10QSB 1 p64811e10qsb.txt 10QSB 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JANUARY 31, 2001 COMMISSION FILE NO. 027619 iBIZ TECHNOLOGY CORP. ---------------------------------------------------------------- (Exact name of registrant as specified in its charter) Florida 86-0933890 --------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1919 West Lone Cactus, Phoenix, Arizona 85027 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (623) 492-9200 ---------------- Check whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Class Outstanding at March 16, 2001 ----- ----------------------------- Common stock, $0.001 par value 38,017,966 2 TABLE OF CONTENTS PART I. - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).................................... 1 BALANCE SHEETS ..................................................... 2 STATEMENTS OF OPERATIONS............................................ 4 STATEMENT OF CASH FLOWS............................................. 6 NOTES TO FINANCIAL STATEMENTS....................................... 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PART II. - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS................................................... 29 ITEM 2. CHANGES IN SECURITIES............................................... 29 ITEM 3. DEFAULTS UPON SENIOR SECURITIES..................................... 30 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 30 ITEM 5. OTHER INFORMATION................................................... 30 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................... 30 3 PART I ITEM 1. FINANCIAL INFORMATION INDEPENDENT ACCOUNTANTS' REVIEW REPORT To The Board of Directors and Stockholders iBIZ Technology Corp. and Subsidiary Phoenix, Arizona We have reviewed the accompanying consolidated balance sheet of IBIZ Technology Corp. and Subsidiary as of January 31, 2001 and the related consolidated statements of operations and cash flows for the three months ended January 31, 2001 and 2000 and the statement of stockholders' equity for the three months ended January 31, 2001 in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of IBIZ Technology Corp. and Subsidiary. A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America. We have audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of IBIZ Technology Corp. and Subsidiary as of October 31, 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended (not presented herein); and in our report dated December 30, 2000 we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of October 31, 2000, is fairly stated in all material respects in relation to the balance sheet from which it has been derived. /s/ Moffitt & Company, P.C. MOFFITT & COMPANY, P.C. SCOTTSDALE, ARIZONA February 1, 2001 except for footnote number 28 which is dated March 2, 2001. 1 4 IBIZ TECHNOLOGY CORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS JANUARY 31, 2001 AND OCTOBER 31, 2000 ASSETS
JANUARY 31, OCTOBER 31, 2001 2000 (UNAUDITED) (AUDITED) ---------- ----------- CURRENT ASSETS Cash and cash equivalents $ 577,571 $ 631,375 Accounts receivable 386,344 432,113 Inventories 544,481 439,582 Prepaid expenses 172,484 104,874 ---------- ---------- TOTAL CURRENT ASSETS 1,680,880 1,607,944 ---------- ---------- PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION 1,978,083 1,948,715 ---------- ---------- OTHER ASSETS Notes receivable, officers 384,711 391,332 Customer list, net of accumulated amortization 6,940 7,932 Deposits 67,447 60,959 ---------- ---------- TOTAL OTHER ASSETS 459,098 460,223 ---------- ---------- TOTAL ASSETS $4,118,061 $4,016,882 ========== ==========
2 5 LIABILITIES AND STOCKHOLDERS' EQUITY
JANUARY 31, OCTOBER 31, 2001 2000 (UNAUDITED) (AUDITED) ----------- --------- CURRENT LIABILITIES Accounts payable $ 643,126 $ 973,894 Accrued liabilities Payroll 199,780 96,283 Other 149,353 101,736 Sales and payroll taxes payable 88,358 89,023 Corporation income taxes payable 19,028 19,028 Deferred income 54,169 85,798 Notes payable, current portion 5,430 5,335 ----------- ----------- TOTAL CURRENT LIABILITIES 1,159,244 1,371,097 ----------- ----------- LONG-TERM LIABILITIES Convertible debentures payable 2,815,800 1,750,000 Notes payable, long-term portion 13,078 14,479 ----------- ----------- TOTAL LONG-TERM LIABILITIES 2,828,878 1,764,479 ----------- ----------- STOCKHOLDERS' EQUITY Common stock Authorized - 100,000,000 shares, par value $.001 per shares Issued and outstanding January 31, 2001 - 38,017,966 shares 38,018 0 October 31, 2000 - 37,812,425 shares 0 37,813 Paid in capital in excess of par value of stock 8,121,323 7,940,384 Retained earnings (deficit) (8,029,402) (7,096,891) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 129,939 881,306 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,118,061 $ 4,016,882 =========== ===========
See Accompanying Notes and Independent Accountants' Review Report. 3 6 IBIZ TECHNOLOGY CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 2001 AND 2000 (UNAUDITED)
THREE MONTHS ENDED JANUARY 31, ------------------------------- 2001 2000 (RESTATED) ------------ --------------- SALES $ 1,005,328 $ 628,853 COST OF SALES 624,267 550,795 ------------ ------------ GROSS PROFIT 381,061 78,058 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,208,952 (773,095) ------------ ------------ (LOSS) BEFORE OTHER INCOME (EXPENSE) (827,891) (695,037) ------------ ------------ OTHER INCOME (EXPENSE) Settlement of lawsuit 101,369 0 Cancellation of debt 122,000 0 Other income 326 0 Interest income 9,616 5,398 Interest expense (35,541) (20,481) Interest expense - convertible debentures-beneficial conversion feature (302,390) (572,935) ------------ ------------ TOTAL OTHER INCOME (EXPENSE) (104,620) (588,018) ------------ ------------ NET (LOSS) $ (932,511) $ (1,283,055) ============ ============ NET (LOSS) PER COMMON SHARE Basic and diluted $ (0.02) $ (.05) ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING Basic and diluted 37,929,185 26,721,059 ============ ============
See Accompanying Notes and Independent Accountants' Review Report. 4 7 IBIZ TECHNOLOGY CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED JANUARY 31, 2001 (UNAUDITED)
