<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 1, 2000
REGISTRATION NO. 333-89645
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
EBIZ ENTERPRISES, INC.
(Name of Small Business Issuer in Its Charter)
----------------------------
<TABLE>
<S> <C> <C>
NEVADA 3571 84-1075269
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
15695 NORTH 83RD WAY
SCOTTSDALE, ARIZONA 85260
(480) 778-1000
(Address and Telephone Number of Principal
Executive Offices and Principal Place of Business)
JEFFREY I. RASSAS WITH COPIES TO:
CHIEF EXECUTIVE OFFICER THOMAS J. MORGAN, ESQ.
EBIZ ENTERPRISES, INC. QUENTIN D. VAUGHAN, ESQ.
15695 NORTH 83RD WAY LEWIS AND ROCA LLP
SCOTTSDALE, ARIZONA 85260 40 NORTH CENTRAL AVENUE
TELEPHONE: (480) 778-1000 PHOENIX, ARIZONA 85004-4429
FACSIMILE: (480) 778-1001 TELEPHONE: (602) 262-5712
FACSIMILE: (602) 262-5747
(Name, Address and Telephone Number of Agent For Service)
Approximate Date of Proposed Sale to the Public: As soon as practicable, from
time to time, after the Registration Statement becomes effective. If any of the
securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, as
amended, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of earlier effective registration
statement for the same offering. [ ]
-------------------------------------------------------------------
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
-------------------------------------------------------------------
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
-------------------------------------------------------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Security to be Amount to be Offering Price Aggregate Registration
Registered Registered Per Share(1) (2) Offering Price (1)(2) Fee
================================================================================================================================
<S> <C> <C> <C> <C>
Common Stock, $.001 par value, underlying Series A
10% Convertible Preferred Stock 181,583 3.50 635,541 177
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value, underlying 9%
Subordinated Convertible Debenture 3,076,917 3.50 10,769,210 2,994
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value, underlying Warrant 245,000 3.50 857,500 238
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value, outstanding 386,500 $3.50 $ 1,352,750 $ 376
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value, underlying an
outstanding warrant 10,000 3.50 35,000 10
- --------------------------------------------------------------------------------------------------------------------------------
TOTALS 3,900,000 $3.50 $13,650,000.00 $3,795
================================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Per share price determined pursuant to Rule 457(c) as of October 20, 1999.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE> 2
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM
NO. CAPTION IN FORM SB-2 CAPTION IN PROSPECTUS
- --------------------------------------------------------------------------------------
<S> <C> <C>
1. Front of Registration Statement and Front Cover Page; Front Cover of
Outside Front Cover of Prospectus Prospectus
2. Inside Front and Outside Back Cover Inside Front Cover of Prospectus;
Pages of Prospectus Outside Book Cover of Prospectus
3. Summary of Information and Risk Summary; Risk Factors
Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Plan of Distribution
6. Dilution Not Applicable
7. Selling Securityholders Selling Securityholders
8. Plan of Distribution Plan of Distribution
9. Legal Proceedings Our Business - Litigation
10. Directors, Executive Officers, Management
Promoters and Control Persons
11. Security Ownership of Certain Principal Shareholders
Beneficial Owners and Management
12. Description of Securities Description of Ebiz's Securities
13. Interest of Named Experts and Counsel Not Applicable
14. Disclosure of Commission Position on Management-Limitation of Liability and
Indemnification for Securities Act Indemnification Matters
Liabilities
15. Organization Within Last Five Years Certain Transactions
16. Description of Business Management's Discussion and Analysis
of Financial Condition and Results of
Operations; The Business
17. Management's Discussion and Analysis Management's Discussion and Analysis
or Plan of Operation of Financial Condition and Results of
Operations
18. Description of Property Our Business-Facilities
19. Certain Relationships and Related Certain Transactions
Transactions
20. Market for Common Equity and Related Market for Common Stock
Stockholder Matters
21. Executive Compensation Management - Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Not Applicable
Accountants on Accounting and
Financial Disclosure
</TABLE>
<PAGE> 3
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED FEBRUARY 1, 2000
UP TO 3,900,000 SHARES
EBIZ ENTERPRISES, INC.
This offering relates to the possible resale, from time to time, by
certain securityholders of Ebiz Enterprises, Inc. ("Ebiz") of shares of our
common stock. Ebiz will not receive any of the proceeds from the sale of these
shares but will receive certain amounts upon exercise of outstanding warrants.
Ebiz's common stock is traded on the OTC Bulletin Board under the symbol
"EBIZ." On January 31, 2000 the last reported bid price of the common stock on
the OTC Bulletin Board was $5.9375 per share.
------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 TO READ ABOUT THE FACTORS YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK.
------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is February , 2000.
<PAGE> 4
SUMMARY
You should read the following summary together with the more detailed
statements appearing elsewhere in this prospectus. References to Ebiz throughout
this prospectus may also refer to its predecessors which include Genras, Inc.
("Genras") and Vinculum Incorporated ("Vinculum").
EBIZ ENTERPRISES, INC.
We develop and operate Internet e-commerce Web sites and design,
manufacture and distribute high-value, low-cost computer systems which utilize
the Linux operating system. We manufacture three-branded computer system lines,
the Element-L(TM), the M(2) Systems(TM) and the recently introduced PIA(TM)
(Personal Internet Appliance).
The Linux operating system is a computer operating system similar to the
Windows or the Mac OS systems. Unlike other operating systems, the Linux system
and its source code were developed by a multitude of individuals in the
international Internet community and are available free of charge from over 100
Linux related Web sites. See the section captioned "OUR BUSINESS - The Market
and Industry - The Linux Market" for more information regarding the Linux
Operating System.
We market our branded systems and other products through our Web sites or
Vertical Service Portals ("VSPs"), as well as other distribution channels. Our
primary VSP, TheLinuxStore.com, is focused exclusively on Linux-based solutions
and services. Please refer to the section captioned "OUR BUSINESS" for more
detailed information regarding our products and business operations.
We were incorporated in Nevada in June 1998 as a wholly owned subsidiary
of Vinculum and commenced business operations as a result of a merger of
Vinculum into Ebiz in August 1998. Vinculum had acquired the assets and
operations of Genras in June 1998. Genras had operations since May 1995.
Our administrative offices and warehouse and production facilities are
located at 15695 North 83rd Way, Scottsdale, Arizona 85260, and our telephone
number is (480) 778-1000.
THE OFFERING
<TABLE>
<S> <C>
SECURITIES OFFERED......... This prospectus relates to the offering of up to
3,900,000 shares of our common stock. The shares
registered with this prospectus include 181,583
shares issuable upon the conversion of our Series
A 10% Convertible Preferred Stock ("Series A
Preferred"), up to 3,076,917 shares which may be
issued upon conversion of an outstanding 9%
Subordinated Convertible Debenture ("Debenture"),
245,000 shares issuable upon exercise of a Warrant
to Purchase Common Stock ("Warrant"), 386,500
outstanding shares of common stock, and 10,000
shares issuable upon the exercise of another
outstanding warrant.
The principal of the Debenture is convertible into
a minimum of 947,260 shares at a conversion price
of $7.4953 per share. The $7.4953 conversion price
is the maximum conversion price for the Debenture.
The actual conversion price is based on a formula
that varies with the market price of
</TABLE>
2
<PAGE> 5
<TABLE>
<S> <C>
our stock. The interest accruing on the Debenture
is also convertible into our common stock based on
the same formula. See "DESCRIPTION OF EBIZ'S
SECURITIES - Debenture and Warrant" for a
description of the conversion rights of the
Debenture. We determined the number of shares
underlying the Debenture subject to the
registration statement of which this prospectus is
a part by analyzing the market price of our shares
at the time of filing the registration statement
of which this prospectus is a part and agreement
with the holder of the Debenture. The actual
shares issued upon conversion of the Debenture may
be more or less than the 3,076,917 shares
registered.
COMMON STOCK OUTSTANDING
AFTER OFFERING............. As of December 31, 1999, we had 7,493,112 shares
of common stock outstanding and pending issuance,
including 386,500 shares covered by this
prospectus. The conversion of the Series A
Preferred and Debenture and exercise of the
warrants will result in the issuance of additional
shares. For purposes of this prospectus, we have
assumed that an additional 3,513,500 shares will
be issued upon conversion or exercise of these
securities. Because the number of shares issuable
upon conversion of the Debenture is based on a
formula that varies with the market price of our
common stock, and because there is no obligation
on the holders of the Series A Preferred,
Debenture and warrants to convert or exercise
these securities, we may issue more or less than
the additional 3,513,500 shares covered by this
prospectus.
SYMBOL..................... EBIZ
</TABLE>
3
<PAGE> 6
SUMMARY FINANCIAL DATA
(in thousands except per share data)
The following summary financial information is derived from our audited
Financial Statements included in this prospectus. This data should be read with
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and the Financial Statements and related notes included herein.
<TABLE>
<CAPTION>
Three Months
Years Ended June 30, Ended Sept 30,
1998 1999 1999
-------- -------- --------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Revenue $ 6,825 $ 15,290 $ 5,639
Cost of Sales 6,158 14,359 5,347
Gross Profit 667 931 292
Operating Loss (393) (1,649) (1,018)
Net Loss Attributable to Common
Shareholders (422) (1,954) (1,240)
Loss Per Share (.08) (0.29) (0.17)
Weighted Average Shares 5,620 6,821 7,320
</TABLE>
<TABLE>
<CAPTION>
June 30, Sept 30
1998 1999 1999
------- ------- -------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents $ 469 $ 76 $ 484
Current Assets 1,165 3,443 3,721
Total Assets 1,218 3,917 9,476
Current Liabilities 525 2,852 2,424
Convertible Preferred Stock -- 869 866
Accumulated Deficit (200) (2,154) (3,401)
Shareholders' Equity 693 1,066 721
</TABLE>
4
<PAGE> 7
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, this prospectus
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended ("Exchange Act"). Ebiz intends that
such forward-looking statements be subject to the safe harbors provided by these
statutes.
Wherever possible, we have identified these forward-looking statements by
words such as "anticipates," "believes," "estimates," "expects," "intends" and
similar expressions. These forward-looking statements include the
forward-looking statements regarding future events and our plans and
expectations and involve risks and uncertainties. Our actual results may differ
materially from the forward-looking statements. Factors that may cause or
contribute to such differences include those discussed below under "RISK
FACTORS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS," as well as those discussed elsewhere herein and in the
exhibits attached hereto or incorporated by reference.
Although we believe that the assumptions underlying the forward-looking
statements herein are reasonable, any of the underlying assumptions could prove
inaccurate and there can be no assurance that the results contemplated will be
realized. In addition, as disclosed below under "RISK FACTORS," our business and
operations are subject to substantial risks which increase the uncertainties
inherent in the forward-looking statements included in this prospectus. The
inclusion of such forward-looking information should not be regarded as a
representation by us or any other person that the future events, plans or
expectations we contemplate will be achieved.
RISK FACTORS
Investment in the shares offered by this prospectus involves a high degree
of risk. You should carefully consider the risks and uncertainties described
below and the other information in this prospectus before deciding to invest in
the shares.
WE ARE AN EARLY STAGE COMPANY WITH LIMITED OPERATING HISTORY MAKING IT DIFFICULT
TO EVALUATE OUR FUTURE PROSPECTS.
