10QSB 1 ibiz_10q-043002.txt 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 APRIL 30, 2002 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.) 2238 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 [ ] No [X] Class Outstanding at August 20, 2002 ------------------------------ ------------------------------ Common stock, $0.001 par value 289,118,972 TABLE OF CONTENTS ----------------- PART I. - FINANCIAL INFORMATION.............................................1 ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).....................................3 BALANCE SHEETS ......................................................6 STATEMENTS OF OPERATIONS.............................................7 STATEMENT OF CASH FLOWS..............................................10 NOTES TO FINANCIAL STATEMENTS........................................12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PART II. - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS....................................................41 ITEM 2. CHANGES IN SECURITIES................................................41 ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................................42 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................42 ITEM 5. OTHER INFORMATION....................................................42 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................42 2 PART I ------ Item 1. Financial Information IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2002 AND 2001 3 TABLE OF CONTENTS PAGE NO. -------- INDEPENDENT ACCOUNTANTS' REVIEW REPORT.................................... 5 FINANCIAL STATEMENTS Consolidated Balance Sheets........................................ 6 Consolidated Statements of Operations..............................7 - 8 Consolidated Statement of Stockholders' (Deficit).................. 9 Consolidated Statements of Cash Flows..............................10-11 Notes to Consolidated Financial Statements.........................12-32 4 INDEPENDENT ACCOUNTANTS' REVIEW REPORT To The Board of Directors and Stockholders IBIZ Technology Corp. and Subsidiaries We have reviewed the accompanying consolidated balance sheet of IBIZ Technology Corp. and Subsidiaries as of April 30, 2002 and the related consolidated statements of operations and cash flows for the three and six months ended April 30, 2002 and 2001 and the statement of stockholders' (deficit) for the six months ended April 30, 2002 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 Subsidiaries. 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, 2001, and the related consolidated statements of operations, stockholders' (deficit) and cash flows for the year then ended (not presented herein); and in our report dated February 8, 2002 we expressed an unqualified opinion on those financial statements, with an additional comment that there were conditions which raised substantial doubt about the Company's ability to continue as a going concern. In our opinion, the information set forth in the accompanying consolidated balance sheet as of October 31, 2001, is fairly stated in all material respects in relation to the balance sheet from which it has been derived. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 26 to the financial statements, the Company has incurred significant operating losses, has negative working capital, lacks sufficient operating cash to purchase products to fill sales orders, is delinquent in payment of payroll taxes and is delinquent in payment of some wages. These conditions raise uncertainty about its ability to continue as a going concern. Management's plans regarding these matters also are described in Note 26. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. /s/ Moffitt & Company, P.C. MOFFITT & COMPANY, P.C. SCOTTSDALE, ARIZONA June 25, 2002 5 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS APRIL 30, 2002 AND OCTOBER 31, 2001
ASSETS APRIL 30, OCTOBER 31, 2002 2001 (UNAUDITED) (AUDITED) ------------- ------------- CURRENT ASSETS Cash and cash equivalents $ 0 $ 6,981 Accounts receivable, trade, net 16,008 93,747 Account receivable, factor 17,570 0 Account receivable, officer 8,670 0 Inventories 185,864 166,742 Prepaid expenses 60,356 54,127 Net assets held for sale 0 438,871 ------------- ------------- TOTAL CURRENT ASSETS 288,468 760,468 ------------- ------------- PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION 74,206 147,378 ------------- ------------- OTHER ASSETS Deposits 16,012 16,012 ------------- ------------- TOTAL ASSETS $ 378,686 $ 923,858 ============= ============= LIABILITIES AND STOCKHOLDERS' (DEFICIT) APRIL 30, OCTOBER 31, 2002 2001 (UNAUDITED) (AUDITED) ------------- ------------- CURRENT LIABILITIES Bank overdraft $ 4,483 $ 0 Accounts payable, trade 545,370 797,585 Note payable, trade 32,500 57,500 Accrued liabilities 839,586 727,050 Taxes payable 129,284 140,511 Deferred income 10,487 4,495 Convertible debentures payable, current portion 2,032,469 2,305,929 Note payable, factor 0 70,734 Notes payable, other, current portion 7,474 5,721 ------------- ------------- TOTAL CURRENT LIABILITIES 3,601,653 4,109,525 ------------- ------------- LONG-TERM LIABILITIES Convertible debentures payable 1,012,500 750,000 Notes payable, other 5,816 8,811 ------------- ------------- TOTAL LONG -TERM LIABILITIES 1,018,316 758,811 ------------- ------------- STOCKHOLDERS' EQUITY (DEFICIT) Preferred stock Authorized - 50,000,000 shares, par value $.001 per share Issued and outstanding -0- shares Common stock Authorized - 450,000,000 shares, par value $.001 per share Issued and outstanding April 30, 2002 - 249,159,275 shares 249,159 0 October 31, 2001 - 99,862,248 shares 0 99,862 Additional paid in capital 10,813,122 9,801,345 Accumulated deficit (15,303,564) (13,845,685) ------------- ------------- TOTAL STOCKHOLDERS' (DEFICIT) (4,241,283) (3,944,478) ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) $ 378,686 $ 923,858 ============= ============= See Accompanying Notes and Independent Accountants' Review Report. 6
