- The Marks must not be used in a manner that, in Corel's judgment, may
diminish or otherwise damage Corel's goodwill in the Marks, including
but not limited to uses which could be deemed to be obscene,
pornographic, or otherwise in poor taste or unlawful, or which purpose
or objective is to encourage unlawful activities.
- You must place an asterisk (*) or similar notation mark beside the
first use of a Mark and include the following attribution statement on
the materials in which the Marks are featured.
"* Trademark(s) of Corel Corporation or Corel Corporation Limited"
<PAGE> 12
11
SCHEDULE "B"
SOFTWARE AND SOFTWARE PRICES
I. SOFTWARE
i) Corel WordPerfect 8 for Linux - Personal Edition
Languages: English, French, Italian, German and Spanish
Estimated availability: available
End User License and registration card
II. SOFTWARE PRICES
i) For each copy of the Software reproduced, Distributor is not required
to pay any Software Prices.
<PAGE> 13
12
SCHEDULE "C"
LOGO LINK USAGE GUIDELINES
Proper usage of the Corel logo (the "Logo") requires compliance with the
following guidelines:
REQUIRED LINK
The Logo must always be a single active link to the Corel home page at
http://www.corel.com (the "Corel Site"). See the HTML code provided below. By
linking to the Corel Site, you agree to be bound by the Corel Site Terms and
Conditions of Use.
REQUIRED HTML CODE - NEW BROWSER WINDOW USE
The following code must be used to place the Logo on your HTML page. The Logo
itself must be located in the same directory as the HTML page that references
it:
<A HREF="http://www.corel.com/index.htm" TARGET="_blank"><IMG ALT="[Corel
Corporation Logo]" SRC="corel.gif" HEIGHT=35 WIDTH=100 BORDER=0></A>
CHANGES TO YOUR URL
Any change to your placement of the Logo on your site requires the completion of
a new Logo Link Application Form.
LOGO SIZE
There is only one version of the Logo. The required size of the Logo is 100 by
35 pixels. The Logo may NOT be displayed in a larger size, even if all elements
of the Logo are increased in size proportionately. Your web page title and other
trademarks and logos must appear at least as prominently as the Logo.
REQUIRED PLACEMENT
The Logo must be placed by itself in a prominent location on your site. The Logo
may not be used as a feature or design element of any other logo. The Logo must
not be used in conjunction with a high-contrast background.
NO ALTERATION ALLOWED
The Logo must not be modified or distorted in ANY way. Do not shrink it, take it
apart, change its proportions, color or font, or otherwise alter it from the
Corel-supplied version.
POSITIVE PRESENTATION
Your site must display the Logo in a positive manner. The Logo may not be used
to depict Corel or its products negatively, or in a manner that could reflect
adversely on Corel or its products and services, including, but not limited to
uses which could be deemed to be obscene, pornographic, excessively violent or
otherwise in poor taste or unlawful, or which purpose or objective is to
encourage unlawful activities.
Your web page title and other trademarks and logos must appear at least as
prominently as the Logo.
You may not display the Logo in any manner that implies sponsorship, endorsement
or license by Corel.
You may not display the Logo on any site that infringes Corel's intellectual
property or other rights, or violates any state, provincial, federal or
international law.
<PAGE> 14
13
GUIDELINE CHANGES
Corel reserves the right to change the Logo Link Usage Guidelines at its sole
discretion upon ten (10) days electronic notice of such changes.
PROPRIETARY RIGHTS
The Logo is a proprietary logo of Corel Corporation. It contains Corel's
trademark and may be used only with the permission of Corel. The Logo Usage
Guidelines do not grant a license or any other right in Corel's logos or
trademarks. Use of the Logo acknowledges Corel's ownership of such logos and
trademarks (collectively referred to as the "Marks") and does not create any
right, title or interest in or to the Marks. All use of or goodwill associated
with the Marks enures to the benefit of Corel.
TERMINATION
Corel reserves the right in its sole discretion to immediately terminate or
modify permission to use the Logo at any time. Further, Corel reserves the
right to refuse permission to use the Logo and to decline your Logo Link
Application Form. Corel may visit participating sites to ensure compliance with
the Logo Link Usage Guidelines. Corel reserves the right to take action against
any use that does not conform to the Logo Link Usage Guidelines, infringes any
Corel intellectual property or other right or violates other applicable law.
Upon termination, you agree to immediately remove the Logo from your site and
disable your link to Corel's homepage.
DISCLAIMER
Corel disclaims any warranties that may be express or implied by law regarding
the Logo, including warranties against infringement.
*****
The Logo may only be used with the permission of Corel. To receive the Logo and
HTML code to link your site to Corel's homepage, complete the above Logo Link
Application Form, read the above Logo Link Usage Guidelines and accept to be
bound by the terms and conditions stated therein by hitting the "ACCEPT" button
below. If you do not accept to be bound by the terms and conditions contained
in the Logo Link Usage Guidelines, hit the "REJECT" button below.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
registration statement of our report dated September 10, 1999 and to all
references to our Firm included in this registration statement.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona
November 29, 1999
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