You should consider the risks and difficulties we will face as an early
stage company engaged in the business of providing Linux - based solutions
through e-commerence distribution channels. Both the Linux market and e-commerce
distribution methods are new and rapidly evolving. Because we are an early stage
company in an evolving market, our future prospects cannot be readily evaluated
based upon our prior operations. Our revenues may not grow as we anticipate and
our business strategy may not be successful if we do not adequately address the
difficulties we will face, including those discussed in this "RISK FACTORS"
section and elsewhere in this prospectus.
Our current strategy focuses on the Linux market and is new in our
business operations. This focus creates uncertainties as to our future revenue
growth and profitability. Historically, our predecessor, Genras, was a reseller
of surplus computer hardware and software products through third-party Web
auction sites. In fiscal 1999 we shifted our focus away from the Web auction
distribution channel, which comprised over 90% of fiscal 1998 revenues, to our
current business format of direct marketing and utilizing our Vertical Service
Portal ("VSP") Web sites. We have 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) and PIA(TM) brand PCs, each utilizing the Linux operating systems,
and are devoting considerable resources to the development of these lines and to
TheLinuxStore.com, our primary
5
<PAGE> 8
VSP. We are also incorporating the Linux operating system into our M(2)
Systems(TM) line which has historically only utilized the Windows operating
system. See "OUR BUSINESS - Our Vertical Service Portals (VSPs)" and "Our Value
Priced PC Brands" for more information about our VSPs and branded computer
system. Also see "OUR BUSINESS - The Market and Industry - The Linux Market" for
a discussion of the Linux operating system.
WE HAVE A HISTORY OF LOSSES AND ANTICIPATE FUTURE LOSSES.
We may not be successful in continuing to grow our revenues or reaching or
maintaining profitable operations. 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 expected
to occur and we do not anticipate profitable operations to be achieved within at
least the next 12 months. We may never achieve profitability. 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. If we do not obtain sufficient funding or if we do not achieve
profitable operations as projected, our business may not survive.
OUR ABILITY TO CONTINUE AS A GOING CONCERN IS DEPENDENT UPON OUR ABILITY TO
RAISE ADDITIONAL CAPITAL AND WE MAY NOT FIND SUITABLE CAPITAL SOURCES.
Our ability to operate profitably under our current business plan is
largely contingent upon success in obtaining additional sources of debt and
equity capital. Our independent auditors have noted that our success in
obtaining additional capital funding will determine our ability to continue as a
going concern. 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 its holder. Without additional capital we may not be able to
fully implement our business or operating and development plans. We may not
obtain financing adequate to meet our ultimate capital needs. If adequate
capital can not be obtained or obtained on satisfactory terms, our operations
could be negatively impacted.
OUR REVENUE GROWTH WILL BE AFFECTED BY OUR SHIFT IN BUSINESS STRATEGY.
Our revenues in the short term are not likely to increase as in prior
periods, or may decrease as a result of our strategies. 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
strategies will be successful. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and Capital Resources
- - Fiscal 2000 Liquidity" for additional discussion of the possible effect of our
strategies on future operations. If our strategies are unsuccessful, we may
never attain profitable operations.
WE ARE DEPENDENT UPON THE EVOLUTION OF E-COMMERCE AND THE GROWTH OF WEB USAGE.
We expect to derive significant revenues from sales of our computer
systems and other products through our VSP Web sites. If the e-commerce market
fails to develop, develops more slowly than we anticipate or if we are
unsuccessful in penetrating this market, our anticipated revenues may not
materialize. This strategy anticipates continued growth in consumer acceptance
of on-line shopping. While the trend
6
<PAGE> 9
appears to be toward rapid expansion of e-commerce, this market has not existed
long enough to establish broad acceptance or generate significant revenue.
WE ARE DEPENDENT UPON CORPORATE AND CONSUMER ACCEPTANCE OF THE LINUX OPERATING
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. None of our manufactured computer
systems have brand name recognition to the same extent of most of our
competitors. Our relatively new Element-L(TM) product line and our very newly
developed PIA(TM) line both utilize the Linux operating system. Acceptance of
the Linux operating system will be critical to the success of these product
lines. Our M(2) Systems (TM) line is also relatively new. Our computer systems
may not meet with consumer acceptance. If our systems are not met with consumer
acceptance as we anticipate, our revenues and operating results will likewise
not reach the levels we anticipate. While we believe the prior experience of our
management team will enable us to operate our business successfully, we may not
ultimately succeed in implementing our business plan.
WE FACE INTENSE COMPETITION IN THE E-COMMERCE MARKETS AND WE MAY NOT BE ABLE TO
COMPETE SUCCESSFULLY.
E-commerce distribution is a relatively new industry and is anticipated to
attract significant competition. The computer hardware and software distribution
business is an intensely competitive industry, and we face increasing
competition in every aspect of this business. We may not be able to compete
effectively in these marketplaces.
We plan to create a growing presence in e-commerce distribution of
Linux-based products and will face intense barriers to entry as the business of
selling products via the Internet experiences growth. The e-commerce
distribution 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
with which we will also compete, 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. See "OUR BUSINESS - Competition" for
more discussion of our competition.
WE ALSO FACE INTENSE COMPETITION IN THE COMPUTER MANUFACTURING AND LINUX
MARKETS.
We recently entered the PC manufacturing market, which is highly
competitive. The market for Linux-based solutions is new, fragmented, rapidly
changing and also highly competitive. In the computer systems manufacturing and
distribution market, we face significant competition from several large
companies that have more establish distribution channels as well as better name
recognition and much greater financial resources than we do. Some of these
companies include Compaq Computer Corporation, Dell Computer Corporation,
Gateway, Inc., Hewlett-Packard Company and International Business Machines
Corporation. These companies have systems that are qualified for utilizing the
Linux operating system. We also face competition in the Linux market from other
companies that are directly focusing on this market, such as Red Hat, Inc. and
VA Linux Systems, Inc. All of these companies have resources substantially
greater than ours which may provide them with a competitive advantage.
7
<PAGE> 10
WE HAVE EXPERIENCED RAPID GROWTH AND MAY NOT 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. We may not be able
to effectively manage this or future growth. Our inability to manage internal or
acquisition-based growth effectively would cause a significant strain on our
resources and our financial performance would be negatively impacted. 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, 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 successfully penetrate the Linux
market.
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 COULD
NEGATIVELY IMPACT OUR QUARTERLY AND ANNUAL OPERATING RESULTS.
As a result of our limited operating history, rapid growth and change in
business focus, and because of the emerging nature of the Linux market 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. Our business development and
marketing expenses will increase significantly as we expand our operations. To
the extent that such expenses precede and are not rapidly followed by increased
revenue, losses would likely occur. 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 in any quarterly or annual period.
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 or annual operating 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.
8
<PAGE> 11
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 may not be able to prevent all security
breaches or may not have adequate capital and other resources to devote to
security measures.
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 significantly reduced this line of
distribution, gained significant expertise in dealing with Internet distribution
and collection issues and instituted new credit review and approval procedures,
future unexpected problems and collection risks may develop 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.
We are increasingly generating revenues from manufacturing our own brand
of computers. This activity creates a wide variety of risks associated with
manufacturing, including but not limited to defects and warranty costs exceeding
expectations. Also, customer service and technical support requirements could
exceed expectations and have severe adverse effects on operations. We may not be
able to handle production and quality control issues as we increase
manufacturing activity. While we perform a substantial amount of pre-delivery
testing of our systems and believe we have a lower than industry average return
of our manufactured products, we may experience significant returns in the
future that could 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 would increase and our net income could
decrease as a result.
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
d0istribution sources. We have limited proprietary property, and are relying
heavily on copyright, trademark, trade secret, nondisclosure and
9
<PAGE> 12
confidentiality measures to protect these limited rights. See "OUR BUSINESS -
Intellectual Property" for a discussion of our intellectual property 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,
infringement claims may be asserted against us. 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. We may not 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. We may not be able to effectively deal with these changes
which could result in our operations being unprofitable.
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 year 1998 two customers represented over 71% of our total sales and in
fiscal 1999 three customers represented 60% of our total 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
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 may not 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 our current management resources may not be sufficient to 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
10
<PAGE> 13
given that we will not suffer the loss of key human resources for one reason or
another. Our future success also depends on our continuing ability to attract,
retain and motivate highly skilled employees. Competition for employees in the
industry is intense. We may be unable to retain our key employees or to attract,
assimilate or retain other highly qualified employees in the future. We have
experienced difficulty from time to time in attracting the personnel necessary
to support the growth of our business and we may experience similar difficulties
in the future.
WE MAY 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 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
"DESCRIPTION OF EBIZ'S SECURITIES - Debenture and Warrant" for a more detailed
description of the rights of the Debenture holder. 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, Ebiz may not
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 our 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 our stock to fluctuate greatly, with large
percentage changes in price occurring in any trading day session. Holders of our
common stock may also not be able to readily liquidate their investment or may
be forced to sell at depressed prices due to low volume trading. If high spreads
between the bid and ask prices of our 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 relisted on the OTC Bulletin Board.
Management has indicated its willingness to cause the common stock to be listed
on the NASDAQ SmallCap Market and National Market when qualified. However, any
such listing may not occur and an active market in our common stock may
11
<PAGE> 14
never develop or be sustained. If an active market does not develop, holders of
our common stock may be unable to readily sell the shares they hold or may not
be able to sell their shares at all.
FUTURE SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK TO DECLINE IN PRICE.
The sale of a substantial number of shares of our common stock under this
offering, or the perception of such sales could make it more difficult for Ebiz
to sell equity or equity related securities in the future at a time and price we
deem appropriate. After this offering is completed, 11,006,612 shares of our
common stock will be outstanding, assuming the Debenture is converted into a
total of 3,076,917 shares and a total of 3,513,500 newly issued shares are sold
in this offering. If our stock price decreases, more shares may be issuable
resulting in more shares being outstanding. All shares registered in this
offering will be freely tradable. It is anticipated that shares registered under
this offering will be sold over a period of up to two years. In addition to the
shares to be sold under this offering, as of December 31, 1999, Ebiz has
outstanding 3,622,424 shares of "restricted securities" held by the officers and
directors of Ebiz and 1,754,762 held by others. A significant portion of the
shares held by persons other than the officers and directors are currently, or
relatively soon, will be available for sale under Rule 144(k). Under Rule
144(k), restricted securities may be sold by non-affiliates of Ebiz without
restrictions on volume limits. It is also anticipated that we will issue
additional shares of our common stock in the near term in exchange for equity
investments and services and that we will agree to register such shares. The
number of newly - issued shares with registration rights could be substantial. A
significant amount of common stock coming on the market at any given time could
result in the price of such stock to decline and to be highly volatile. See
"SHARES ELIGIBLE FOR FUTURE SALE."
DIVIDEND POLICY
Holders of our common stock are entitled to receive ratably dividends, if
any, as declared by our Board of Directors. We have never declared or paid a
dividend on our common stock and we do not intend to pay dividends in the
foreseeable future. We are required to accrue a 10% ($10 per share) cumulative
annual dividend for each share of Series A Preferred outstanding. This dividend
is payable as and when declared by our Board of Directors before payment of any
dividends on common stock may be made. Dividends on the shares of Series A
Preferred may be payable in whole or in part, at our discretion, in cash or in
kind with our common stock.
MARKET FOR COMMON STOCK
Our stock is currently traded on the OTC Bulletin Board. Our stock was
temporarily delisted from the OTC Bulletin Board on November 4, 1999 through
December 23, 1999 for failure to meet the deadline for being subject to the
Exchange Act reporting requirements. During this period, our common stock was
traded through the National Quotation Bureau.
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.
12
<PAGE> 15
<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
<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
<CAPTION>
Fiscal 2000 High Low
<S> <C> <C>
First Quarter ended September 30, 1999 $ 6.8750 $ 2.1250
</TABLE>
As of December 31, 1999, there were approximately 475 owners of record of
Ebiz's common stock.