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED APRIL 30, 2002 AND 2001 (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, APRIL 30, --------------------------- --------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ SALES $ 115,324 $ 369,185 $ 251,061 $ 1,209,287 COST OF SALES 68,218 306,269 151,734 851,601 ------------ ------------ ------------ ------------ GROSS PROFIT 47,106 62,916 99,327 357,686 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (426,102) (917,160) (875,407) (1,896,848) SETTLEMENT OF LAWSUIT 0 0 0 101,369 CANCELLATION OF DEBT 0 0 42,031 122,000 OTHER INCOME 0 20,636 0 20,962 ------------ ------------ ------------ ------------ OPERATING (LOSS) (378,996) (833,608) (734,049) (1,294,831) ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE) Interest income 22 6,763 37 16,379 Interest expense (37,532) (57,783) (123,285) (93,324) Interest expense - convertible debentures-beneficial conversion feature (66,666) (509,026) (182,880) (811,417) ------------ ------------ ------------ ------------ TOTAL OTHER INCOME (EXPENSE) (104,176) (560,046) (306,128) (888,362) ------------ ------------ ------------ ------------ (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (483,172) (1,393,654) (1,040,177) (2,183,193) INCOME TAXES 0 0 0 0 ------------ ------------ ------------ ------------ (LOSS) FROM CONTINUING OPERATIONS (483,172) (1,393,654) (1,040,177) (2,183,193) ------------ ------------ ------------ ------------ DISCONTINUED OPERATIONS (Loss) from operations of discontinued business segments (5,313) (66,992) (246,160) (209,965) Write-down of net assets held for sale (171,542) 0 (171,542) 0 ------------ ------------ ------------ ------------ (LOSS) FROM DISCONTINUED OPERATIONS (176,855) (66,992) (417,702) (209,965) ------------ ------------ ------------ ------------ NET (LOSS) $ (660,027) $(1,460,646) $(1,457,879) $(2,393,158) ============ ============ ============ ============ See Accompanying Notes and Independent Accountants' Review Report. 7
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) FOR THE THREE AND SIX MONTHS ENDED APRIL 30, 2002 AND 2001 (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, APRIL 30, --------------------------- --------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ NET (LOSS) PER COMMON SHARE Basic and Diluted: Continuing operations $ .00 $ (.04) $ (.01) $ (.06) Discontinued operations .00 .00 .00 .00 ------------ ------------ ------------ ------------ NET (LOSS) $ .00 $ (.04) $ (.01) $ (.06) ============ ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING Basic and diluted 239,688,609 37,989,702 239,688,609 37,989,702 ============ ============ ============ ============
Stock options and warrants to purchase 20,186,155 shares of common stock were not included in the computations of diluted loss per common share amounts. See Accompanying Notes and Independent Accountants' Review Report. 8 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT) FOR THE SIX MONTHS ENDED APRIL 30, 2002 (UNAUDITED)
PREFERRED STOCK COMMON STOCK ADDITIONAL ---------------- ----------------------------- PAID IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL ------- ------ ------------- ------------- ------------- ------------- ------------- BALANCE, NOVEMBER 1, 2001 0 $ 0 99,862,248 $ 99,862 $ 9,801,345 $(13,845,685) $ (3,944,478) CONVERSION OF DEBENTURES FOR COMMON STOCK: PRINCIPAL 0 0 58,415,455 58,416 276,361 0 334,777 ACCRUED INTEREST 0 0 4,305,172 4,305 17,453 0 21,758 FEES AND COSTS FOR ISSUANCE OF COMMON STOCK 0 0 0 0 (28,777) 0 (28,777) ISSUANCE OF COMMON STOCK FOR: PAYMENT OF ACCOUNTS PAYABLE 0 0 31,212,000 31,212 286,648 0 317,860 PAYMENT OF SALARIES AND RETENTION BONUSES 0 0 26,900,000 26,900 91,460 0 118,360 CONSULTING FEES 0 0 17,000,000 17,000 31,000 0 48,000 LEGAL FEES 0 0 5,750,000 5,750 74,750 0 80,500 DONATION OF STOCK BACK TO THE COMPANY FOR TREASURY STOCK 0 0 (9,285,600) (9,286) (122,998) 0 (132,284) ISSUANCE OF COMMON STOCK TO THE PRESIDENT TO REIMBURSE HIM FOR SHARES GIVEN TO DEBENTURE HOLDERS FROM: TREASURY STOCK 0 0 9,285,600 9,286 122,998 0 132,284 NEW SHARES 0 0 5,714,400 5,714 80,002 0 85,716 INTEREST EXPENSE - CONVERTIBLE DEBENTURES - BENEFICIAL CONVERSION FEATURE 0 0 0 0 182,880 0 182,880 NET (LOSS) FOR THE SIX MONTHS ENDED APRIL 30, 2002 0 0 0 0 0 (1,457,879) (1,457,879) ------- ------ ------------- ------------- ------------- ------------- ------------- BALANCE, APRIL 30, 2002 0 $ 0 249,159,275 $ 249,159 $ 10,813,122 $(15,303,564) $ (4,241,283) ======= ====== ============= ============= ============= ============= ============= See Accompanying Notes and Independent Accountants' Review Report. 9
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED APRIL 30, 2002 AND 2001 (UNAUDITED)
2002 2001 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) $(1,040,177) $(2,183,193) Adjustments to reconcile net (loss) to net cash (used) by operating activities of continuing operations: Loss from discontinued operations (417,702) (209,965) Write-down of net assets held for sale 171,542 0 Depreciation 110,222 122,507 Interest expense - convertible debentures-beneficial conversion feature 182,880 811,417 Common stock issued for expenses 128,500 374 Allowance for uncollectible accounts, net (10,154) 0 Changes in operating assets and liabilities: Accounts receivable, trade 87,893 234,871 Accounts receivable, factor (17,570) 0 Inventories (19,122) (40,355) Prepaid expenses (6,229) (25,099) Deposits 0 947 Accounts and notes payable, trade 309,322 (359,620) Accrued liabilities and taxes 241,427 116,297 Customer deposits 0 77,180 Deferred income 5,992 (44,746) ------------ ------------ NET CASH (USED) BY OPERATING ACTIVITIES (273,176) (1,499,385) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment 0 (98,236) Proceeds from sale of net assets held for sale 48,635 0 ------------ ------------ NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 48,635 (98,236) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Bank overdraft 4,483 0 Net proceeds from issuance of convertible debentures payable 293,723 1,343,463 Repayment of note payable, factor (70,734) 0 Repayment of notes payable, other (1,242) (2,594) Changes in notes and loan receivable, officer (8,670) 0 ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 217,560 1,340,869 ------------ ------------ See Accompanying Notes and Independent Accountants' Review Report. 10