COMMON STOCK -------------------------- SHARES AMOUNT ---------- ---------- BALANCE, NOVEMBER 1, 2000 37,812,425 $ 37,813 CONVERSION OF DEBENTURES FOR COMMON STOCK 205,541 205 FEES AND COSTS FOR ISSUANCE OF COMMON STOCK AND DEBENTURES 0 0 INTEREST EXPENSE - CONVERTIBLE DEBENTURES - BENEFICIAL CONVERSION FEATURE 0 0 NET (LOSS) FOR THE THREE MONTHS ENDED JANUARY 31, 2001 0 0 ---------- ---------- BALANCE, JANUARY 31, 2001 38,017,966 $ 38,018 ========== ==========
PAID IN CAPITAL IN EXCESS OF RETAINED PAR VALUE EARNINGS OF STOCK (DEFICIT) ----------- ------------ $ 7,940,384 $ (7,096,891) 34,371 0 (155,822) 0 302,390 0 0 (932,511) ----------- ------------ $ 8,121,323 $ (8,029,402) =========== ============
See Accompanying Notes and Independent Accountants' Review Report. 5 8 IBIZ TECHNOLOGY CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED JANUARY 31, 2001 AND 2000 (UNAUDITED)
THREE MONTHS ENDED JANUARY 31, ----------------------------------- 2001 2000 (RESTATED) ------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) $ (932,511) $(1,283,055) Adjustments to reconcile net (loss) to net cash (used) by operating activities: Depreciation and amortization 61,151 10,774 Interest expense - convertible debentures-beneficial conversion feature 302,390 572,935 Changes in operating assets and liabilities: Accounts receivable 45,769 (170,337) Inventories (104,899) 30,028 Prepaid expenses (67,610) 10,738 Accounts payable (330,768) (241,024) Accrued liabilities and taxes 150,449 12,523 Customer deposits 0 (85,394) Deferred income (31,629) 31,336 Changes in deposits (6,488) 347 ----------- ----------- NET CASH (USED) BY OPERATING ACTIVITIES (914,146) (1,111,129) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (89,527) (70,615) Purchase of customer list 0 (11,900) ----------- ----------- NET CASH (USED) BY INVESTING ACTIVITIES (89,527) (82,515) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock 0 137,000 Proceeds from issuance of convertible debentures payable 944,554 1,600,000 Repayment of notes payable (1,306) (62,590) Changes in notes receivable, officers 6,621 (55,352) ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES $ 949,869 $ 1,619,058 ----------- -----------
See Accompanying Notes and Independent Accountants' Review Report. 6 9 IBIZ TECHNOLOGY CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE THREE MONTHS ENDED JANUARY 31, 2001 AND 2000 (UNAUDITED)
THREE MONTHS ENDED JANUARY 31, ----------------------------------- 2001 2000 (RESTATED) ------------- --------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (53,804) $ 425,414 CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 631,375 25,343 --------- --------- CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 577,571 $ 450,757 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during period: Interest $ 67,275 $ 3,787 ========= ========= Taxes $ 0 $ 0 ========= ========= NON CASH INVESTING AND FINANCING ACTIVITIES Issuance of common stock for convertible debentures $ 34,576 $ 200,000 ========= ========= Interest expense - convertible debentures-beneficial conversion feature $ 302,390 $ 572,935 ========= =========
See Accompanying Notes and Independent Accountants' Review Report. 7 10 IBIZ TECHNOLOGY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 2001 (UNAUDITED) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND NATURE OF BUSINESS IBIZ Technology Corp. (hereinafter referred to as the Company) was organized on April 6, 1994, under the laws of the State of Florida. The Company operates as a holding company for subsidiary acquisitions. Invnsys Technology Corporation (hereinafter referred to as Invnsys) is in the business of designing, manufacturing and distributing desktop computers, monitors, transactional printers, financial application keyboards, numeric keypads and related products. Invnsys also provides network integration services, digital subscriber line high speed internet connection services, business-to-business sale of software and a co-location computer data and server facility. Invnsys also provides repair services and sells maintenance contracts. The corporation operates a service center in Phoenix, Arizona. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of IBIZ Technology Corp. and its wholly owned subsidiary, Invnsys Technology Corporation. All material inter-company accounts and transactions have been eliminated. CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost (determined principally by average cost) or market. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Major renewals and improvements are charged to the asset accounts while replacements, maintenance and repairs, which do not improve or extend the lives of the respective assets, are expensed. At the time property and equipment are retired or otherwise disposed of, the asset and related accumulated depreciation accounts are relieved of the applicable amounts. Gains or losses from retirements or sales are credited or charged to income. See Accompanying Notes and Independent Accountants' Review Report. 8 11 IBIZ TECHNOLOGY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 2001 (UNAUDITED) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT (CONTINUED) Invnsys depreciates its property and equipment for financial reporting purposes using the straight-line method based upon the following useful lives of the assets: Tooling 3 Years Machinery and equipment 5-10 Years Office furniture and equipment 5-10 Years Vehicles 5 Years Leasehold improvements 5 Years Computer software 3-5 Years Co-location equipment 5-25 Years