USE OF PROCEEDS
Ebiz will not receive any proceeds from the sale of the common stock in
this offering but may receive up to $1,785,990 upon the exercise of warrants if
all warrants are exercised. There can be no assurance that any warrants will be
exercised. Ebiz utilized the proceeds from the sale of the Debenture and the
Series A Preferred for debt repayment and general corporate and working capital
purposes and expects to utilize the proceeds, if any, from exercise of the
warrants for general corporate and working capital purposes.
SELLING SECURITYHOLDERS
This prospectus relates to the proposed resale by the selling
securityholders of a total of 3,900,000 shares of our common stock which
includes 181,583 shares to be issued upon conversion of our outstanding Series A
Preferred, up to 3,076,917 shares to be issued upon conversion of the Debenture,
up to 245,000 shares to be issued upon exercise of the Warrant, 386,500 shares
of outstanding common stock, and 10,000 shares to be issued upon exercise of
another outstanding warrant. Except for the 386,600 shares outstanding, the
shares subject to this prospectus will be newly issued.
We are registering these shares in order to permit the selling
securityholders to offer these shares for resale from time to time. See "PLAN OF
DISTRIBUTION" below for information regarding the resales of the common stock
subject to this prospectus. The following sets forth, as of the date of this
prospectus, certain information concerning the selling securityholders and the
shares being registered for resale to the public. Except for Aztore Holdings,
Inc. as noted below, the selling securityholders have not had any material
relationship with the Ebiz within the past three years.
13
<PAGE> 16
SERIES A PREFERRED
The outstanding shares of Series A Preferred were issued in a private
placement occurring in March and April, 1999. Each share of Series A Preferred
is convertible into 16 2/3 shares of common stock. The shares of Series A
Preferred may be converted at anytime at the option of the holder and will
automatically convert in the event the closing bid price of Ebiz's common stock
equals or exceeds $13.50 (adjusted for capital structure changes) for 20 out of
30 consecutive trading days. We are unaware of any of the Series A Preferred
selling securityholders holding our stock prior to acquiring the Series A
Preferred or currently holding any shares of our common stock.
The holders of the Series A Preferred, the number of shares of Series A
Preferred held, the number of shares of common stock registered on behalf of
these securityholders upon conversion and the number of shares to be held after
completion of this offering are as follows:
<TABLE>
<CAPTION>
Shares Issuable Upon
Series A Preferred Conversion of Series
Held Prior to A Preferred(1) and Shares Held
Securityholder Offering Shares Offered After Offering (2)
-------------- -------- -------------- ------------------
<S> <C> <C> <C>
Outback Investments Ltd. 300 5,000 0
Steve and Celina Calderon,
JTWROS 60 1,000 0
Joseph A. Rodriguez 100 1,667 0
Ann E. Randt 100 1,667 0
Vladimir A. Gasic 100 1,667 0
Douglas and Pauline Hecker,
JTWROS 60 1,000 0
Douglas and Patricia Bruhn,
JTWROS 500 8,333 0
Rodgers Charitable
Remainder Trust 1,000 16,667 0
Meyer Charitable
Remainder Trust 1,000 16,667 0
James Minder and Susan
Davis Family Trust 100 1,667 0
Kochert-Okun Dentistry
PC EPP 500 8,333 0
Sawyer Family Trust 250 4,167 0
Magary Family Trust 180 3,000 0
Leonard Small 100 1,667 0
Paul Winer 750 12,500 0
James A. Turner 50 833 0
Grant Family Trust 200 3,333 0
LVAH, Inc. SRPSP 250 4,167 0
Okun Family Trust 60 1,000 0
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
Shares Issuable Upon
Series A Preferred Conversion of Series
Held Prior to A Preferred(1) and Shares Held
Securityholder Offering Shares Offered After Offering (2)
-------------- -------- -------------- ------------------
<S> <C> <C> <C>
M. Susan Olson
Revocable Trust 120 2,000 0
J.A. and Beverly Schweikert
JTWROS 250 4,167 0
Woodstock Trust 150 2,500 0
Michael Buekers 300 5,000 0
Pathology Associates MPPP
fbo Charles Evans, M.D. 250 4,167 0
Ronald and Gladene Clarke
JTWROS 25 417 0
Stephen McBride 50 833 0
Dean Purdy 100 1,667 0
Andrie Gasic 60 1,000 0
Lana Dee Master
Revocable Trust 200 3,333 0
John Sterzinar 100 1,667 0
Tempe Family Practice 250 4,167 0
Dennis and Gay Kilpatrick 200 3,333 0
Susan McNamara 60 1,000 0
Richard Barrett 60 1,000 0
Luca and Rose Aprea,
JTWROS 100 1,667 0
Alan Hoffman and
Barbara Wiggin, CP 60 1,000 0
Alston Revocable
Family Trust 250 4,167 0
Dar-C RPSP 200 3,333 0
Robert and Veronica
Ciancola 100 1,667 0
Thomas Klein 100 1,667 0
Kochert Family Trust 500 8,333 0
Leslie Fish and Maria Fish
JTWROS 250 4,167 0
Neal Gimbel, M.D.,
P.C. MPPP 300 5,000 0
Dwayne and Betty Steinle,
JTWROS 200 3,333 0
R&M Enterprises LP 250 4,167 0
First Trust Custodian
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
Shares Issuable Upon
Series A Preferred Conversion of Series
Held Prior to A Preferred(1) and Shares Held
Securityholder Offering Shares Offered After Offering (2)
-------------- -------- -------------- ------------------
<S> <C> <C> <C>
Louis Cowart IRA 500 8,333 0
Tony Palumbo, Ltd. DBPP 250 4,167 0
</TABLE>
(1) Calculated based on a conversion ratio of one share of Series A
Preferred to 16 2/3 shares of common stock.
(2) Assuming all shares registered are sold by the respective
securityholders.
The securityholders are under no obligation to offer for sale or sell the
shares issued upon conversion of the Series A Preferred. See "DESCRIPTION OF
EBIZ'S SECURITIES Series A 10% Convertible Preferred Stock" below for a more
complete discussion of the rights and preferences of the Series A Preferred.
DEBENTURE AND WARRANT
The Debenture is convertible from time-to-time into shares of common
stock at a per share conversion price based on a formula. 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 common stock for the 15 consecutive
trading days ending on the trading day immediately preceding submission of a
conversion notice by the holder. The principal portion of the Debenture is
convertible into a minimum of 947,260 shares of Ebiz's common stock and, based
on the formula, the principal portion of the Debenture would have been
convertible into 1,793,700 shares if converted in full on December 31, 1999.
Accrued interest is also convertible under the same formula. This prospectus
covers a total of 3,076,917 shares related to the Debenture or 2,129,657 shares
in addition to the minimum number of shares the principal of the Debenture may
be converted. Because the conversion of the Debenture is based on the market
price of our common stock, and because we do not know how much interest may
ultimately accrue on the Debenture which is also convertible, we cannot predict
exactly how many shares will be issued upon conversion of the Debenture. In
order to adequately cover a reasonable increase in the number of shares that may
ultimately be issued, we have registered the additional 2,129,657 shares that
could be issued upon conversion of the Debenture. The actual number of shares
issued upon conversion of the Debenture may be more or less than the number of
shares covered by this prospectus.
The Warrant is exercisable for the purchase of 245,000 shares of our
common stock before August 22, 2004 and this prospectus covers all 245,000 of
those shares. Of the 245,000 shares subject to the Warrant, 60,000 may be
purchased at $7.4723 per share, 60,000 at $8.6212 per share and 125,000 at
$6.3277 per share upon exercise. The Warrant may be exercised in whole or in
part from time to time.
The Debenture and Warrant were issued in a private placement of these
securities which occurred in August, 1999 and are held by JEM Ventures EBIZ,
LLC, a Delaware limited liability company. JEM Ventures EBIZ is an affiliate of
J.E. Matthew, LLC, an Illinois limited liability company. J.E. Matthew may be
deemed to share beneficial ownership of the shares underlying the Debenture and
Warrant due to its shared power to vote and dispose of such shares. J.E. Matthew
disclaims beneficial ownership of the shares beneficially held by JEM Ventures
EBIZ.
Under the terms of the Debenture and Warrant, the holder may not convert
or exercise these instruments to the extent such conversion or exercise would
result in such holder's beneficial ownership of
16
<PAGE> 19
Ebiz's common stock, disregarding shares beneficially owned through the
unconverted or unexercised portions of those instruments, to exceed 4.99% of the
outstanding common stock of Ebiz.
The table below lists the selling securityholder and other information
regarding the beneficial ownership of the common stock, issuable upon conversion
of the Debenture and upon exercise of the Warrant, offered by such selling
securityholder. The second column lists the number of shares of common stock
which would have been issuable to such selling securityholder on December 31,
1999 upon conversion of the Debenture and exercise of the Warrants held by such
selling securityholder on such date (without regard to any limitation on
conversions or exercise). The third column assumes the sale of all of the shares
being offered by such selling securityholders.
<TABLE>
<CAPTION>
Shares of Common Stock
Beneficially Owned on Shares of Common Shares of Common Stock
Securityholder December 31, 1999 Stock Offered Hereby Owned After Offering
-------------- ----------------- -------------------- --------------------
<S> <C> <C> <C>
JEM Ventures EBIZ, LLC 1,793,700 3,312,917 0
</TABLE>
We are unaware of any other shares held by JEM Ventures EBIZ or J.E.
Matthew. Assuming all of the shares issued upon conversion of the Debenture and
exercise of the Warrant are sold, JEM Ventures EBIZ would not hold any shares
after completion of the offering. JEM Ventures EBIZ is not obligated to convert
the Debenture, to exercise the Warrant or to sell any of the shares of common
stock issuable upon such conversion or exercise. See "DESCRIPTION OF EBIZ'S
SECURITIES - Debenture and Warrant" below for a more complete description of the
Debenture and Warrant.
COMMON STOCK AND OTHER WARRANT
The holders of the common stock and warrant covered by this prospectus,
the number of shares held prior to this offering, the shares registered and the
shares held after completion of this offering are as follows:
<TABLE>
<CAPTION>
Securityholder Shares Held Prior Shares Shares Held
-------------- ----------------- ------ -----------
to Offering Registered After Offering(1)
----------- ---------- -----------------
<S> <C> <C> <C>
Aztore Holdings, Inc.(2) 201,610 50,000 151,610
Houlihan Smith & Company, Inc. 44,000 54,000 0
Jamie E. Georgeson 1,500 1,500 0
Rennie Tejoda 1,000 1,000 0
Kensington International, Inc. 1,000 1,000 0
Parcel 14, LLC 0 129,000 0
Scott Bishins 229,400 120,000 109,400
Lawrence A. Underwood 76,499 30,000 46,499
</TABLE>
(1) Assuming all shares registered are sold by the respective
securityholders.
(2) Assuming all shares registered are sold by Aztore , it would hold
151,610 shares or 1.38% of the outstanding shares after the
offering, assuming a total of 11,006,612 shares are then
outstanding.
(3) Includes 47,500 issued shares and 10,000 shares to be issued upon
exercise of a warrant to purchase such shares at $3.00 per share.
17
<PAGE> 20
Aztore Holdings, Inc. was an affiliate and substantial shareholder of the
Company's predecessor, Vinculum, prior to the Company's acquisition of the
assets of Genras. Michael S. Williams, the president of Aztore Holdings, was a
director of Ebiz until July, 1999.