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE SIX MONTHS ENDED APRIL 30, 2002 AND 2001 (UNAUDITED)
2002 2001 ---------- ---------- NET (DECREASE) IN CASH AND CASH EQUIVALENTS $ (6,981) $(256,752) CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 6,981 631,375 ---------- ---------- CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 0 $ 374,623 ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during period for: Interest $ 26,972 $ 2,354 ========== ========== Taxes $ 0 $ 0 ========== ========== NON-CASH INVESTING AND FINANCING ACTIVITIES Issuance of common stock for convertible debentures $ 334,777 $ 34,576 ========== ========== Issuance of common stock for fees, services and expenses $ 218,083 $ 374 ========== ========== Issuance of common stock for accounts payable and accrued liabilities $ 339,618 $ 0 ========== ========== Interest expense - convertible debentures-beneficial conversion feature $ 182,880 $ 811,417 ========== ========== See Accompanying Notes and Independent Accountants' Review Report. 11
IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2002 AND 2001 (UNAUDITED) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS ------------------ IBIZ Technology Corp. (hereinafter referred to as the Company) was organized on April 6, 1994, under the laws of the State of Florida. The Company operates as a holding company for subsidiary acquisitions. Invnsys Technology Corporation (hereinafter referred to as Invnsys) is a management company that administers subsidiary companies. IBIZ, Inc. designs, manufactures (through subcontractors), and distributes a line of accessories for the PDA and handheld computer market which are distributed through large retail chain stores and e-commerce sites. IBIZ Inc. also markets LCD monitors, OEM notebook computers, third party software, and general purpose financial application keyboards. Qhost, Inc. provides Web-enabling services which included Co-Location services, Web design and development, and data center technical management services. These segments of the Company's operations were discontinued on October 31, 2001. PRINCIPLES OF CONSOLIDATION --------------------------- The consolidated financial statements include the accounts of IBIZ Technology Corp. and its wholly owned subsidiaries - Invnsys Technology Corporation, IBIZ, Inc. and Qhost, Inc. 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. ACCOUNTS RECEIVABLE ------------------- Accounts receivable are reported at the customers' outstanding balances less any allowance for doubtful accounts. 12 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2002 AND 2001 (UNAUDITED) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ALLOWANCE FOR DOUBTFUL ACCOUNTS ------------------------------- The allowance for doubtful accounts on accounts receivables is charged to income in amounts sufficient to maintain the allowance for uncollectible accounts at a level management believes is adequate to cover any possible losses. INVENTORIES ----------- Inventories are stated at the lower of cost (determined principally by average cost) or market. PROPERTY AND EQUIPMENT ---------------------- Property and equipment are stated at cost. Major renewals and improvements are charged to the asset accounts while replacement, maintenance and repairs, which do not improve or extend the lives of the respective assets, are expensed. At the time property and equipment are retired or otherwise disposed of, the asset and related accumulated depreciation accounts are relieved of the applicable amounts. Gains or losses from retirements or sales are credited or charged to income. 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 10 Years Office furniture and equipment 5-10 Years Vehicles 5 Years ACCOUNTING FOR CONVERTIBLE DEBT SECURITIES ------------------------------------------ The Company has issued convertible debt securities with non-detachable conversion features. 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 features as interest expense and an increase to Additional Paid in Capital. 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. 13 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2002 AND 2001 (UNAUDITED) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION ------------------- Product sales - When the goods are shipped and title passes to the customer. Maintenance agreements - Income from maintenance agreements is being recognized on a straight-line basis over the life of the service contracts. The unearned portion is recorded as deferred income. Service income - When services are performed. PREPAID EXPENSES ---------------- The Company's prepaid expenses are being amortized over a one year period. LONG-LIVED ASSETS ----------------- Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may no longer be appropriate. The Company assesses the recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value. 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. 14 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2002 AND 2001 (UNAUDITED) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SHIPPING AND HANDLING COSTS --------------------------- The Company's policy is to classify shipping and handling costs as part of cost of goods sold in the statement of operations. 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 ----------------------- IBIZ, Inc. is in the computer and computer technology industry and its products are subject to rapid obsolescence and management must authorize funds for research and development costs in order to stay competitive. COMMON STOCK ISSUED FOR NON-CASH TRANSACTIONS --------------------------------------------- It is the Company's policy to value stock issued for non-cash transactions at the stock closing price at the date the transaction is finalized. 