ACCOUNTING FOR CONVERTIBLE DEBT SECURITIES The Company has issued convertible debt securities with a non-detachable conversion feature that were "in the money" at the date of issue. The Company accounts for such securities in accordance with Emerging Issues Task Force Topic D-60. The Company has recorded the fair value of the beneficial conversion feature as interest expense and an increase to Paid in Capital in Excess of Par Value of Stock. CUSTOMER LISTS The customer list is recorded at cost and is being amortized on a straight-line basis over three years. ACCOUNTING ESTIMATES Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used. REVENUE RECOGNITION Invnsys recognizes revenue from product sales when the goods are shipped and title passes to customers. SALES OF MAINTENANCE AGREEMENTS The revenue received for the maintenance agreements is being recognized on a straight-line basis See Accompanying Notes and Independent Accountants' Review Report. 9 12 over the life of the contracts. The unearned portion is recorded as deferred income. IBIZ TECHNOLOGY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 2001 (UNAUDITED) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in FASB Statement No.109, Accounting for Income Taxes. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. NET (LOSS) PER SHARE The Company adopted Statement of Financial Accounting Standards No. 128 that requires the reporting of both basic and diluted (loss) per share. Basic (loss) per share is computed by dividing net (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. In accordance with FASB 128, any anti-dilutive effects on net (loss) per share are excluded. RISKS AND UNCERTAINTIES The Company is in the computer and computer technology industry. The Company's products are subject to rapid obsolescence and management must authorize funds for research and development costs in order to stay competitive. NOTE 2 DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The Company has financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments as of January 31, 2001 and October 31, 2000, as defined in FASB 107, does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheets. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgement is required in interpreting market data to develop the estimates of fair value, and accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. See Accompanying Notes and Independent Accountants' Review Report. 10 13 IBIZ TECHNOLOGY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 2001 (UNAUDITED) NOTE 3 ACCOUNTS RECEIVABLE A summary of accounts receivable and allowance for doubtful accounts is as follows:
JANUARY 31, OCTOBER 31, 2001 2000 (UNAUDITED) (AUDITED) --------- --------- Accounts receivable $ 411,344 $ 457,113 Allowance for doubtful accounts 25,000 25,000 --------- --------- Net accounts receivable $ 386,344 $ 432,113 ========= ========= Allowance for doubtful accounts Balance, beginning of period $ 25,000 $ 2,500 Additions for the period 0 97,500 Write-off of uncollectible accounts for the period 0 (75,000) --------- --------- Balance, end of year $ 25,000 $ 25,000 ========= =========
NOTE 4 INVENTORIES The inventories are comprised of the following:
JANUARY 31, OCTOBER 31, 2001 2000 (UNAUDITED) (AUDITED) ----------- ----------- Finished products $496,168 $391,479 Demonstration and loaner units 4,070 4,070 Office 44,243 44,033 -------- -------- $544,481 $439,582 ======== ========
See Accompanying Notes and Independent Accountants' Review Report. 11 14 IBIZ TECHNOLOGY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 2001 (UNAUDITED) NOTE 5 PROPERTY AND EQUIPMENT Property and equipment and accumulated depreciation consists of:
JANUARY 31, OCTOBER 31, 2001 2000 (UNAUDITED) (AUDITED) ----------------- ------------------ Co-location equipment $ 1,806,194 $ 1,719,479 Tooling 68,100 68,100 Machinery and equipment 49,855 49,404 Office furniture and equipment 125,669 123,308 Vehicles 39,141 39,141 Leasehold improvements 23,179 23,179 Software 96,858 96,858 ----------------- ------------------ 2,208,996 2,119,469 Less accumulated depreciation 230,913 170,754 ----------------- ------------------ Total property and equipment $ 1,978,083 $ 1,948,715 ================= ==================
Depreciation expense for the three months ended January 31, 2001 and 2000 was $60,159 and $10,179, respectively. NOTE 6 NOTES RECEIVABLE, OFFICERS
JANUARY 31, OCTOBER 31, 2001 2000 (UNAUDITED) (AUDITED) ----------- ----------- IBIZ Technology Corp. Notes to two corporation officers The notes are unsecured, bear interest at 6% and are due on January 7, 2002. $ 0 $ 12,079 Invnsys Technology Corporation The related note is secured by 2,000,000 shares of common stock in the Company, payable on demand and accrues interest at 6%. Management believes the notes will not be collected within the current operating cycle and classified the asset as a long-term asset. 384,711 379,253 -------- -------- Total notes receivable $384,711 $391,332 ======== ========
See Accompanying Notes and Independent Accountants' Review Report. 12 15 IBIZ TECHNOLOGY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 2001 (UNAUDITED) NOTE 7 CUSTOMER LIST The customer list and accumulated amortization consists of:
JANUARY 31, OCTOBER 31, 2001 2000 (UNAUDITED) (AUDITED) ----------- ----------- Cost $ 11,900 $ 11,900 Less accumulated amortization (4,960) (3,968) -------- -------- Net customer list $ 6,940 $ 7,932 ======== ========
The amortization expense for the three months ended January 31, 2001 and 2000 was $992 and $595, respectively. NOTE 8 INCOME TAXES
JANUARY 31, JANUARY 31, 2000 2001 (UNAUDITED) (UNAUDITED) (RESTATED) ----------- ----------- (Loss) from continuing operations before income taxes $ (932,511) $(1,283,055) ----------- ----------- The provision for income taxes is estimated as follows: Currently payable $ 0 $ 0 ----------- ----------- Deferred $ 0 $ 0 ----------- ----------- Significant components of the Company's deferred tax assets and liabilities are as follows: Deferred tax assets: Net operating loss carryforwards $ 596,000 $ 451,000 Accrued expenses and miscellaneous 8,100 8,100 Tax credit carryforward 38,424 38,424 ----------- ----------- 642,524 497,524 Less valuation allowance 642,524 497,524 ----------- ----------- Net deferred tax asset $ 0 $ 0 =========== ===========
See Accompanying Notes and Independent Accountants' Review Report 13 16 IBIZ TECHNOLOGY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 2001 (UNAUDITED) NOTE 8 INCOME TAXES (CONTINUED)
JANUARY 31, OCTOBER 31, 2001 2000 (UNAUDITED) (AUDITED) ----------- --------- Deferred tax liabilities Property and equipment related $ 6,199 $ 6,199 ======== ======== A reconciliation of the valuation allowance is as follows: Balance, beginning of period $497,524 $356,638 Addition to allowance for the three months ended January 31, 2001 and 2000 145,000 140,886 -------- -------- Balance, end of period $642,524 $497,524 ======== ========
NOTE 9 TAX CARRYFORWARDS The Company has the following tax carryforwards at January 31, 2001:
EXPIRATION YEAR AMOUNT DATE ------------------ ----------- ---------------- Net operating loss October 31, 1995 $ 2,500 October 31, 2010 October 31, 1997 253,686 October 31, 2012 October 31, 1998 71,681 October 31, 2013 October 31, 1999 842,906 October 31, 2019 October 31, 2000 3,575,081 October 31, 2020 January 31, 2001 630,121 October 31, 2021 ----------- $5,375,975 ========== Capital loss October 31, 1997 25,600 October 31, 2002 Contribution October 31, 1997 545 October 31, 2002 October 31, 1999 2,081 October 31, 2004 October 31, 2000 3,008 October 31, 2005 ----------- Research tax credits 38,424
See Accompanying Notes and Independent Accountants' Review Report. 14 17 IBIZ TECHNOLOGY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 2001 (UNAUDITED) NOTE 10 CONVERTIBLE DEBENTURES
JANUARY 31, OCTOBER 31, 2001 2000 (UNAUDITED) (AUDITED) ----------- --------- LITES TRADING COMPANY - $1,600,000 DEBENTURE $ 750,000 $ 750,000 --------------------------------------------- On March 27, 2000, the Company issued $1,600,000 of 7% convertible debentures under the following terms and conditions:
1. Due date - March 27, 2005. 2. Interest only on May 1 and December 1 of each year commencing May 1, 2000. 3. Default interest rate - 18%. 4. Warrants to purchase 375,000 shares of common stock at $1.45 per share. 5. Conversion terms - The debenture holder shall have the right to convert all or a portion of the outstanding principal amount of this debenture plus any accrued interest into such number of shares of common stock as shall equal the quotient obtained by dividing the principal amount of this debenture by the applicable conversion price. 6. Conversion price - Lesser of (i) $1.45 (fixed price) or (ii) the product obtained by multiplying the average closing price by .80. 7. Average closing price - The debenture holder shall have the election to choose any three trading days out of twenty trading days immediately preceding the date on which the holder gives the Company a written notice of the holder's election to convert outstanding principal of this debenture. 8. Redemption by Company - If there is a change in control of the Company, the holder of the debenture can request that the debenture be redeemed at a price equal to 125% of the aggregate principal and accrued interest outstanding under this debenture. 9. The debentures are unsecured. 10. Any further issuance of common stock or debentures must be approved by debenture holders. 11. Debenture holders have a eighteen month right of first refusal on future disposition of stock by the Company. 12. Restriction on payment of dividends, retirement of stock or issuance of new securities. See Accompanying Notes and Independent Accountants' Review Report. 15 18 IBIZ TECHNOLOGY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 2001 (UNAUDITED) NOTE 10 CONVERTIBLE DEBENTURES (CONTINUED)
JANUARY 31, OCTOBER 31, 2001 2000 (UNAUDITED) (AUDITED) -------------- -------------- $5,000,000 CONVERTIBLE DEBENTURE $ 2,065,800 $ 1,000,000 -------------------------------- On October 31, 2000, the Company issued the following 8% convertible debentures: 1. Due date - October 30, 2002. 2. Interest payable quarterly from January 1, 2001. 3. Default interest rate - 20%. 4. On the first $ 1,000,000 of financing, the Company issued warrants to purchase 500,000 shares of stock at $ 0.48 per share. The Company reserved an additional 1,240,000 shares for future borrowing on this debenture line. 5. Put note purchase price - $4,000,000. 6. Fees and costs - 7% - 10% of cash received for debentures and warrants plus legal fees. 7. The Company must reserve a number of common shares equal to not less then 200% of the amount of common shares necessary to allow the debenture and warrant holder to be able to convert all such outstanding notes and put notes to common stock. 8. Conversion price for put notes. The initial 50% of the put notes shall be the lesser of: (i) 80% of the average of the three lowest closing bid prices for the stock for twenty two days or (ii) 80% of the average of the five lowest closing bid prices for the stock for sixty days. The conver- sion price of the balance of the put notes shall be 86% of the average of the three lowest closing bid prices for ten days. 9. The debentures have penalty clauses if the common stock is not issued when required by the debenture holder. 10. The debentures are unsecured. 11. The Company's right to exercise the put commences on the actual effective date of the SEC Registration Statement and expires three years after the effective date. 12. Right of first refusal - The debenture holders have the right to purchase a proportionate amount of new issued shares in order to maintain their ownership interest percentage. -------------- -------------- Total debentures $ 2,815,800 $ 1,750,000 ============== ==============
See Accompanying Notes and Independent Accountants' Review Report. 16 19 IBIZ TECHNOLOGY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 2001 (UNAUDITED) NOTE 11 NOTE PAYABLE
JANUARY 31, OCTOBER 31, 2001 2000 (UNAUDITED) (AUDITED) ----------- --------- Note payable to Community First National Bank due in monthly payments of principal and interest of $545 with interest at 7 percent until March 7, 2004. The note is secured by an automobile which costs $ 36,000 and has a book value of $7,800 $18,508 $19,814 Less: current portion 5,430 5,335 ------- ------- Net long-term debt $13,078 $14,479 ======= ======= Maturities of long-term debt are as follows: 2001 $ 5,430 $ 5,476 2002 5,822 5,721 2003 6,243 6,135 2004 1,013 2,482 ------- ------- $18,508 $19,814 ======= =======
NOTE 12 REAL ESTATE LEASE On June 1, 1999, Invnsys leased a new facility from a related entity. The lease commenced on July 1, 1999, requires initial annual rentals of $153,600 (with annual increases) plus taxes and operating costs and expires on December 31, 2024. Invnsys has also guaranteed the mortgage on the premises in the amount of $938,219 and given a security interest in all of its assets, (excluding $544,481 of See Accompanying Notes and Independent Accountants' Review Report. 17 20 inventory) in the amount of $3,573,580. Future minimum lease payments excluding taxes and expenses, are as follows: 2001 $ 122,632 2002 169,344 2003 177,816 2004 186,708 November 1, 2004 - December 31, 2024 6,482,145 ----------------- Total $ 7,138,645 ==================