Houlihan Smith & Company is under no obligation to exercise its warrant.
None of the above securityholders are obligated to offer for sale or to sell the
shares being registered. Except for Aztore Holdings, we are unaware of any of
the above securityholders holding more than 1% of the outstanding Ebiz shares.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information that we believe is relevant
to an assessment and understanding of Ebiz's results of operations and financial
condition for the fiscal years ended June 30, 1999 and 1998 and the three months
ended September 30, 1999. 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. The following
discussion, as well as sections of the discussions elsewhere in this prospectus,
including the "RISK FACTORS" and "OUR BUSINESS" sections, contain
forward-looking statements. See "SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS"
above.
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 M(2) Systems(TM). In April 1999, we began manufacturing a second
brand of PCs, Element-L(TM), and in December, 1999, we launched our newest
branded PC line, the PIA(TM). The Element-L(TM) and PIA(TM) lines feature the
Linux operating system. The M(2)Systems(TM) line utilized a Windows based
operating system. Current M(2) Systems(TM) are dual-boot systems, utilizing both
the Linux and Windows operating systems. The PIA(TM) can also be configured to
dual-boot and utilize the Windows as well as the Linux operating system. Also in
April, 1999, we launched TheLinuxStore.com, our VSP dedicated to Linux products.
TheLinuxStore.com has become our primary focus as the Linux operating
system has emerged as the low-cost, high-performance alternative to conventional
computing systems. TheLinuxStore.com is intended to be a full-service specialty
distributor offering "Everything Linux." Through it, we provide a full range of
Linux solutions including desktop PCs, workstations, notebooks, Alpha systems,
servers, hardware components, peripherals, software and apparel. In addition,
TheLinuxStore.com features community resources, a free Linux directory and links
to numerous Linux-based sites.
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
18
<PAGE> 21
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 major competitive advantages include our
proven customer databases, the depth, vision and expertise of our management
team and our internal programming and Web development staff. We expect to
utilize these strengths with our extensive contacts and expertise in computer
component and surplus merchandise procurement and in e-commerce development,
distribution and marketing.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998. Sales were $5,638,628 for the quarter ended September 30,
1999 compared to $4,586,753 for the quarter ended September 30, 1998. The
$1,051,875 increase, approximately 23% over the prior period, was due to the
sales of our Element-L(TM) and M2 Systems(TM), the improved productivity of our
sales force and increased promotion of our principal Web site,
TheLinuxStore.com. During the three months ended September 30, 1999, we
concentrated our focus on the rapidly growing market for Linux based systems and
related products and services by enhancing TheLinuxStore.com to become a VSP
that is intended to serve the Linux community and provide a knowledge base for
new and aspiring Linux users. Concurrently, we have utilized our own sales
capabilities to generate substantial sales volume for systems, components and
peripherals directly to corporate customers and through selected value added
resellers, retailers and major e-commerce Web sites, such as egghead.com.
Cost of sales for the three months ended September 30, 1999 decreased to
94.8% of sales from 99.8% of sales from the same period in 1998. The decrease
was due to the change in sales mix away from the auction business and towards
the Linux market and the production of our sales force. The gross profit margin
increased to 5.2% of sales for the quarter ended September 30, 1999 from 0.2% of
sales for the same period in 1998.
Selling, general and administrative expense was $1,268,908 or 22.5% of
sales, for the quarter ended September 30, 1999 as compared to $410,118, 8.9% of
sales, for the same period in 1998. This was due to higher expenditures for
advertising and marketing and the building of the information technology, sales,
marketing and administrative infrastructure, and the related expenses, required
to implement our strategies.
Interest expense increased to $216,794 in the quarter ended September 30,
1999 from $52,919 in the same period in 1998. The increase was due to the higher
level of debt during the first quarter of fiscal 2000 and to costs incurred to
retire debt, and related warrants, in August, 1999.
The preceding operational factors resulted in a net loss attributable to
common stockholders of $1,240,289, or $0.17 per diluted share, for the three
months ending September 30, 1999 as compared to a net loss of $463,371, or $0.07
per diluted share, for the three months ended September 30, 1998.
Year Ended June 30, 1999 Compared to Year Ended June 30, 1998. Net revenue
of $15,290,202 for the year ended June 30, 1999 compared to $6,824,967 for the
year ended June 30, 1998. The $8,465,235 increase, approximately 124% over the
prior year, was due to the introduction of our Element-L(TM) and the growth in
sales of our M2Systems(TM) brands, the opening of our VSPs and the development
of our own sales force.
19
<PAGE> 22
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 de-emphasized
sales through third party auction Web sites, and increased our sales directly to
consumers, businesses and institutions through our own sites. In addition, we
developed our own sales capabilities to generate substantial sales volume for 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 was $14,358,772 in 1999 compared to $6,157,794 in
1998. The increased sales volume was the primary reason for the increase. Gross
profit margins decreased from 9.8% to 6.1% due to the wind down of the auction
business during the first quarter of 1999 and the ramp-up costs associated with
the tripling of system manufacturing during the second half of 1999.
Selling, General and Administrative expense was $2,512,415 for fiscal
1999, an increase of $1,830,845 from 1998. This increase was due to the building
of our information technology, sales, marketing and administrative
infrastructure and the related expenses required to begin implementing the
Company's strategies.
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.
Our prior results of operations are not indicative of future results. See
"RISK FACTORS" above and "Liquidity and Resources" below for a discussion of
factors that may affect future revenues and liquidity.
LIQUIDITY AND CAPITAL RESOURCES
Three Months Ended September 30, 1999 compared to Three Months Ended
September 30, 1998. At September 30, 1999, we had cash and cash equivalents of
approximately $484,000, representing an increase of approximately $408,000 from
the total of approximately $76,000 at June 30, 1999. The increase is primarily
the result of the convertible Debenture placed in August, 1999.
Operating Activities. Our net cash used in operating activities was
approximately $713,000 for the three months ended September 30, 1999 as compared
to approximately $534,000 used in the three months ended September 30, 1998. In
first quarter of fiscal 2000, the cash was used for the selling, general and
administrative expenses from the implementation of our strategic programs. In
the quarter ended September 30, 1998, the net cash used in operating activities
was primarily for increased inventory and the reduction of accounts payable.
Investing Activities. The net cash used in investing activities was
approximately $80,000 and $102,000 for the quarters ended September 30, 1999 and
September 30, 1998, respectively. In the three months ended September 30, 1999,
these activities included the acquisition and development of software and
equipment for our Web sites and administrative activities. For the same period
in 1998, investing activities included the acquisition of software and equipment
for administrative and operations functions.
Financing Activities. During the three months ended September 30, 1999,
the net cash provided by financing activities was approximately $1,201,000. The
Debenture provided approximately $6,903,000, of which $5,000,000 was placed in a
bank as collateral for the Debenture, which is to be accessed through the
conversion of the Debenture into shares of Ebiz's common stock. We repaid
$350,000 of our line of credit and
20
<PAGE> 23
$887,900 of the principal of notes payable. Additional notes payable of $488,000
were initiated during the quarter and $210,100 were outstanding on September 30,
1999.
Year Ended June 30, 1999 compared to Year Ended June 30, 1998. At June 30,
1999, we 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. Our 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 our
strategic programs. In fiscal 1998, the net cash used in operating activities
was primarily for increased inventory.
Investing Activities. The net cash used in 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 our Web sites for which approximately $190,000 was expended
and administrative activities for which approximately $283,000 was expended. 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. 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 borrowing, 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 a rate of 8.75%, which was 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
$1,194,000 after financing expenses, as a result of additional shareholder
warrant exercises that generated approximately $293,000 at $0.75 per share and
the sale of additional common stock that generated approximately $901,000 at
$2.10 to $3.00 per share ($2.31 per share average). 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
21
<PAGE> 24
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.
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 the
period.
On August 25, 1999, we issued a $7,100,000 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)
$7.4933 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 purchase 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 Debenture, 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 solely to
prior operations of Vinculum occurring prior to its acquisition of our
predecessor, Genras. The utilization of the net operating loss incurred prior to
June 1998 is subject to limitations, however, and 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.
22
<PAGE> 25
YEAR 2000 "Y2K" CONSIDERATIONS
Prior to January 1, 2000, we 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 cost of bringing our systems into Y2K compliance was less
than $50,000.
Since January 1, 2000, all of our operating systems, including
invoicing and receiving, have been tested and are functioning normally. We have
not experienced any impact on our day-to-day operations as a result of Y2K. We
are unaware of any significant Y2K problems being experienced by the companies
with which we do business. We are continuing to monitor our systems for any
potential Y2K problem which may yet occur, but do not anticipate any such
occurrence.
OUR BUSINESS
OVERVIEW
We develop and operate Internet e-commerce Web sites, and design,
manufacture and distribute high-value, low-cost branded computer systems. See
"Our Value Priced PC Brands" below for more information regarding our branded
computer systems. Our computer systems are intended to appeal to 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 the high-growth markets we target 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" below
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 more discussion of our VSPs. Our primary VSP, TheLinuxStore.com, offers our
branded computer 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. Our auditors have
qualified their opinion to our financial statements to assume we will continue
as a going concern. As a growing, early stage company, our ability to raise
capital as well as increase our sales revenue will be critical to our ability to
continue as a going concern. We are also concentrating the focus of our business
on utilization of the Linux operating system and away from some of our past
e-commerce strategies. We are limiting our operations with respect to systems
not utilizing the Linux operating system to legacy customers. As a result, our
gross revenues, as well as our operating expenses, have decreased. We anticipate
our revenue reduction to be short-term and, due to focusing on Linux based
products, that our gross margins will increase and our operating expenses
stabilize. See the sections captioned "RISK FACTORS" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" above
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
23
<PAGE> 26
with an estimated 700 shareholders, acquired all the operating assets and
liabilities of Genras for 5,000,000 shares of Vinculum common stock. Prior to
the acquisition, Genras had no relationship with Vinculum. 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 originally 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 it name to Ebiz Enterprises, Inc. in May 1999. In August
1998 Vinculum merged into Ebiz solely to change its domicile to Nevada. All
information in this prospectus prior to June, 1998 reflects the operations of
Ebiz's predecessor, Genras.
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 Internet 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. 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.
We manufacture low priced computer systems for the business,
small-office/home-office and consumer markets. We distribute these systems and
related products through the Internet as well as other distribution channels.
Because the products we market are targeted to these fast growing markets and
because our methods of distribution are oriented to sales through e-commerce
channels, we believe our operations will benefit from the trends discussed
above.
The Linux Market
Overview. Linux is a free Unix-type-computer 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
24
<PAGE> 27
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. However, 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 of the Linux
system 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.
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.
Our primary VSP, TheLinuxStore.com, is focused exclusively on providing
Linux-based solutions, including computer systems, servers and products. We
utilize the Linux operating system in our branded computer systems that we
manufacture. We believe that our operations will benefit from the trend towards
use of Linux-based solutions as discussed above due to our focus on the Linux
market.
25
<PAGE> 28
BUSINESS OBJECTIVES AND STRATEGIES
We currently distribute three branded computer system lines:
Element-L(TM), M2 Systems(TM), and our newest line, PIA(TM). We market our
systems through our VSPs and other distribution channels.
Our strategic business objectives are to:
- - Maintain our comprehensive VSPs that combine product marketing
with community interests such as news, resources, links pre- and
post-sales technical support, hardware service and customer
service;
- - Utilize our Linux product development expertise to continue
product extensions within the Element-L(TM) and PIA(TM) product
lines;
- - Generate significant revenue to achieve financial targets through
product sales as well as through technical support, service and
training opportunities, customer services, Internet advertising,
marketing and Web links;
- - Expand sales, marketing, production and distribution of our
branded product lines until they are 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 through our VSPs.