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 at April 30, 2002 and October 31, 2001, 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. 15 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2002 AND 2001 (UNAUDITED) NOTE 3 AMENDMENT OF ARTICLES OF INCORPORATION The Articles of Incorporation were amended to increase the number of authorized shares of common stock from 100,000,000 to 450,000,000 and authorized the creation of 50,000,000 shares of blank check preferred stock. NOTE 4 ACCOUNTS RECEIVABLE A summary of accounts receivable and allowance for doubtful accounts is as follows: APRIL 30, OCTOBER 31, 2002 2001 (UNAUDITED) (AUDITED) ------------- ------------- Accounts receivable $ 61,861 $ 143,747 Allowance for doubtful accounts 45,853 50,000 ------------- ------------- Net accounts receivable $ 16,008 $ 93,747 ============= ============= APRIL 30, OCTOBER 31, 2002 2001 (UNAUDITED) (AUDITED) ------------- ------------- Allowance for doubtful accounts Balance, at beginning of period $ 50,000 $ 25,000 Additions for the period 6,007 80,534 Recovery for the period 1,860 0 Write-off of uncollectible accounts for the period (12,014) (55,534) ------------- ------------- Balance, at end of period $ 45,853 $ 50,000 ============= ============= 16 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2002 AND 2001 (UNAUDITED) NOTE 5 INVENTORIES The inventories are comprised of the following: APRIL 30, OCTOBER 31, 2002 2001 (UNAUDITED) (AUDITED) ------------- ------------- Finished products $ 180,864 $ 161,742 Office 5,000 5,000 ------------- ------------- $ 185,864 $ 166,742 ============= ============= NOTE 6 NET ASSETS HELD FOR SALE On December 21, 2001, Invnsys sold all of the properties, rights and assets used in connection with the internet service segment of Invnsys'operations. The services sold include the provision of dial up Internet access, dedicated internet access, Web hosting and Web page development services, Co-Location and bandwidth and managed server services to residential and commercial customers. The Co-Location operations are included in Discontinued Operations. In accordance with provisions of SFAS No. 121, the assets included in net assets held for sale will not be depreciated. See Note 36 for current year disposition of net assets held for sale. NOTE 7 PROPERTY AND EQUIPMENT Property and equipment and accumulated depreciation consists of: APRIL 30, OCTOBER 31, 2002 2001 (UNAUDITED) (AUDITED) ------------- ------------- Tooling $ 68,100 $ 68,100 Machinery and equipment 41,821 41,821 Office furniture and equipment 81,027 81,027 Vehicles 39,141 39,141 Software 0 90,159 ------------- ------------- 230,089 320,248 Less accumulated depreciation 155,883 172,870 ------------- ------------- Total property and equipment $ 74,206 $ 147,378 ============= ============= 17 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2002 AND 2001 (UNAUDITED) NOTE 8 NOTES RECEIVABLE, OFFICERS APRIL 30, OCTOBER 31, 2002 2001 (UNAUDITED) (AUDITED) ------------- ------------- Invnsys Technology Corporation A note due from the president of the Company, which is payable on demand and accrues interest at 6%. Management believes the note is uncollectible since IBIZ no longer has collateral for the note. The Company elected to write-off the loan as uncollectible by establishing an allowance for doubtful collections for the total amount due on the note. Total amount of note $ 373,159 $ 373,159 Less allowance for doubtful collection (373,159) (373,159) ------------- ------------- Net note $ 0 $ 0 ============= ============= NOTE 9 TRADE NOTE PAYABLE TO GAMMAGE AND BURNHAM In July 2001, the Company issued a note to Gammage and Burnham, PLC for the payment of $80,000 of legal fees previously recorded in accounts payable. The note is secured by accounts receivable but the security is waived in favor of the note payable to Platinum Funding Corporation providing Gammage and Burnham PLC receives $2,500 each time that Invnsys draws against its factoring line. NOTE 10 ACCRUED LIABILITIES Accrued liabilities consist of the following: APRIL 30, OCTOBER 31, 2002 2001 (UNAUDITED) (AUDITED) ------------- ------------- Interest $ 298,300 $ 201,987 Officers' bonuses 35,233 104,552 Bonuses, other 0 41,140 Wages 283,275 231,806 Severance wages 150,000 75,000 Vacation pay 41,238 41,238 Other 31,540 31,327 ------------- ------------- $ 839,586 $ 727,050 ============= ============= 18 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2002 AND 2001 (UNAUDITED) NOTE 11 TAXES PAYABLE APRIL 30, OCTOBER 31, 2002 2001 (UNAUDITED) (AUDITED) ------------- ------------- Taxes payable consists of the following: Payroll taxes payable $ 110,256 $ 121,483 California income tax payable 19,028 19,028 ------------- ------------- $ 129,284 $ 140,511 ============= ============= NOTE 12 INCOME TAXES APRIL 30, OCTOBER 31, 2002 2001 (UNAUDITED) (AUDITED) ------------- ------------- (Loss) from continuing operations before income taxes $ (1,040,177) $ (2,183,193) 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: APRIL 30, OCTOBER 31, 2002 2001 (UNAUDITED) (AUDITED) ------------- ------------- Deferred tax assets: Net operating loss carryforwards $ 2,639,876 $ 2,241,000 Accrued expenses and miscellaneous 134,700 134,700 Tax credit carryforward 38,424 38,424 ------------- ------------- 2,813,000 2,414,124 Less valuation allowance 2,813,000 2,414,124 ------------- ------------- Net deferred tax asset $ 0 $ 0 ============= ============= 19 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2002 AND 2001 (UNAUDITED) NOTE 12 INCOME TAXES (CONTINUED) A reconciliation of the valuation allowance is as follows: APRIL 30, OCTOBER 31, 2002 2001 (UNAUDITED) (AUDITED) ------------- ------------- Balance, at beginning of period $ 2,414,124 $ 1,158,265 Addition for the period 398,876 1,255,859 ------------- ------------- Balance, at end of period $ 2,813,000 $ 2,414,124 ============= ============= NOTE 13 TAX