Rent expense for the three months ended January 31, 2001 and 2000 was $38,648 and $38,400 respectively. See Accompanying Notes and Independent Accountants' Review Report. 18 21 IBIZ TECHNOLOGY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 2001 (UNAUDITED) NOTE 13 ADVERTISING All direct advertising costs are expensed as incurred. For the three months ended January 31, 2001, the Company charged $14,317 in advertising expenses less a $41,909 refund for a net advertising cost of $(27,592). For the three months ended January 31, 2000, advertising costs were $9,110. NOTE 14 INTEREST The Company incurred interest expenses for the three months ended January 31, 2001 and 2000 as follows:
JANUARY 31, JANUARY 31, 2000 2001 (UNAUDITED) (UNAUDITED) (RESTATED) ----------- ---------- For operations $ 35,541 $ 20,481 For convertible debentures-beneficial conversion feature 302,390 572,935 -------- -------- Total $337,931 $593,416 ======== ========
NOTE 15 PRODUCT WARRANTY PROVISION Invnsys established a provision for product warranty to cover any potential warranty costs on computer equipment that are not covered by the computer manufacturer's warranty. Warranty summary
JANUARY 31, JANUARY 31 2001 2000 (UNAUDITED) (UNAUDITED) ----------- ----------- Balance, beginning of year $20,000 $50,000 Reduction for the year 0 14,432 ------- ------- Balance, end of year $20,000 $35,568 ======= =======
NOTE 16 RESEARCH AND DEVELOPMENT Invnsys incurred research and development cost for the three months ended January 31, 2001 and 2000 of $4,035 and $0, respectively. NOTE 17 OFFICERS' COMPENSATION At January 31, 2001, officers' compensation was as follows: President and Chief Executive Officer $ 250,000 Vice President 150,000 Chief Financial Officer 150,000 Chief Operating Officer 150,000 See Accompanying Notes and Independent Accountants' Review Report. 19 22 IBIZ TECHNOLOGY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 2001 (UNAUDITED) NOTE 18 ECONOMIC DEPENDENCY For the three months ended January 31, 2001, Invnsys had $405,706 of sales to one customer. Invnsys purchased approximately 20% of its PDA's from one supplier. NOTE 19 EMPLOYEE STOCK OPTIONS On January 31, 1999, the corporation adopted a stock option plan for the purpose of providing an incentive based form of compensation to the officers, directors, key employees and service providers of the Company. The stock subject to the plan and issuable upon exercise of options granted under the plan are shares of the corporation's common stock, $.001 par value, which may be either unissued or treasury shares. The aggregate number of shares of common stock covered by the plan and issuable upon exercise of all options granted shall be 5,000,000 shares, which shares shall be reserved for use upon the exercise of options to be granted from time to time. The exercise price is the fair market value of the shares (average of bid and ask price) at the date of the grant of the options. Vesting terms of the options range from immediately to ten years. The Company has elected to continue to account for stock-based compensation under APB Opinion No. 25, under which no compensation expense has been recognized for stock options granted to employees at fair market value. A summary of the option activity for the three months ended January 31, 2001 and 2000 pursuant to the terms of the plan is as follows:
JANUARY 31, JANUARY 31, 2001 2000 (UNAUDITED) (UNAUDITED) ----------- ----------- Balance, beginning of year 3,385,000 2,350,000 Granted 0 625,000 Exercised 0 0 Canceled (170,000) 0 ---------- ---------- Balance, end of year 3,215,000 2,975,000 ========== ==========
2,692,500 shares are exercisable at January 31, 2001. See Accompanying Notes and Independent Accountants' Review Report. 20 23 IBIZ TECHNOLOGY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 2001 (UNAUDITED) NOTE 19 EMPLOYEE STOCK OPTIONS (CONTINUED) Information regarding stock options outstanding as of January 31, 2001 and 2000 is as follows:
2001 2000 -------------- ----------------- Price range $0.53 - $2.00 $ 0.75 Weighted average exercise price $0.92 $ 0.92 Weighted average remaining contractual life 8 years, 5 months 9 years, 3 months Options exercised Price range 0 0 Shares 0 0 Weighted average exercise price 0 0 The weighted average fair value of options granted were estimated as of the date of grant using the Black-Scholes stock option pricing model, based on the following weighted average assumptions: Dividend yield 0 0 Expected volatility 50% 30% Risk free interest rate 5.13% - 6.65% 6.40% Expected life 10 years 10 years
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
JANUARY 31, JANUARY 31, 2000 2001 (UNAUDITED) (UNAUDITED) (RESTATED) ----------- ---------- Net (loss) As reported $ (932,511) $ (710,120) Pro forma $ (1,003,246) $ (799,820) (Loss) per share attributable to common stock As reported $ (.02) $ (.03) Pro forma $ (.03) $ (.03)
See Accompanying Notes and Independent Accountants' Review Report. 21 24 IBIZ TECHNOLOGY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 2001 (UNAUDITED) NOTE 20 COMMON STOCK PURCHASE WARRANTS As of January 31, 2001 the Company has issued the following common stock purchase warrants:
NUMBER EXERCISE DATE OF SHARES TERM PRICE -------------------- ---------- --------- --------------- May 13, 1999 100,000 3 years $ 1.00 May 7, 1999 80,000 10 years $ 0.75 May 13, 1999 100,000 10 years $ 1.00 November 9, 1999 100,000 4 years $ .94 December 14, 1999 75,000 3 years $ 1.66 December 28, 1999 200,000 4 years $ .94 January 10, 2000 281,250 5 years $ .99 March 27, 2000 615,000 5 years $ 1.45 - 2.05 May 17, 2000 125,000 5 years $ 1.04 - 5.00 June 16, 2000 150,000 1 year $ 1.50 - 2.00 August 30, 2000 34,125 5 years $ .937 August 30, 2000 250,000 3 years $ .50 August 30, 2000 250,000 3 years $ .75 August 30, 2000 36,364 3 years $ 1.00 September 3, 2000 109,000 3 years $ 1.00 September 27, 2000 278,750 3 years $ .90 October 31, 2000 1,740,000 2 years $ 105% of average closing price of stock December 20, 2000 400,000 5 years $ 105% of average closing price of stock December 20, 2000 150,000 5 years $ 105% --------- of average closing price of stock 4,524,489 =========