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.
We expect to add to our sales, engineering, Linux consulting and service staff
with the intent of increasing customer satisfaction. We also intend to enhance
the performance capabilities of our products to produce 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 fulillment, 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 a 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 common interest
Internet destination points which will be a source for news and
information as well as providing an opportunity for product
purchases.
- - Offering free value-added services. These services include e-mail
forwarding, message boards, job and resume postings, home age
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
26
<PAGE> 29
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 experience through our VSPs by
ensuring that they find the product of their choice, backed with
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 reduce the cost 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. We 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 to our VSPs by our
customers.
- 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 include
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 our ability to effectively
develop, market and manage our VSP Web sites and develop our e-commerce
initiatives is critical to our success. In fiscal 1999, we recorded
approximately $190,000 of research and development costs related primarily to
the development of our VSPs. 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 work stations, notebook and desktop
computer systems, servers, hardware components and peripherals, software, books,
resource material, apparel, training and support services. Through this VSP we
distribute third party products
27
<PAGE> 30
and our Element-L(TM) and PIA(TM) lines. 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.com 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 customer database for marketing purposes. We intend to implement customer
loyalty programs offering additional benefits and incentives to frequent
customers.
We 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. Launched in January, 1999, this Web site 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,
28
<PAGE> 31
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 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.
Revenue is generated from the sale of products that we purchase and
resell, as well as from sales of our M2 Systems(TM) product line. We generate
fees for product listings for Auction and Clearinghouse items, as well as
travel-related commissions from EBIZ Travel. We also generate advertising
revenue from banner ads and links.
This VSP is being marketed to both vendors to list products as well as
potential purchasers through an integrated sales and marketing program, heavily
dependent upon our sales department's interaction with our current customer
base. To generate customer traffic, we promote the site through public
relations, online advertising on business-to-business Web sites (some via
reciprocal advertising and affiliate agreements), professional purchasing
associations, industry-related sites and through direct e-mail marketing.
OUR VALUE PRICED PC BRANDS
We currently manufacture and distribute three lines, the Element-L(TM),
the M2 Systems(TM) and the PIA(TM) brands.
- 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 nine distinct Linux-based systems,
including 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.
29
<PAGE> 32
- 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 market these
systems through egghead.com, Computer Renaissance Stores, Onsale.com
and other resellers. Our sales to all resellers accounted for
approximately 59% of revenue in fiscal 1999. Our new production of M2
Systems(TM) will include the capability to "dual-boot" utilizing both
the Windows and Linux operating system.
- PIA(TM) In December, 1999, we launched our newest product line, the
PIA(TM) (Personal Internet Appliance), which targets consumers and
institutions such as schools and libraries seeking a full-service
Internet access device. The PIA(TM) is a highly-stylized
fully-configured desktop computer that utilizes the Linux operating
system. The PIA(TM) is designed to enable users to surf the Web
quickly, easily and affordably, exchange e-mail, play games, chat
online and perform 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 retail price
for the basic product is under $300, placing the device well within the
reach of most consumers and institutions. The PIA(TM) product line
extensions are anticipated to include additional configurations,
upgrades and peripherals and can be configured to dual-boot and also
utilize the Windows operating system.
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.
30
<PAGE> 33
- Establish a comprehensive database in excess of 1,000,000
customers, and build strong customer loyalty to maximize repeat
purchases.
- Establish evaluation and accountability processes to manage our VSP
sites and measure the results of marketing programs and sales
support activities.
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.
31
<PAGE> 34
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.
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 over the past two years 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 suppliers such as SuperMicro Computer,
Inc., Intelligent Computer Periphexalo, Cobalt Networks, Inc. and Corel
Corporation will become significant suppliers to Ebiz.
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(TM) and PIA(TM) systems. This
agreement is for a twelve-month period, which commenced in September, 1999. The
agreement may be extended for an additional twelve-month term or sooner canceled
under certain conditions.
We have historically had a concentration of customers. In fiscal 1999,
sales to egghead.com accounted for 26% of total revenues and to Fred Meyer Food
Stores accounted for 15% of the total revenue. See "NOTES TO FINANCIAL
STATEMENTS - NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONCENTRATION
OF CREDIT RISKS." We believe that in the future our customers will become more
diverse and that the level of concentration will diminish.
32
<PAGE> 35
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. 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, FirstLinux.com, LinuxToday.com, Slashdot.org, Freshmeat.com and
linuxbandwagon.com. Sites that directly compete with TheLinuxStore.com in
content, services and products included RedHat.com, valinux.com and penguin.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. These include Red Hat, Inc.
and VA Linux Systems, Inc. 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.
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 and Free iMac. 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
33
<PAGE> 36
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," "M(2) 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.
FACILITIES
We currently lease 30,000 square feet of office and warehouse
facilities located in Scottsdale, Arizona. Approximately 10,000 square feet of
the facility are utilized for administrative and sales offices and the remaining
20,000 square feet are utilized for warehouse and manufacturing. The lease on
the facility is for a term through July 2001, with a current annual rental
payment of approximately $175,000.
EMPLOYEES
As of December 31, 1999, we had a total of 57 full-time employees,
including 27 administrative, 12 sales and 18 manufacturing employees. Our
employees are not covered by any collective bargaining agreements, and we
consider our relationship with our employees to be good.
LITIGATION
Ebiz is not involved in any current litigation. Miscellaneous claims,
including breach of a license agreement, a claim by a former employee and
certain trademark infringements are outstanding. Management believes that all
such matters are within ordinary levels for an organization of our size and
nature. Management believes that these disputes will be resolved without a
materially adverse consequence to Ebiz.
MANAGEMENT
The directors and executive officers of Ebiz are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jeffrey I. Rassas 37 Director and Chief Executive Officer
Stephen C. Herman 45 Director and President
Donald B. Altvater 54 Vice President and Controller
Larry Phillips 33 Vice President, Sales
</TABLE>
34
<PAGE> 37
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 electrical engineering degree.
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 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 in1989, where
he was responsible for corporate pension plans and individual investor
portfolios. He holds a Bachelors of Science Degree in Finance and Economics from
St. Cloud State University in Minnesota.
EXECUTIVE COMPENSATION
The following table is based upon compensation for the calendar years
ended December 31, 1998, 1997 and 1996.
35
<PAGE> 38
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1)
NAME SALARY BONUS
- ---- ------ -----
<S> <C> <C>
Jeffrey Rassas 1999 $96,000 $ 9,000
Chief Executive 1998 $72,000 $10,000
Officer 1997 $72,000 $60,000
Stephen Herman 1999 $96,000 $ 9,000
President 1998 $72,000 $10,000
1997 $12,000(2) --
</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) Based on employment from September through December 1997.
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 December 31, 1999, a total of 477,000 stock options were
outstanding of which 195,500 were vested under the Plan. A total of 150,000
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.
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of September 30, 1999, the ownership of
each person known by Ebiz to be the beneficial owner of five percent or more of
Ebiz's Common Stock, each officer and director individually, and all officers
and directors as a group. Ebiz has been advised that each person has sole voting
and investment power over the shares listed below unless otherwise indicated.
36
<PAGE> 39
<TABLE>
<CAPTION>
PERCENT OF
BENEFICIAL
NAME AND ADDRESS OF OWNER NUMBER OF SHARES OWNERSHIP(1)
------------------------- ---------------- ------------
<S> <C> <C>
Jeffrey I. Rassas(2) 1,808,212 24.13%
15695 North 83rd Way
Scottsdale, Arizona 85260
Stephen C. Herman(3) 1,814,212 24.21%
15695 North 83rd Way
Scottsdale, Arizona 85260
All Directors and
Officers as a Group 3,622,424(2) 48.34%
(2 persons)
</TABLE>
(1) Based upon 7,493,112 shares of common stock being issued and
outstanding or committed to be issued as of December 31, 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.
CERTAIN TRANSACTIONS
Effective as of June 1, 1998, Ebiz's predecessor, Vinculum, acquired
substantially all of the assets and assumed the liabilities of Genras in
exchange for 5,000,000 shares of its common stock. The 5,000,000 shares were
distributed by Genras to its shareholders as follows: Jeffrey I. Rassas -
2,250,000 shares, Stephen C. Herman - 2,250,000 shares and Thomas A. Cifelli -
500,000 shares. Ebiz also agreed to reimburse, on a net after-tax basis, any
income tax liability of the Genras shareholders related to the period of January
1, 1998 through the date of acquisition. After the acquisition, Mr. Cifelli was
an officer and shareholder of Ebiz. Mr. Cifelli's relationship as an officer of
Ebiz was terminated in January, 1999. 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 Mr. Williams and Mr. 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.
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.
37
<PAGE> 40
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 are payable on demand. At December 31, 1999, approximately
$72,000 had been borrowed from Mr. Rassas and approximately $52,716 from Mr.
Herman.
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.
DESCRIPTION OF EBIZ'S SECURITIES
Ebiz is a Nevada corporation and is authorized to issue 70,000,000
shares of common stock, $.001 par value, and 5,000,000 shares of preferred
stock, $.001 par value. As of December 31, 1999, 7,366,197 shares of common
stock were outstanding, 126,915 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 December 31, 1999, Ebiz had a
total of 477,000 options granted under the Plan outstanding, of which 195,500
were vested. Each option under the Plan is exercisable for one share of its
common stock. As of December 31, 1999, Ebiz had committed to issue additional
warrants for the purchase of 222,000 of its shares at prices ranging from
$4.5375 to $8.25. As of December 31, 1999, Ebiz had outstanding warrants to
purchase 350,730 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.
38
<PAGE> 41
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.
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, which was purchased at $100 per
share, 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. Upon
conversion, a Series A Preferred holder would exchange $6.00 of the amount paid
for the Series A Preferred for each share of common stock received. 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
39
<PAGE> 42
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.
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 and 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.
40
<PAGE> 43
OPTIONS AND OTHER WARRANTS
As of September 30, 1999, 105,730 warrants in addition to the Warrant
described above were outstanding, which consist of 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 December 31, 1999, Ebiz had outstanding 477,000 options granted to
employees and consultants with exercise prices ranging from $1.00 to $6.00 per
share, of which 195,500 had vested. Each outstanding warrant and option is
exercisable for one share of Ebiz's common stock. Also as of December 31, 1999,
Ebiz had committed to issue additional warrants to purchase 222,000 share of
its common stock, 55,000 at $4.5375, 55,000 at $4.15625, 55,000 at $6.1875 and
55,000 at $8.25, which expire October to December, 2003.
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.
SHARES ELIGIBLE FOR FUTURE SALE
Ebiz currently has 7,493,112 shares outstanding and will have a total
of 11,006,612 shares outstanding assuming (a) conversion of the Debenture into
3,076,917 shares, (b) exercise in full of the Warrants and other warrant
exercisable for shares registered in the offering, and (c) conversion of all
outstanding Series A Preferred. All the shares being registered under the
registration statement of which this prospectus is a part will be freely
transferable by persons except "affiliates" of Ebiz, as that term is defined
under the Securities Act, without restriction or further registration.
Ebiz has agreed to register 334,678 additional shares of its common
stock for resale by certain securityholders. Of these 334,678 shares, 18,948 are
outstanding and 315,730 are underlying outstanding warrants. Ebiz anticipates
that it will register its Stock Option Plan and the shares of its common stock
underlying the options granted under such plan in the near term. Ebiz also
anticipates that it will issue additional shares of its common stock in the near
term in exchange for equity investments and services and that it may agree to
register such shares. The number of newly issued shares could be substantial.