CARRYFORWARDS The Company has the following tax carryforwards at April 30, 2002: EXPIRATION YEAR AMOUNT DATE ------------------- ------------ ---------------- Net operating loss October 31, 1995 $ 2,500 October 31, 2010 October 31, 1997 253,686 October 31, 2012 October 31, 1998 71,681 October 31, 2013 October 31, 1999 842,906 October 31, 2019 October 31, 2000 3,574,086 October 31, 2020 October 31, 2001 5,051,232 October 31, 2021 April 30, 2002 1,457,879 October 31, 2022 ------------ $ 11,253,970 ============ Capital loss October 31, 1997 25,600 October 31, 2002 20 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2002 AND 2001 (UNAUDITED) NOTE 13 TAX CARRYFORWARDS (CONTINUED) EXPIRATION YEAR AMOUNT DATE ------------------- ------------ ---------------- Contribution October 31, 1997 $ 545 October 31, 2002 October 31, 1999 2,081 October 31, 2004 October 31, 2000 3,008 October 31, 2005 October 31, 2001 1,000 October 31, 2006 Research tax credits 38,424 NOTE 14 CONVERTIBLE DEBENTURES APRIL 30, OCTOBER 31, 2002 2001 (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. 21 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2002 AND 2001 (UNAUDITED) NOTE 14 CONVERTIBLE DEBENTURES (CONTINUED) APRIL 30, OCTOBER 31, 2002 2001 (UNAUDITED) (AUDITED) ------------- ------------- 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 the debenture holders. 11. Debenture holders have an 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. $5,000,000 CONVERTIBLE DEBENTURE $ 1,705,387 $ 1,891,456 On October 31, 2001, the Company issued 8% convertible debentures as follows: 1. Due date - October 30, 2002 and January 15, 2003. 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. 22 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2002 AND 2001 (UNAUDITED) NOTE 14 CONVERTIBLE DEBENTURES (CONTINUED) APRIL 30, OCTOBER 31, 2002 2001 (UNAUDITED) (AUDITED) ------------- ------------- 7. The Company must reserve a number of common shares equal to but 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 conversion 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. LAURUS MASTER FUND, LTD. $ 327,082 $ 414,473 In April and July 2001, the Company issued $500,000 and $150,000 of 8% convertible debentures under the following terms and conditions: 23 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2002 AND 2001 (UNAUDITED) NOTE 14 CONVERTIBLE DEBENTURES (CONTINUED) APRIL 30, OCTOBER 31, 2002 2001 (UNAUDITED) (AUDITED) ------------- ------------- 1. Due dates - April 2002 and July 2002. 2. Interest on September 30, 2001 and quarterly thereafter. 3. Default interest rate - 20%. 4. On the first financing, the Company issued warrants to purchase 1,500,000 shares of common stock at the lesser of $.1225 per share or an amount equal to the average of the three lowest closing prices for a ten day trading period. The Company may redeem the warrants for $.666 per share. On the second financing, the Company issued warrants to purchase 1,500,000 shares of common stock at the lesser of $.048 or an amount equal to 105% of the average of the three lowest closing bid prices for the common stock for the ten trading days prior to but not including the date the warrants are exercised. 5. Conversion terms - The debenture holder shall have the right to convert all or a portion of the outstanding principal amount of this debenture plus any accrued interest into such number of shares of common stock as shall equal the quotient obtained by dividing the principal amount of this debenture by the applicable conversion price. 6. Conversion price - Lower of eighty percent of the average of the three lowest closing bid prices for a specified three day or twenty-two day period. 7. Prepayment - The debenture may not be paid prior to the maturity date without the consent of the holder. ALPHA CAPITAL $ 262,500 $ 0 In January and April 2002, the Company issued an 8% convertible debenture as follows: 1. Due date - January 30, 2004. 2. Interest payable quarterly from March 31, 2002. 3. Default interest rate - 20%. 24 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2002 AND 2001 (UNAUDITED) NOTE 14 CONVERTIBLE DEBENTURES (CONTINUED) APRIL 30, OCTOBER 31, 2002 2001 (UNAUDITED) (AUDITED) ------------- ------------- 4. Fees and costs - 7% - 10% of cash received for debentures and warrants plus legal fees. 5. Conversion price - (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 three lowest closing bid prices for the stock for sixty days. 6. The debentures are unsecured. ------------- ------------- Total debentures $ 3,044,969 $ 3,055,929 Less current portion 2,032,469 2,305,929 ------------- ------------- Long-term portion $ 1,012,500 $ 750,000 ============= ============= NOTE 15 NOTE PAYABLE, FACTOR On October 9, 2001, the Company entered into a two year factoring agreement with Platinum Funding Corporation. The terms of the agreement provide that Platinum Funding Corporation may purchase Invnsys' accounts receivable, without recourse, by advancing 70% of the sales invoice to Invnsys. The interest charged on the loan is based upon the period of time an invoice is unpaid and ranges from 3% to 15%. NOTE 16 NOTE PAYABLE, OTHER APRIL 30, OCTOBER 31, 2002 2001 (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 $1,800. $ 13,290 $ 14,532 Less: current portion 7,474 5,721 ------------- ------------- Net long-term debt $ 5,816 $ 8,811 ============= ============= 25 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2002 AND 2001 (UNAUDITED) NOTE 16 NOTE PAYABLE, OTHER (CONTINUED) APRIL 30, OCTOBER 31, 2002 2001 (UNAUDITED) (AUDITED) ------------- ------------- Maturities of long-term debt are as follows: April 30, 2002 $ 0 $ 1,859 April 30, 2003 7,474 5,339 April 30, 2004 5,816 6,229 April 30, 2005 0 ------------- ------------- $ 13,290 $ 14,532 ============= ============= NOTE 17 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, APRIL 30, ------------------------ ------------------------ 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Payroll $ 110,877 $ 47,406 $ 376,481 $ 592,224 Consulting, net (35,003) 17,550 52,207 42,641 Legal 94,183 34,521 94,524 109,506 Other 256,045 817,683 352,195 1,152,477 ----------- ----------- ----------- ----------- $ 426,102 $ 917,160 $ 875,407 $1,896,848 =========== =========== =========== =========== NOTE 18 DISCONTINUED OPERATIONS APB 30 requires that an entity restate prior year financial statements to disclose the results of subsequent discontinued operations. The network integration services, digital subscriber line high speed internet connection services, and Co-Location computer data and server facility were discontinued on October 31, 2001. The April 30, 2001 statements of operations and cash flows were restated to segregate the (loss) from discontinued operations from continued operations. The following information is presented for the discontinued operations: A. Segments discontinued - as indicated above B. Discontinued date - October 31, 2001 C. Manner of disposal - write-down of assets to fair market value and sale of segments 26 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2002 AND 2001 (UNAUDITED) NOTE 19 COMPUTATION OF EARNINGS PER SHARE APRIL 30, APRIL 30, 2001 2002 RESTATED ------------- ------------- From continuing operations Net (loss) from continuing operations $ (1,040,177) $ (2,183,193) Weighted average number of common shares outstanding 239,688,609 37,989,702 (Loss) per share $ (.01) $ (.06) From discontinued operations Net (loss) from discontinued operations $ (417,702) $ (209,965) Weighted average number of common shares outstanding 239,688,609 37,989,702 (Loss) per share $ .00 $ .00 NOTE 20 CANCELLATION OF DEBT 2002 2001 ------------- ------------- Settlement of lawsuit $ 0 $ 101,369 Invnsys settled its lawsuit with Epson America, Inc. for $2,500 which generated $101,369 of income. Account payable The Company negotiated a cancellation of $122,000 account payable with a supplier. This cancellation resulted in $122,000 of income. 0 122,000 Settlement of prior year liabilities 42,031 0 ------------- ------------- $ 42,031 $ 223,369 ============= ============= 27 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2002 AND 2001 (UNAUDITED) NOTE 21 REAL ESTATE LEASE On January 8, 2002, IBIZ, Inc. leased its office and warehouse facilities under the following terms and conditions: 1. Term - Three years from February 1, 2002 to January 31, 2005 2. Size of facility - 4,343 square feet 3. Base rent - Monthly rentals plus taxes and common area operating expenses 4. Base rental schedule - MONTHS RENT ------------- -------------- 1 - 12 $ 2,172 13 - 24 3,692 25 - 36 4,343 Future minimum lease payments excluding taxes and expenses, are as follows: April 30, 2003 $ 30,624 April 30, 2004 46,257 April 30, 2005 39,087 ----------- $ 115,968 =========== Rent expense for the six months ended April 30, 2002 and 2001 was $35,099 and $80,433, respectively. NOTE 22 ADVERTISING All direct advertising costs are expensed as incurred. Invnsys charged to operations $4,931 and $(21,101) in advertising costs for the six months ended April 30, 2002 and 2001, respectively. NOTE 23 RESEARCH AND DEVELOPMENT Invnsys incurred research and development cost for the six months ended April 30, 2002 and 2001 of $0 and $5,871, respectively. NOTE 24 WORKERS' COMPENSATION INSURANCE As of the date of this report, the Company does not have workers' compensation insurance for its employees. 28 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2002 AND 2001 (UNAUDITED) NOTE 25 OFFICERS' COMPENSATION The Company entered into employment agreements with four of its corporate officers. The contracts are for three years beginning July 2001 and provide for the following: 1. Salaries from $150,000 to $250,000 for each officer. On November 1, 2001, the officers voluntarily reduced their salaries to $100,000 and $125,000. 2. Bonuses of 1% of total sales for each of its officers. 3. Options for 1,200,000 shares of common stock which will vest and be exercisable for a period of ten years. 4. Option price of $.02 a share. 5. Termination - Termination by the Company without cause - the employee shall receive six months salary Change of control - in the event of change of control, the Company shall pay the employee a lump sum payment of three years annual salary. NOTE 26 GOING CONCERN These financial statements are presented on the basis that the Company is a going concern. Going concern contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time. The following factors raise uncertainty as to the Company's ability to continue as a going concern: A. Continued operating losses B. Negative working capital C. Lack of cash to purchase products to complete sales orders D. Delinquent payroll taxes E. Unpaid wages F. Decline in national economy Management's plans to eliminate the going concern situation include but are not limited to: A. Reduction in operating overhead. The Company reduced its payroll from approximately 50 employees to 7. B. Moved its office and warehouse facility. The Company anticipates that rent, utilities and property taxes will be reduced by $200,000 per year. C. Discontinued segments that were not profitable. D. Sale of assets held for sale. E. Arranged for new financing through convertible debentures. F. Paid, some but not all, delinquent payables and unpaid wages through the issuance of common stock. 