3,614,489 shares are exercisable at January 31, 2001. See Accompanying Notes and Independent Accountants' Review Report. 22 25 IBIZ TECHNOLOGY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 2001 (UNAUDITED) NOTE 21 COMMON STOCK AVAILABLE FOR ISSUANCE Total share authorized 100,000,000 Less shares issued and outstanding (38,017,966) ------------ 61,982,034 Less Reserved for employee stock options (4,910,000) Reserved for purchase warrants (4,524,489) Convertible debentures - estimated (2,700,000) ------------ Common stock available for issuance 49,847,545 ============
NOTE 22 FINANCIAL PROJECT MANAGEMENT AGREEMENTS In May 2000, the Company entered into a fourteen month agreement with Silverman Heller Associates to promote financial and corporate communication activities. The project manager will be compensated as follows: 1. A monthly fee of $5,500 beginning on May 17, 2000. 2. In connection with the services the project manager will provide, warrants to purchase 75,000 shares of common stock at the closing price on May 17, 2000 and an additional 50,000 shares at $5.00 per share. These warrants and the shares to be issued upon the exercise of the warrants will vest and be exercisable as of May 17, 2000 and expire five years from the issue date. The warrants will be granted registration rights on the next stock registration within the five-year term. The individuals will be compensated as follows: 1. 80,000 shares of common stock valued at $.80 per share on or before June 15, 2000. 2. 400,000 shares of common stock valued at $.80 per share on or before June 15, 2000. NOTE 24 CASH IN BANK The Company has $708,840 deposited in one banking institution. Only $200,000 of the balance is insured by the Federal Deposit Insurance Corporation. NOTE 25 SETTLEMENT OF LAWSUIT Invnsys settled its lawsuit with Epson America, Inc. for $2,500 which generated $101,369 of income on the settlement. See Accompanying Notes and Independent Accountants' Review Report. 23 26 IBIZ TECHNOLOGY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 2001 (UNAUDITED) NOTE 26 CANCELLATION OF DEBT The Company negotiated a cancellation of a $122,000 account payable with a supplier. This cancellation resulted in $122,000 of cancellation of debt income. NOTE 27 RESTATEMENT OF JANUARY 31, 2000 NET (LOSS), PAID IN CAPITAL, RETAINED EARNINGS AND NET (LOSS) PER SHARE The January 31, 2000 financial statements did not record the interest expense - convertible debentures - beneficial conversion feature in the amount of $572,935. The statements are restated as follows: Net (loss) As previously reported $ (710,120) Adjustment Interest expense - convertible debentures - beneficial conversion feature 572,935 ----------- As restated $(1,283,055) =========== Paid-in capital As previously reported $ 1,443,650 Adjustment Interest expense - convertible debentures - beneficial conversion feature 572,935 ----------- As restated $ 2,016,585 =========== Retained earnings As previously reported $(2,351,283) Adjustment Interest expense - convertible debentures - beneficial conversion feature 572,935 ----------- As restated $(2,924,218) =========== Net (loss) per share As previously reported $ (.03) Adjustment Interest expense - convertible debentures - beneficial conversion feature (.02) ----------- As restated $ (.05) ===========
See Accompanying Notes and Independent Accountants' Review Report. 24 27 IBIZ TECHNOLOGY CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 2001 (UNAUDITED) NOTE 28 SECURITIES AND EXCHANGE PROCEEDING On February 28, 2001, the Securities and Exchange Commission commenced an administrative proceeding against the Company. The Company has negotiated and submitted a settlement offer, which has been formally approved by the Commission. Pursuant to this settlement agreement, an administrative order has been issued which orders the Company to cease and desist from committing or causing any future violations of Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder. No other relief against the Company is being sought. NOTE 29 BUSINESS SEGMENT INFORMATION The Company has elected to organize its business based principally upon products and services. The Company operates in three reportable business segments: internet sales, product sales and services and other. The internet sales segment has responsibility for providing co-location and DSL income. The product sales segment has responsibility for sales of co-location equipment, software and licenses, computer equipment and PDA's. The service segment provides miscellaneous services to Invnsys' customers and absorbs all general and administrative expenses that are not allocated to internet sales and product sales. Summary of business segment for the three months ended January 31, 2001
INTERNET PRODUCT SERVICES SALES SALES AND OTHER CONSOLIDATED ----- ----- --------- ------------ Sales $ 216,164 $ 705,535 $ 83,629 $ 1,005,328 Operating profit (loss) (111,973) 144,062 (964,600) (932,511) Identifiable assets 1,806,195 0 402,801 2,208,996 Depreciation 47,335 0 12,824 60,159 Expenditures for long-lived 86,715 0 2,812 89,527 assets
NOTE 30 UNAUDITED FINANCIAL INFORMATION The accompanying financial information as of January 31, 2001 is unaudited. In managements opinion, such information includes all normal recurring entries necessary to make the financial information not misleading. See Accompanying Notes and Independent Accountants' Review Report. 25 28 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Through its operating subsidiary, INVNSYS, iBIZ designs, manufacturers, and distributes an expanding line of accessories for the fast-growing PDA (personal digital assistants) and handheld computer market which are distributed through large retail chains such as CompUSA and Fry's Electronics as well as numerous e-commerce sites such as Walmart.com, Mobile Planet and others. The Company also provides Web-enabling services which include co-location services, web design and development, and data center technical management services. The Company's infrastructure cabling services include design and installation of corporate voice and data networks, inside/outside plant, computer and phone room build-outs, and wireless and fiber optic telecommunications systems. Additionally, the Company markets LCD monitors, OEM notebook computers, digital subscriber line services, third party software, and general purpose financial application keyboards. SELECTED FINANCIAL INFORMATION.