Ebiz currently has outstanding 5,377,186 shares of "restricted
securities" of which 1,754,762 are currently or relatively soon will be
eligible for resale under Rule 144(k). The remaining 3,622,424 shares of
restricted securities are held by Mr. Rassas, the Chief Executive Officer, and
Mr. Herman, the President of Ebiz. These shares are eligible for resale under
Rule 144, subject to applicable volume limitations.
Ebiz is unable to estimate the number of shares that may be sold in the
future by its existing securityholders or the effect, if any, that sales of
shares by such holders will have on the market price of the common stock
prevailing from time to time. Sales of substantial amounts of common stock by
existing shareholders could adversely affect prevailing market prices. See "RISK
FACTORS - Future sales of our common stock could cause our stock to decline in
price." for additional discussion concerning this risk.
PLAN OF DISTRIBUTION
Securityholders whose shares of common stock are being registered with
this prospectus may sell or distribute their common stock directly or indirectly
in transactions through underwriters, brokers, dealers or agents, as they
determine. The securityholders may also transfer, devise or gift their shares by
other means not described in this prospectus. In addition, if any shares covered
by this prospectus qualify for sale pursuant to Rule 144 under the Securities
Act, the securityholders may sell such shares pursuant to Rule 144 rather than
pursuant to this prospectus. They may sell their shares through privately
negotiated transactions, including distributions to shareholders or partners or
other persons affiliated with the shareholders. These securityholders are not
restricted as to the prices at which they may sell their shares, and sales at
less than market price may depress the market price of Ebiz's common stock.
These securityholders are also not
41
<PAGE> 44
restricted as to the number of shares they may sell at any one time. It is
possible that a significant number of shares being sold at the same time may
also depress the price of Ebiz's common stock.
There are no contractual arrangements between or among Ebiz and any of
the securityholders, other than JEM Ventures EBIZ. In connection with our
issuance to JEM Ventures EBIZ of the Debenture and the related Warrant, we
provided certain registration rights, and have filed a registration statement
with the SEC. This prospectus forms part of that registration statement. We have
also agreed to prepare and file any amendments and supplements to the
registration statement as may be necessary to keep it effective until this
prospectus is no longer required for the holder of the Debenture and the related
Warrant to sell the shares of common stock issuable upon conversion thereof. We
have also agreed to indemnify and hold the holder of the Debenture and related
Warrant harmless from and against certain liabilities under the Securities Act
that could arise in connection with their sale of the underlying shares of
common stock and have agreed to pay all reasonable fees and expenses incident to
the filing of the registration statement.
No professional underwriter in its capacity as such will be acting for
the securityholders. We anticipate that the sale of common stock by the selling
securityholders will be made through customary brokerage channels. However, the
distribution of the common stock may be effected from time to time in one or any
combination of the following transactions (which may involve crosses or block
transactions): (i) in the over-the-counter market, (ii) in transactions
otherwise than in the over-the-counter market (including on any national
security exchange or quotation service on which the common stock may be listed
at the time of sale, including the Nasdaq Smallcap Market), or any privately
negotiated transaction, (iii) through the granting of options on the common
stock (whether such options are listed on an options exchange or otherwise),
(iv) by pledge to secure debts or other obligations, or (v) to cover short sales
made pursuant to this prospectus. Any of these transactions may be effected at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices, at negotiated prices or at fixed prices.
In effectuating sales, brokers or dealers engaged by the
securityholders may arrange for other brokers or dealers to participate in the
resales. The securityholders may enter into hedging transactions with
broker-dealers and in connection with those transactions, broker-dealers may
engage in short sales of the shares. The securityholders may also sell the
shares short and deliver shares to close out such short positions. The
securityholders may also enter into option or other transactions with
broker-dealers that require the delivery to the broker-dealer of the shares,
which the broker-dealer may resell pursuant to this prospectus. The
securityholders may also pledge the shares to a broker-dealer or other person to
secure obligations, and upon default, the pledgee may effect sales of the
pledged securities pursuant to the prospectus.
If the securityholders effect any of these transactions by selling
common stock to or through underwriters, brokers, dealers or agents, such
underwriters, brokers, dealers or agents may receive compensation in the form of
discounts, concessions or commissions from the shareholders or commissions from
purchasers of common stock for whom they may act as agent (which discounts,
concessions or commissions as to particular underwriters, brokers, dealers or
agents might be in excess of those customary in the types of transactions
involved). The securityholders and any brokers, dealers or agents that
participate in the distribution of the common stock might be deemed to be
underwriters, and any profit on the sale of the common stock by them and any
discounts, concessions or commissions received by any such underwriters,
brokers, dealers or agents might be deemed to be underwriting discounts and
commissions under the Securities Act. Any NASD broker-dealer selling common
stock offered under this prospectus cannot receive compensation (calculated as
the difference between the purchase and resale price of the common stock) in
excess of % on principal transactions or in excess of normal and ordinary
brokerage commissions, which, in any event, may not exceed % of the sale
price, for agency transactions.
A securityholder may pledge its common stock from time-to-time in
connection with such securityholder's financing arrangements. To the extent any
such pledgees exercise their rights to foreclose on
42
<PAGE> 45
and sell the underlying common stock, such pledgees may be deemed underwriters
with respect to such common stock and sales by them may be effected under this
prospectus.
Under the Exchange Act and applicable rules and regulations promulgated
thereunder, any person engaged in a distribution of any of the common stock may
not simultaneously engage in market making activities with respect to the common
stock, depending on the circumstances, for five business days prior to the
commencement of such distribution. In addition, and without limiting the
foregoing, the shareholders will be subject to applicable provisions of the
Exchange Act and the rules and regulations promulgated thereunder, which
provisions may limit the timing of purchases and sales of any of the common
stock by the securityholders
Under the securities laws of certain states, the common stock may be
sold in such states only through registered or licensed brokers or dealers. In
addition, in certain states the common stock may not be sold unless the common
stock has been registered or qualified for sale in such state or an exemption
from registration or qualification is available and is complied with.
EXPERTS
The financial statements of Ebiz as of June 30, 1998 and 1999 and for
each of the two years in the period ended June 30, 1999 included in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included in reliance upon the authority of
such firm as experts in accounting and auditing in rendering the reports.
Reference is made to such report, which includes an explanatory paragraph with
respect to the uncertainty regarding Ebiz's ability to continue as a going
concern as discussed in the Note 1 to the financial statements.
LEGAL MATTERS
Certain legal matters with respect to the validity of the common stock
offered will be passed upon by Ebiz's legal counsel, Lewis and Roca LLP,
Phoenix, Arizona.
ADDITIONAL INFORMATION
Ebiz has filed with the Commission a registration statement on Form
SB-2 under the Securities Act, with respect to the common stock offered under
this prospectus. This prospectus does not contain all the information contained
in the registration statement. For further information, please refer to the
registration statement, including the exhibits filed or incorporated as part
thereof. The registration statement and exhibits are available for inspection
without charge at the Public Reference Section of the Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549. Statements contained in this
prospectus as to the contents of any contract or other document are not
necessarily complete and reference is made to the copy of such contract or other
document filed as an exhibit to the registration statement. All statements
contained in this prospectus are qualified in their entirety by such reference.
43
<PAGE> 46
REPORTS TO SHAREHOLDERS
Ebiz will furnish holders of shares of common stock annual reports
containing audited financial statements and any such other periodic reports as
may be appropriate or as may be required by law. Ebiz is subject to the periodic
reporting requirements of the Exchange Act. In accordance with the Exchange Act,
Ebiz will file reports, proxy statements and other information with the
Commission. These reports, proxy statements and other information may be read
and copied at public reference facilities of the Commission at 450 Fifth Street
N.W., Washington, D.C. 20549; and at the regional offices maintained by the
Commission at 500 West Madison Street , Suite 1400, Chicago, Illinois 60661; 7
World Trade Center, 13th Floor, New York, New York 10048; and 5670 Wilshire
Boulevard, Los Angeles, California 90036. Copies of these materials can be
obtained from the Public Reference Section of the Commission at 450 Fifth Street
N.W., Washington, D.C. 20549 at prescribed rates. Additionally, the Commission
maintains a web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. You may obtain information on the operation
of the SEC's public reference facilities by calling the SEC at 1-800-SEC-0330.
44
<PAGE> 47
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants F-2
Balance Sheets at September 30, 1999, (unaudited) F-3
June 30, 1999 and June 30, 1998
Statements of Operations for the Years Ended June 30, 1999 and 1998 F-4
Statements of Operations for the Three Months Ended F-5
September 30, 1999 and 1998 (unaudited)
Statements of Comprehensive Income for the Three Months Ended F-6
September 30, 1999 and 1998 (unaudited)
Statements of Stockholders' Equity for the period F-7
from July 1, 1997 through June 30, 1999
Statements of Cash Flows for the Years Ended F-8
June 30, 1999 and 1998
Statements of Cash Flows for the Three Months Ended F-9
September 30, 1999 and 1998 (unaudited)
Notes to Financial Statements for the Periods Ended F-10
September 30, 1999, June 30, 1999 and 1998
Schedule II - Valuation and Qualifying Accounts F-22
and Reserves for the Years Ended
June 30, 1999 and 1998
</TABLE>
F-1
<PAGE> 48
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EBIZ Enterprises, Inc.:
We have audited the accompanying balance sheets of EBIZ Enterprises, Inc., a
Nevada corporation, (the Company) as of June 30, 1999 and 1998, and the related
statements of operations, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of EBIZ Enterprises, Inc. as of
June 30, 1999 and 1998, and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company incurred net losses and had negative cash flow
from operations in 1999 and 1998 and has not obtained sufficient funds to
achieve management's plans or support its operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from this
uncertainty.
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 respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
September 10, 1999
F-2
<PAGE> 49
EBIZ ENTERPRISES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
Sept. 30, June 30, June 30,
1999 1999 1998
---- ---- ----
(unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C>
Cash $ 484,402 $ 76,366 $ 468,651
Accounts receivable, net of allowance for doubtful
of $30,000, $40,000 and $9,548, respectively 1,719,167 1,669,816 272,829
Inventory, net of allowances of $82,936, $10,000
and $0, respectively 1,427,676 1,568,148 324,531
Prepaid expenses and other current assets 89,995 128,184 95,265
Due from officers - - 3,432
--------- --------- ---------
Total current assets 3,721,240 3,442,514 1,164,708
Furniture And Equipment, net 514,316 474,778 53,437
Deferred Loan Fees, net 190,056 -
-
Restricted Cash 5,000,000 -
-
Note Receivable 50,000 - -
---------- ---------- ----------
Total assets $9,475,612 $3,917,292 $1,218,145
========= ========= =========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $1,875,247 $1,423,178 $ 525,124
Accrued expenses 338,473 468,549
Line of credit - 350,000
Notes payable 210,100 610,000
---------- ---------- ---------
Total current liabilities 2,423,820 2,851,727 525,124
--------- --------- ---------
Convertible Debenture, net of discount of $769,678 6,330,322 - -
--------- --------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Convertible preferred stock; $.001 par value; 5,000,000
shares authorized; 10,895, 10,895 and 0 shares issued and
outstanding, respectively; liquidation value $100 per
share, respectively 866,449 868,599 -
Common stock; $.001 par value; 70,000,000 shares
authorized; 7,364,115, 7,261,715 and 6,256,450 shares
issued and outstanding, respectively 7,364 7,262 6,256
Additional paid-in capital 3,248,879 2,343,762 886,642
Accumulated deficit (3,401,222) (2,154,058) (199,877)
----------- ---------- -----------
Total stockholders' equity 721,470 1,065,565 693,021
---------- ---------- -----------
Total liabilities and stockholders' equity $9,475,612 $3,917,292 $1,218,145
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 50
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.