29 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2002 AND 2001 (UNAUDITED) NOTE 26 GOING CONCERN (CONTINUED) G. Requested abatement of delinquent payroll tax penalties. H. Purchased products to complete sales orders from funds received from the new debenture financing. NOTE 27 EMPLOYEE STOCK OPTIONS On January 31, 1999, the corporation adopted the 1999 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 10,000,000 shares, which shares shall be reserved for use upon the exercise of options to be granted from time to time. The exercise price is the fair market value of the shares (average of bid and ask price) at the date of the grant of the options. Vesting terms of the options range from immediately to five years. The Company has elected to continue to account for stock-based compensation under APB Opinion No. 25, under which no compensation expense has been recognized for stock options granted to employees at fair market value. A summary of the option activity for the six months ended April 30, 2002 and 2001, pursuant to the terms of the plan is as follows: SHARES WEIGHTED UNDER AVERAGE OPTION EXERCISE PRICE ------------- ------------- Options outstanding at October 31, 2001 3,145,000 $ .92 Granted 0 .00 Exercised 0 .00 Cancelled and expired 685,000 .62 ------------- ------------- Options outstanding at April 30, 2002 2,460,000 .55 ============= 2,460,000 shares are exercisable at April 30, 2002 30 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2002 AND 2001 (UNAUDITED) NOTE 27 EMPLOYEE STOCK OPTIONS (CONTINUED) Information regarding stock options outstanding as of April 30, 2002 and 2001 is as follows: 2002 2001 ------------- ------------- Price range $.02 - $1.06 $ .75- $2.00 Weighted average exercise price $ .55 $ .90 Weighted average remaining contractual 8 years, 8 years, life 0 months 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 in the six months ended April 30, 2002 and 2001 were estimated as of the date of grant using the Black-Scholes stock option pricing model, based on the following weighted average assumptions: 2002 2001 ------------- ------------- Dividend yield 0 0 Expected volatility 50% 50% Risk free interest rate 5.13% - 6.65% 5.13 - 6.65% Expected life 5 - 10 years 5 - 10 years For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows: APRIL 30, APRIL 30, 2002 2001 ------------- ------------- Net (loss) from continuing operations As reported $ (1,040,197) $ (2,183,193) Pro forma $ (1,223,638) $ (2,353,787) (Loss) per share attributable to common stock As reported $ (.01) $ (.06) Pro forma $ (.01) $ (.06) 31 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2002 AND 2001 (UNAUDITED) NOTE 27 EMPLOYEE STOCK OPTIONS (CONTINUED) On November 21, 2001, the stockholders approved the IBIZ Technology Corp. 2001 stock option plan. The plan provides for the grant of stock options to purchase common stock to eligible directors, officers, key employees and service providers to IBIZ. The 2001 stock option plan covers an aggregate maximum of 10,000,000 shares of common stock and provides for the granting of both incentive stock options and non-qualified stock options. The exercise price may not be less than the fair market value of the common stock on the date of the grant of the option. NOTE 28 COMMON STOCK PURCHASE WARRANTS As of April 30, 2002 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 August 30, 2000 34,125 5 years $ .937 August 30, 2000 250,000 3 years $ .50 August 30, 2000 250,000 3 years $ .75 August 30, 2000 36,364 3 years $ 1.00 September 3, 2000 109,000 3 years $ 1.00 September 27, 2000 278,750 3 years $ .90 October 31, 2000 500,000 2 years $ .4755 December 20, 2000 400,000 5 years $ .2275 December 20, 2000 150,000 5 years $ .2275 April 26, 2001 1,500,000 5 years $ .1225 June 22, 2001 1,500,000 5 years $ .042 June 27, 2001 1,500,000 5 years $ .048 August 21, 2001 525,000 5 years $ .039 October 9, 2001 350,000 5 years $ .0256 32 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2002 AND 2001 (UNAUDITED) NOTE 28 COMMON STOCK PURCHASE WARRANTS (CONTINUED) NUMBER EXERCISE DATE OF SHARES TERM PRICE ----------------- --------- ------------ ------------- May 13, 1999 100,000 3 years $ 1.00 January 15, 2002 166,666 5 years $ .0097 January 15, 2002 500,000 5 years $ .0097 January 30, 2002 5,000,000 5 years $ FMV April 23, 2002 3,000,000 5 years $ FMV ---------- 17,726,155 ========== 17,726,155 shares are exercisable at January 31, 2002. NOTE 29 LEGAL PROCEEDINGS The Company is the defendant in three lawsuits for unpaid accounts payable and wages. Management has recorded a liability in the amount of $45,000 for these debts and is negotiating with the creditors to reduce the amounts of the final settlements. NOTE 30 ECONOMIC DEPENDENCY For the six months ended April 30, 2002, IBIZ, Inc. had sales of approximately 19% of its PDA's to one customer. NOTE 31 SECURITIES AND EXCHANGE PROCEEDING On February 28, 2001, the Securities and Exchange Commission commenced an administrative proceeding against the Company. The Company 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 32 UNPAID OFFICERS' SALARIES On December 20, 2001, the Board of Directors authorized the issuance of convertible debentures to the officers of the Company as consideration for their unpaid wages. As of the date of this report, the debentures have not been issued. 33 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2002 AND 2001 (UNAUDITED) NOTE 33 PREFERRED STOCK On December 20, 2001, the Board of Directors authorized the issuance of 3,500,000 shares of preferred stock to three officers and one director in lieu of their annual bonus and retention incentives. The preferred stock will have a 10:1 conversion rate from common stock to preferred stock and will have a "super" voting right of 100:1. As of the date of this report the preferred stock had not been issued. NOTE 34 CONVERTIBLE LOCK AGREEMENT In January 2002, the debenture holders agreed that they would not convert any debentures for 60 days and further that they would not convert any debentures for six months unless the market price of the stock exceeds $.02. NOTE 35 UNAUDITED FINANCIAL INFORMATION The accompanying financial information as of April 30, 2002 is unaudited. In management's opinion, such information includes all normal recurring entries necessary to make the financial information not misleading. NOTE 36 CONTINGENCIES Real Estate at 1919 W. Lone Cactus Drive, Phoenix, Arizona ---------------------------------------------------------- The Company has pledged all of its assets, except inventory, to guarantee a mortgage of $915,000 on the premises it previously occupied at 1919 W. Lone Cactus Drive, Phoenix, Arizona. Ken Schilling, the President of the Company has an ownership interest in the property at 1919 W. Lone Cactus Drive. Contract Termination Fees on Co-Location Operations --------------------------------------------------- The connectivity providers for the discontinued Co-Location operations charged a $130,000 termination fee. The Company does not believe this fee is payable as the Co-Location operations were transferred to Arizona Internet L.L.C. without any termination activity by the provider. 