Three Month Period Ended ------------------------ 1/31/2001 1/31/2000 --------- --------- (Restated) Statement of Operations Data Net sales $1,005,328 $ 628,853 Gross profit $ 381,061 $ 78,058 Operating income (loss) $ (827,891) $ (695,037) Net earnings (loss) after tax $ (932,511) $(1,283,055) Net earnings (loss) per share $ (0.02) $ (0.05)
1/31/2001 10/31/2000 --------- ---------- Balance Sheet Data Total assets $4,118,061 $ 4,016,882 Total liabilities $3,988,122 $ 3,135,576 Stockholders' equity (deficit) $ 129,939 $ 881,306
RESULTS OF OPERATIONS. Three month period ended January 31, 2001, compared to three month period ended January 31, 2000. Revenues. Sales increased by approximately 60% to $1,005,328 for the three month period ended January 31, 2001 from $628,853 for the three month period ended January 31, 2000. The increase was mainly as a result of growth in PDA products and co-location service sales. Cost of Sales. The cost of sales increased by approximately 13% to $624,267 in the three month period ended January 31, 2001 from $550,795 for the three month period ended January 31, 26 29 2000. The increase in cost of sales is attributable primarily to additional sales of PDA and co-location service sales and reflects the sale of products which have greater relative margins than past products. Gross Profit. Gross profit increased to approximately $381,061 for the three month period ended January 31, 2001 from approximately $78,058 for the three month period ended January 31, 2000. The increase of approximately 388% resulted primarily from the increase in revenues coupled with a lower cost of sales that did not increase in direct proportion to the increase in revenues. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased approximately 56% to $1,208,952 from $773,095 for the three month period ended January 31, 2001. The increase was primarily due to costs associated with expanding the PDA products and co-location facility services, as well as fees paid in connection with financing activities. Interest Expense. Interest expense of $35,541 for the three month period ended January 31, 2001 and $20,481 for the three month period ended January 31, 2000 was interest accrued primarily relating to the convertible debentures. The Company has issued convertible debt securities with a non-detachable conversion feature that was "in the money" at the date of issue. The Company accounts for such securities in accordance with Emerging Issues Task Force Topic D-60. The Company has recorded the fair value of the beneficial conversion feature as interest expense and an increase to Paid-in Capital in Excess of Par Value of Stock. Interest expense under the convertible debenture beneficial conversion feature totaled $302,390 for the three month period ended January 31, 2001, a decrease of 47% from the same type of interest expense of $572,935 for the three month period ended January 31, 2000. The decrease resulted from the reduction in new convertible debentures issued as compared to the corresponding period from the prior year. Net Losses. Net losses decreased to $932,511 for the three month period ended January 31, 2001 from $1,283,055 for the three month period ended January 31, 2000. The decrease in losses resulted primarily from the decrease in the interest expenses for the Company's convertible debenture-beneficial conversion feature coupled with an increase in the Company's gross profits. Liquidity and Capital Resources. Historically, IBIZ has had problems with liquidity. The Company has been unable to generate sufficient internal cash flow to fund all of its obligations. The Company has spent substantial funds on construction and installation of its co-location facility and expansion of its sales and marketing efforts. In December, 2000 the Company raised $1.1 million by issuing 8% convertible notes. The notes are due and payable on December 20, 2002, unless converted into common stock of the Company prior to that time. In December 2000, two parties converted their prior existing 8% convertible notes totaling $34,574 and received 205,542 shares of common stock, including stock paid for interest due. The Company currently has commitments for an additional $2.9 million to be invested pursuant to the 8% convertible notes, subject to meeting certain representations, warranties, covenants and conditions. The Company believes that amount, if received, should be sufficient to finance the Company's business plans through October, 2001. Management anticipates exercising its rights to obtain $900,000 of that amount before May, 2001, but there is no assurance that it will meet the conditions 27 30 necessary to do so. Without obtaining a portion of the $2.9 million, the Company may be required to alter or suspend planned growth initiatives. Management believes that its recent diversification into broadband connectivity services, third-party software sales, and its server co-location facility should improve its liquidity and cash flow. iBIZ recently expanded its distribution of PDA accessory line and certain hardware into several major retail and e-commerce stores. A continuing increase in orders from various PDA retail outlets may require greater capital than is presently available to the Company. The Company has entered into a purchase order and receivables financing agreement with Millennium Funding (a Canfield Capital Management LLC Company) whereby the Company can borrow up to a "to be determined" amount on a case-by-case basis of the purchase orders it receives and 70% of the receivables it accrues. This agreement was executed to insure available funding for anticipated growth in PDA sales volumes and provides for a 2.5% to 3% monthly financing fee for all amounts drawn against it. At the present time, the Company does not intend to draw upon this financing arrangement, but may be required to do so if its operations cannot be financed through its cash flow and other financing commitments. The Company's server co-location facility was opened in September, 2000. The co-location facility and related services currently generate revenue of approximately $72,000 per month. If the consumer demand that the Company anticipates for the server co-location facility fails to continue to increase, the Company may need additional funding. There is no assurance that the sales revenue currently received and high margins experienced, as well as currently anticipated sales growth from both the PDA accessory and the co-location facility will continue. Entry of additional competitors with substantially greater resources than those of the Company could put downward pressure on the anticipated margins. 