F-4
<PAGE> 51
EBIZ ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended September 30,
--------------------------------
1999 1998
---- ----
(unaudited)
<S> <C> <C>
SALES $ 5,638,628 $ 4,586,753
COST OF SALES 5,346,605 4,575,720
----------- -----------
Gross profit 292,023 11,033
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 1,268,908 410,188
DEPRECIATION AND AMORTIZATION 40,628 16,149
------ -------
Loss from operations (1,017,513) (415,304)
OTHER INCOME (EXPENSE):
Interest expense (216,794) (52,919)
Interest income 21,256 4,852
Total Other Income (Expense) (195,538) (48,067)
NET LOSS (1,213,051) (463,371)
DIVIDENDS ON PREFERRED STOCK 27,238 --
----------- -----------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $(1,240,289) $ (463,371)
=========== ===========
Loss Per Common Share
Basic $ (0.17) $ (.07)
Diluted $ (0.17) $ (.07)
Weighted Average Common Shares
Basic $ 7,319,972 $ 6,301,885
Diluted $ 7,319,972 $ 6,301,885
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE> 52
EBIZ ENTERPRISES, INC.
STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended September 30,
1999 1998
<S> <C> <C>
Net loss attributable to common stockholders $(1,240,289) $ (463,371)
Other comprehensive loss, net of tax
Unrealized holding loss arising during period (6,876) --
----------- -----------
Comprehensive loss $(1,247,165) $ (463,371)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 53
EBIZ ENTERPRISES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 1, 1997 THROUGH JUNE 30, 1999
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Shares Amount Shares Amount
---------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
BALANCE, June 30,1997 - $ - 5,562,044 $ 5 ,562
Common stock issued for services rendered
in connection with reverse acquisition - - 187,500 187
Common stock issued for warrants exercised - - 506,906 507
Net loss - - - -
Constructive contribution due to termination
of S corporation election - - - -
---------- -------- --------- ------
BALANCE, June 30, 1998 - - 6,256,450 6,256
Sale of common stock, net of offering costs
of $80,000 - - 455,781 457
Sale of preferred stock, net of offering
costs of $220,901 10,895 868,599 - -
Common stock issued for services and products
received - - 158,528 158
Common stock issued for warrants exercised - - 390,956 391
Deemed dividend on preferred stock for
beneficial conversion feature - - - -
Accrued dividends on preferred stock - - - -
Net loss - - - -
---------- -------- --------- ------
BALANCE, June 30, 1999 10,895 $868,599 7,261,715 $7,262
========== ======== ========= ======
</TABLE>
<TABLE>
<CAPTION>
Additional Total
Paid-in Accumulated Stockholders'
Capital (Deficit) Equity
------------- --------------- -----------
<S> <C> <C> <C>
BALANCE, June 30, 1997 - $250,510 $256,072
Common stock issued for services rendered
in connection with reverse acquisition 352,313 - 352,500
Common stock issued for warrants exercised 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 886,642 (199,877) 693,021
Sale of common stock, net of offering costs
of $80,000 900,845 - 901,302
Sale of preferred stock, net of offering
costs of $220,901 - - 868,599
Common stock issued for services and products
received 218,593 - 218,751
Common stock issued for warrants exercised 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 $2,343,762 $(2,154,058) $1,065,565
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 54
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 32,452 --
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.
F-8
<PAGE> 55
EBIZ ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------
1999 1998
----------- ---------
(unaudited)
<S> <C> <C>
Operating activities
Net loss ($1,213,051) ($463,371)
Adjustments to reconcile net loss to net cash
Depreciation and amortization 40,628 16,149
Stock exchanged for services and inventory 9,000 68,152
Amortization of discounts and loan fees 33,094 --
Changes in assets and liabilities
Accounts Receivable (49,351) 42,546
Due from officers and stockholders -- (2,000)
----------- ---------
Inventory 140,472 (178,978)
Prepaid expenses and deposits 31,313 76,094
Accounts payable 452,069 (142,834)
Accrued expenses (157,314) 49,570
----------- ---------
Net cash used in operating activities (713,140) (534,672)
----------- ---------
Investing activities
Purchase of furniture and equipment (80,165) (102,224)
----------- ---------
Financing activities
Net borrowings under line of credit (350,000) 151,500
Borrowings under notes payable 488,000 110,286
Principal repayments of notes payable (887,900) --
Borrowings from convertible debenture, net 6,903,391 --
Transfer to restricted cash (5,000,000) --
Sale of stock, net of expenses 47,850 --
----------- ---------
Net cash provided by financing activities 1,201,341 261,786
----------- ---------
Net increase (decrease) in cash and cash equivalents 408,036 (375,110)
Cash and cash equivalents, beginning of period 76,366 468,651
----------- ---------
Cash and cash equivalents, end of period $ 484,402 $ 93,541
=========== =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 124,295 $ 52,919
Supplemental disclosure of non-cash financing activities
Issuance of common stock for services and inventory $ 9,000 $ 68,152
Dividends accrued on preferred stock $ 27,238 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE> 56
EBIZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(1) ORGANIZATION AND OPERATIONS
NATURE OF THE BUSINESS
Ebiz Enterprises, Inc. (the "Company") is a developer and distributor of
computer systems, components and accessories for personal and business
computing. The systems include the Company's Element-L Systems, which are based
on the Linux operating system and M(2) 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 desktop, laptop and workstation 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's predecessor, VDG Capital Corporation ("VDG"), was originally
incorporated in Colorado in May 1984. Following a reorganization, VDG's name was
changed to Vinculum Incorporated ("Vinculum") in August 1994. In June 1998,
Vinculum acquired the operating assets and liabilities of Genras, Inc. (an
Arizona corporation) and reincorporated in Nevada as CPU MicroMart, Inc. ("CPU
MicroMart"). In May 1999, CPU MicroMart changed its name to Ebiz Enterprises,
Inc. The Company's stock is listed on the OTC 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's predecessor Genras. The Reverse Acquisition is
treated as an issuance of shares for net assets by Vinculum and not as a
business combination. As a result, no pro forma information is presented for the
Reverse Acquisition.
In connection with the Reverse Acquisition, the Company issued 187,500 shares of
its common stock, valued at $352,000, for acquisition advisory services. In
addition, The Company paid $20,305 in legal fees associated with the
transaction. The aggregate of $372,805 has been expensed and is included as
acquisition advisory fees in the accompanying statements of operations.
F-10
<PAGE> 57
MANAGEMENT PLANS
The Company has directed its primary strategic thrust towards the Linux
operating system segment of the market. Management believes that Linux is a fast
growing operating system and that the demand for Linux-based products and
services represents 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(TM) Linux based systems
in 1999. The Company also plans to continue the sales of its M(2) Systems(TM),
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 a 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
F-11
<PAGE> 58
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 change in the computer product industry
and customer's 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
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 $82,936, $10,000 and $0 at September 30, 1999, June 30, 1999
and 1998, respectively, are established against Company-owned inventories for
excess, slow-moving, and obsolete items and for items where the net realizable
value is less than cost.
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, 1999 June 30,
------------------ --------
(unaudited) 1999 1998
---------- --------
<S> <C> <C> <C>
Components $ 984,692 $1,155,981 $183,418
Work-in-process 136,440 44,947 --
Finished goods 306,544 367,220 141,113
---------- ---------- --------
$1,427,676 $1,568,148 $324,531
========== ========== ========
</TABLE>
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 consists of the following:
<TABLE>
<CAPTION>
Sept. 30, June 30,
Useful --------- --------
Life 1999 1999 1998
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Furniture, fixtures and office Equipment 3 years $ 353,918 $ 295,566 $ 29,702
Software 3 years $ 215,700 200,495 29,427
Leasehold improvements 2 years $ 59,902 $ 53,293 401
--------- --------- --------
629,520 549,354 59,530
Less - accumulated depreciation (115,204) (74,576) (6,093)
--------- --------- --------
$ 514,316 $ 474,778 $ 53,437
========= ========= ========
</TABLE>
F-12
<PAGE> 59
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 $264,000, $215,000 and $0 of bank
overdrafts at September 30, 1999, 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, $8,000 and $0 at September 30, 1999, June 30, 1999 and
1998, respectively, related to the sales of its M(2) Systems computers.
ADVERTISING COSTS
Advertising costs are expensed as incurred and are included in sales and
marketing expenses in the accompanying statements of operations. Advertising
expense was approximately $100,000 and $8,000 for the years ended June 30, 1999
and 1998, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
LOSS PER SHARE
During 1998, the Company adopted SFAS No. 128, Earnings Per Share. Pursuant to
SFAS No. 128, basic earnings per common share are computed by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding during the year. No outstanding options or warrants were assumed to
be exercised for purposes of
F-13
<PAGE> 60
calculating diluted earnings per share for the periods presented, as their
effect was anti-dilutive. Below are the disclosures required pursuant to SFAS
No. 128 for the three months ended September 30, 1999 and 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 Three For the
Months Ended Years Ended
September 30, June 30,
------------- -----------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Basic loss per share:
Loss attributable to common
stockholders $(1,240) $ (463) $(1,954) $ (422)
Weighted average common shares 7,320 6,301 6,821 5,620
------- ------- ------- -------
Loss per common share $ (0.17) $ (.07) $ (0.29) $ (.08)
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
For the Three For the
Months Ended Years Ended
September 30, June 30,
------------- -----------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Diluted loss per share:
Loss attributable to common
stockholders $(1,240) $ (463) $(1,954) $ (422)
Weighted average common shares 7,320 6,301 6,821 5,620
------- ------- ------- -------
Total common shares plus assumed
conversions 7,320 6,301 6,821 5,620
------- ------- ------- -------
Diluted per share amount $ (0.17) $ (.07) $ (0.29) $ (.08)
======= ======= ======= =======
</TABLE>
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:
F-14
<PAGE> 61
<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.
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.
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the instructions for Form 10-QSB. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
("GAAP") for complete financial statements. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary for a
fair presentation of the results for the interim periods presented have been
made. The results for the three month period ending September 30, 1999 may not
necessarily be indicative of the results for the entire fiscal year.
F-15
<PAGE> 62
(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).
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.
F-16
<PAGE> 63
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:
<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.
F-17
<PAGE> 64
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 60,000 shares of Series A 10% 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 16 2/3
shares of common stock. Upon conversion, a holder would exchange $6.00 of the
amount paid for the Preferred Stock for each share of common stock received. In
addition, the Preferred Stock automatically converts 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.
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).
F-18
<PAGE> 65
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:
<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>
F-19
<PAGE> 66
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):
<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.
F-20
<PAGE> 67
(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.
F-21
<PAGE> 68
SCHEDULE II
EBIZ ENTERPRISES, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED JUNE 30, 1999 AND 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.
F-22
<PAGE> 69
No dealer, salesperson or any other person has been authorized to give
any information or to make any representations other than those contained in
this Prospectus, and, if given or made, such information or representations must
not be relied upon as having been authorized by the company. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the company since the date hereof or that the information contained
herein is correct as of any date subsequent to the date hereof. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any
securities offered hereby to or from anyone in any jurisdiction in which such
offer or solicitation is not authorized or in which the person making such offer
or solicitation is not qualified to do so or to any person to whom it is
unlawful to make such offer or solicitation.