28 31 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS INVNSYS was the defendant in a civil matter filed by Epson America, Inc. ("Epson"), in the Superior Court of the State of Arizona (Case No. CV2000-008155), filed 28 April 2000. The complaint alleged that over the past three (3) years, INVNSYS became indebted to Epson in the amount of $151,665.96. Since February 2, 1999, no payment had been made to Epson, leaving an unpaid balance of $102,636.05 plus interest. Epson sought to recover $102,636.05 plus interest accruing at a rate of ten percent (10%) from February 2, 1999, attorneys fees, incurred costs and expenses, together with accruing costs. IBIZ sought to recover additional commissions that it believed Epson owed it and intended to file a counterclaim in the amount of $480,100. As of January 29, 2001, the Company and Epson have agreed to the dismissal of the suit and the settlement of all outstanding issues, with the Company paying a single lump sum of $2,500 to Epson. iBIZ has been assessed approximately $62,000 in penalties and interest by the IRS in connection with payroll taxes due through the first quarter of 1999. The Company has paid the taxes, interest, and some portion of the penalty, but has requested an abatement of the remaining penalty imposed. The Company is awaiting a final disposition by the IRS. On February 28, 2001, the Securities and Exchange Commission (the "Commission") commenced an administrative proceeding against the Company. The Company entered into a settlement agreement with the Commission. Pursuant to this settlement agreement, an administrative order has been issued which orders the Company to cease and desist from committing or causing any future violations of Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder. No other relief against the Company was sought. This administrative proceeding was based on the Commission's allegations that the Company, through its President and CEO Ken Schilling, referenced certain reports prepared by Michael A. Furr in its press releases, and posted hyperlinks to Furr's reports on its website. The Commission alleged that the Furr reports contained false revenue and stock price projections. The Commission also alleged that the Company falsely characterized Furr as independent of the Company. The Company neither admitted nor denied the allegations as part of the settlement agreement. ITEM 2. CHANGES IN SECURITIES (c) Recent Sales of Unregistered Securities The securities described below represent equity securities of iBIZ sold by iBIZ during the three month period ended January 31, 2001 that were not registered under the Securities Act of 1933, as amended (the "Securities Act"), all of which were issued by the Company pursuant to exemptions under the Securities Act. Underwriters were involved in none of these transactions. In each case, the securities were sold to accredited investors, as determined by an investor questionnaire executed in conjunction with the respective subscription agreements. Pursuant to a previously executed stock purchase agreement with various individuals and institutions, in December 2000, the Company exercised its "Put Right" to require such investors to purchase an aggregate of $1.1 million of 8% Convertible Notes (the "Notes"). The Conversion Price for 29 32 all of the Notes is the lesser of (i) 80% of the average of the three lowest closing bid prices of the Common Stock on the Principal Market for the twenty-two (22) trading days prior to the Closing Date, or (ii) 80% of the average of the five lowest closing bid prices of the Common Stock on the Principal Market for the sixty (60) trading days prior to the Conversion Date, as defined in the Note. The maximum share of the Company that any Subscriber may own after conversion at any given time is 4.99%, unless the Subscriber gives 75 days prior notice. The Notes mature on December 20, 2002, with interest only payments due quarterly commencing April 1, 2001, and the principal is due in one lump sum on December 20, 2002. The Company also issued warrants to purchase 550,000 shares of Common Stock at an exercise price as calculated below. The warrants will give the holder the right to purchase common stock for $0.2275 per share, subject to certain equitable anti-dilution provisions. The warrants are immediately exercisable. In December 2000, two parties converted their 8% Convertible Notes totaling $34,574 and received 205,542 shares of common stock, including stock paid for interest due. iBIZ relied on either Regulation D, Rule 506 or Section 4(2) under the Securities Act with respect to these transactions. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits 10.39 Millennium Funding Receivables Factoring and PO Funding Proposal 23.06 Consent of Moffitt & Company, P.C. B. Reports on Form 8-K A report on Form 8-K was filed with the SEC on January 19, 2001, reporting a press release issued on January 12, 2001. 30 33 Pursuant to the requirements of Section 12 of the Securities Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned thereunto duly authorized. Dated this 16th day of March, 2001 iBIZ TECHNOLOGY CORP., A FLORIDA CORPORATION By: /s/ KENNETH W. SCHILLING --------------------------------------- Kenneth W. Schilling, President, Director By: /s/ TERRY S. RATLIFF --------------------------------------- Terry S. Ratliff, Vice President, Comptroller, Secretary, Director By: /s/ MARK H. PERKINS --------------------------------------- Mark H. Perkins, Executive Vice President Director 34 EXHIBIT INDEX Exhibit Number -------------- 10.39 Millennium Funding Receivables Factoring and PO Funding Proposal 23.06 Consent of Moffitt & Company ii