---------------------
TABLE OF CONTENTS
---------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary ............................................................... 2
Special Note on Forward-Looking Statements ............................ 5
Risk Factors .......................................................... 5
Dividend Policy ....................................................... 12
Market for Common Stock ............................................... 12
Use of Proceeds ....................................................... 13
Selling Securityholders ............................................... 13
Management's Discussion and Analysis of
Financial Condition and Results of Operations ....................... 18
Our Business .......................................................... 23
Management ............................................................ 34
Principal Shareholders ................................................ 36
Certain Transactions .................................................. 37
Description of Ebiz's Securities ...................................... 38
Shares Eligible For Future Sale ....................................... 41
Plan of Distribution .................................................. 41
Experts ............................................................... 43
Legal Matters ......................................................... 43
Additional Information ................................................ 43
Reports to Shareholders ............................................... 44
Index to Combined Financial Statements ................................ F-1
</TABLE>
Until April, 30, 2000, all dealers effecting transactions in these securities,
whether a not participating in this offering, may be required to deliver a copy
of this prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to unsold allotments
or subscriptions.
EBIZ ENTERPRISES, INC.
COMMON STOCK
---------------
Prospectus
----------------
JANUARY 31, 2000
<PAGE> 70
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses of Ebiz
in connection with this Offering.
<TABLE>
<CAPTION>
Amount(1)
---------
<S> <C>
SEC Registration Fee ................................. $ 3,795
NASD Filing Fee ...................................... 1,865
Legal Fees and Expenses .............................. 7,500
Accounting Fees and Expenses ......................... 15,000
Printing Expenses .................................... 12,500
Blue Sky Fees and Expenses ........................... 5,660
Miscellaneous ........................................ 2,500
Total ................................................ $78,820
</TABLE>
- ----------
(1) All fees and expenses except the SEC Registration Fee and the NASD Filing
Fee are estimates.
ITEM 25. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Ebiz's Articles Incorporation and bylaws require Ebiz to indemnify each
of its officers and directors against liabilities and reasonable expenses
incurred in any action or proceeding, including stockholders' derivative
actions, by reason of such person being or having been an officer or director of
Ebiz, or of any other corporation for which such person serves as such at the
request of Ebiz, to the fullest extent permitted by Nevada law. Under Nevada
law, Ebiz has adopted provisions in its Articles of Incorporation and bylaws
that eliminate, to the fullest extent available under Nevada law, the personal
liability of its directors and officers for monetary damages incurred as a
result of the breach of their duty of care. These monetary damages incurred as a
result of the breach of their duty of care. These provisions neither limit the
availability of equitable remedies nor eliminate directors' and officers'
liability for engaged in intentional misconduct or fraud, knowingly violating a
law or unlawfully paying a distribution.
Ebiz has been advised that it is the position of the Commission that
insofar as the foregoing provision may be invoked to disclaim liability for
damage arising under the Securities Act, such provision is against public policy
as expressed in the Securities Act and is therefore unenforceable.
Section 78.751 of the Nevada General Corporation enables a corporation
to eliminate or limit personal liability of members of its board of directors
for violations of their fiduciary duties. However, Nevada law does not permit
the elimination of a director's liability for engaging in any transaction form
which the director derived an improper personal benefit or for unlawfully paying
a distribution. The statute has no effect on the availability of equitable
remedies, such as an injunction or rescission, for breach of fiduciary duty.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In June, 1998, our predecessor Vinculum, issued 5,000,000 shares of its
common stock to the three shareholders, of Genras in exchange for all of the
assets, subject to liabilities, of Genras. The assets were
<PAGE> 71
valued at $5,000,000 based upon contemporaneous sales of Ebiz's common stock.
Ebiz recorded $956,503, which was the historic net book value of the assets, as
the net value of the assets received. The assets received are generally the
assets reflected on Ebiz's June 30, 1998 Balance Sheet. 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 $352,500 for the shares
issued. The shares were issued in reliance on the exemption from registration
provided under Section 4(2) of the Securities Act. The 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 said 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 for total consideration of $506,706. 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 or 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.
Since its inception in August, 1998 and through December 31, 1999,
Ebiz has granted options to purchase a total of 627,000 shares of its common
stock under its 1998 Equity Incentive Plan (the "Plan"). These options have been
issued to employees and consultants at strike prices ranging from $1.00 to $6.00
per share. As of December 31, 1999, options to purchase 150,000 shares at $1.00
per share had been exercised, 100,000 by former employees and 50,000 by Aztore
Holdings, Inc. The options issued under the Plan and shares issued upon
exercise of these options were issued in reliance on Rule 701 as promulgated
under the Securities Act.
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 for total
consideration of approximately $293,000. The remaining outstanding E Warrants
expired on December 1, 1998. In May, 1999, Ebiz extended the expiration date of
the remaining F Warrants to December 1, 1999. The F Warrants expired on this
extended date. 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. First Financial Equity Corporation, a NASD
broker-dealer, and Fox & Company Investments, Inc. served as the placement
agents in the offering and received placement agent fees of approximately
$86,000 and warrants to purchase 86,644 shares of common stock at $2.10 to $3.00
per share.
In March and April, 1999, Ebiz issued 10,895 shares of its Series A 10%
Convertible Preferred Shares for total consideration of $1,089,500. First
Financial Equity Corporation served as the placement agent and received a
placement fee of $108,950 and warrants to purchase 9,086 shares of common stock
at $7.20 per share. The Series A 10% Convertible Preferred Shares were sold only
to "accredited investors" as defined in Regulation D in reliance on the
exemption from registration provided under Section 4(2) and Section 4(6) of the
Securities Act and 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
II-2
<PAGE> 72
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
Debenture is convertible into a minimum of 947,260 shares of Ebiz's common
stock. 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 may be exercised in whole or in part
from time to time prior to August 22, 2004. The Debenture and Warrant were
issued 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 27. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
<TABLE>
<S> <C>
2.1(1) Asset Exchange Agreement by and among Genras, Jeffrey I. Rassas, Vinculum and Aztore Holdings,
dated as of March 18, 1998.
3.1(1) Articles of Incorporation of Ebiz
3.2(1) Certificate of Amendment to Articles of Incorporation of Ebiz
3.3(1) Second Certificate of Amendment to the Articles of Incorporation of Ebiz
3.4(1) Certificate of Designation / Resolution of Designation - Series A 10% convertible Preferred Stock
3.5(1) Bylaws of Ebiz
4.1(1) Specimen common stock certificate
5.1(3) Opinion of Lewis and Roca LLP
10.1(1) Office Building Lease, dated April 16, 1999, between Ebiz and Van Wagner
Properties
10.2(1) Ebiz 1998 Equity Incentive Plan, Effective December 23, 1998
10.3(1) Securities Purchase Agreement dated as of August 25, 1999, by and between
JEM Ventures Ebiz, LLC ("JEM") and Ebiz.
10.4(1) Subordinated Convertible Debenture, dated August 25, 1999, in the amount of
$7,100,000, made by Ebiz in favor of JEM
10.5(1) Warrant to Purchase Common Stock, dated August 25, 1999, issued by Ebiz
to JEM, for 245,000 shares
10.6(1) Registration Rights Agreement, dated as of August 25, 1999, by and between Ebiz and JEM, LLC
</TABLE>
II-3
<PAGE> 73
<TABLE>
<S> <C>
10.7(2) OEM Agreement between Corel Corporation and Ebiz, 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
23.2(3) Consent of Lewis and Roca LLP included in Exhibit 5.1
27.1(3) Financial Data Schedule
</TABLE>
(1) Incorporated by reference from Ebiz's Form 10-SB as filed with the
Securities and Exchange Commission on October 19, 1999.
(2) Incorporated by reference from Ebiz's Form 10-SB/A (Amendment No. 2) as
filed with the Securities and Exchange Commission on November 30, 1999.
(3) Previously filed with this registration statement.
ITEM 28. UNDERTAKINGS
1. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission ("SEC") such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer of expenses
incurred or paid by a director, officer or controlling person in connection with
the securities being registered) the small business issuer will, unless in the
opinion of its counsel that the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act, and will be governed by the final adjudication of such issue.
2. The undersigned small business issuer will: (i) for determining any
liability under the Securities Act, treat the information omitted from the form
of prospectus filed as a part of this Registration Statement in reliance upon
Rule 430A and contained in a form or prospectus filed by the small business
issuer under Rule 424(b)(1), or (4) 497(h) under the Securities Act as part of
this Registration Statement as of the time the SEC declared it effective and
(ii) for determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
3. The undersigned small business issuer will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3)
of the Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental
change in the information in the Registration
Statement.
II-4
<PAGE> 74
Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the
total dollar volume of securities offered would not
exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the SEC pursuant to Rule 424(b)
if, in the aggregate, the changes in the volume and
price represent no more than a 20% change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement;
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
II-5
<PAGE> 75
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Scottsdale, County of
Maricopa, Arizona, on February 1, 2000.
Ebiz Enterprises, Inc.
By /s/ Jeffrey I. Rassas
-----------------------
Jeffrey I. Rassas
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jeffrey I. Rassas and Stephen C. Herman and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him, and in his name, place and stead, in
any and capacities, to sign any or all amendments, including post-effective
amendments, to this registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the SEC,
granting unto said attorneys-in-fact and agents, and each of them full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<S> <C>
Dated: February 1, 2000 /s/ Jeffrey I. Rassas
---------------------------
Jeffrey I. Rassas, Director
Dated: February 1, 2000 /s/ Stephen C. Herman
---------------------------
Stephen C. Herman, Director
</TABLE>
II-6
<PAGE> 76
Index to Exhibits
<TABLE>
<S> <C>
2.1(1) Asset Exchange Agreement by and among Genras, Jeffrey I. Rassas, Viaculum and Aztore Holdings,
dated as of March 18, 1998.
3.1(1) Articles of Incorporation of Ebiz
3.2(1) Certificate of Amendment to Articles of Incorporation of Ebiz
3.3(1) Second Certificate of Amendment to the Articles of Incorporation of Ebiz
3.4(1) Certificate of Designation / Resolution of Designation - Series A 10% convertible Preferred Stock
3.5(1) Bylaws of Ebiz
4.1(1) Specimen common stock certificate
5.1(3) Opinion of Lewis and Roca LLP
10.1(1) Office Building Lease, dated April 16, 1999, between Ebiz and Van Wagner
Properties
10.2(1) Ebiz 1998 Equity Incentive Plan, Effective December 23, 1998
10.3(1) Securities Purchase Agreement dated as of August 25, 1999, by and between
JEM Ventures Ebiz, LLC ("JEM") and Ebiz.
10.4(1) Subordinated Convertible Debenture, dated August 25, 1999, in the amount of
$7,100,000, made by Ebiz in favor of JEM
10.5(1) Warrant to Purchase Common Stock, dated August 25, 1999, issued by Ebiz
to JEM, for 245,000 shares
10.6(1) Registration Rights Agreement, dated as of August 25, 1999, by and between Ebiz and JEM, LLC
10.7(2) OEM Agreement between Corel Corporation and Ebiz, 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
23.2(3) Consent of Lewis and Roca LLP included in Exhibit 5.1
27.1(3) Financial Data Schedule
</TABLE>
(1) Incorporated by reference from Ebiz's Form 10-SB as filed with the
Securities and Exchange Commission on October 19, 1999.
(2) Incorporated by reference from Ebiz's Form 10-SB/A (Amendment No. 2) as
filed with the Securities and Exchange Commission on November 30, 1999.
(3) Previously filed with this registration statement.
<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
January 31, 2000