34 IBIZ TECHNOLOGY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2002 AND 2001 (UNAUDITED) NOTE 37 RELATED PARTY TRANSACTION On February 1, 2002, the Company transferred $249,918 of net assets held for sale in full payment of delinquent rent and property taxes in the amount of $78,376 on property previously rented by the Company. Ken Schilling, the President of the Company, has an ownership interest in lessor of this property. 35 MANAGEMENT'S DISCUSSION AND ANALYSIS Through its operating subsidiary, IBIZ, Inc. designs, manufactures, and distributes personal digital assistant accessories (PDA accessories), small footprint desktop computers, transaction printers, general purpose financial application keyboards, numeric keypads, TFT-LCD monitors and related products. IBIZ also markets a line of OEM notebook computers and distributes a line of transactional and color printers. IBIZ also offered, digital subscriber line high-speed Internet connection services, a co-location server facility and business-to-business software sales. These products were discontinued in 2001. SELECTED FINANCIAL INFORMATION SIX MONTHS ENDED ----------------------------- APRIL 30, APRIL 30, 2002 2001 ------------ ------------ Statement of Operations Data Net sales $ 251,061 $ 1,209,287 Gross profit 99,327 357,686 Loss from continuing operations (1,040,177) (2,183,193) Net (loss) after tax (1,457,879) (2,393,158) Net (loss) per share (.01) (.06) Continuing operations Discontinued operations (.00) (.00) THREE MONTHS ENDED ----------------------------- APRIL 30, APRIL 30, 2002 2001 ------------ ------------ Statement of Operations Data Net sales $ 115,324 $ 369,185 Gross profit 47,106 62,916 Loss from continuing operations (483,172) (1,393,654) Net (loss) after tax (660,027) (1,460,646) Net (loss) per share (.00) (.04) Continuing operations Discontinued operations (.00) (.00) APRIL 30, OCTOBER 31, 2002 2001 ------------ ------------ Balance Sheet Data Total assets $ 378,686 $ 923,858 Total liabilities 4,619,969 4,868,336 Stockholders' (deficit) (4,241,283) (3,944,478) 36 CRITICAL ACCOUNTING POLICIES ---------------------------- Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses. In consultation with our Board of Directors and Audit Committee, we have identified five accounting principles that we believe are key to an understanding of our financial statements. These important accounting policies require management's most difficult, subjective judgements. ACCOUNTS RECEIVABLE ------------------- Accounts receivable are reported at the customers' outstanding balances less any allowance for doubtful accounts. ALLOWANCE FOR DOUBTFUL ACCOUNTS ------------------------------- The allowance for doubtful accounts on accounts receivables is charged to income in amounts sufficient to maintain the allowance for uncollectible accounts at a level management believes is adequate to cover any possible losses. INVENTORIES ----------- Inventories are stated at the lower of cost (determined principally by average cost) or market. ACCOUNTING FOR CONVERTIBLE DEBT SECURITIES ------------------------------------------ The Company has issued convertible debt securities with non-detachable conversion features. 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 features as interest expense and an increase to Additional Paid in Capital. REVENUE RECOGNITION ------------------- Product sales - When the goods are shipped and title passes to the customer. Maintenance agreements - Income from maintenance agreements is being recognized on a straight-line basis over the life of the service contracts. The unearned portion is recorded as deferred income. Service income - When services are performed. 37 STOCK-BASED COMPENSATION ------------------------ The Company has elected to follow Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees (APB 25) and the related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recorded. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (Statement No. 123). RESULTS OF OPERATIONS SALES REVENUE The current economic downturn has seriously impacted the Company's sales revenues. A number of the Company's major retail customers retroactively cancelled many of their open purchase orders for our PDA products. The Company did not have sufficient working capital to begin a marketing program to acquire more customers and sales. The Company reported sales revenues of $115,324 for the three month period ended April 30, 2002 as compared to $369,185 for the quarter ended April 30, 2001 resulting in a decrease of $253,861 or 69%. This decrease lead to an overall 79% decrease in sales revenue for the six months period ended April 30, 2002 as sales declined to $251,061for the six months ended April 30, 2002 from $1,209,287 for the six months ended April 30, 2001. GROSS MARGINS The Company's gross margin for the three and six months ended April 30, 2002 were 40% for each period compared to 17% for the three months ended April 30, 2001 and 30% for the six months ended April 30, 2001. The increase in the gross margin is due to the fact that the Company discontinued selling many less profitable products and is concentrating on the sale of PDA products, which have a higher gross profit margin. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses decrease 50% to $462,102 in the three months ended April 30, 2002 from $917,160 in the three months ended April 30, 2001 and decrease 54% to $875,407 in the six months ended April 30, 2002 from $1,896,848 in the six months ended April 30, 2001. The decreases were primarily due to staff reductions and reductions in rent, utilities and voluntary salary reductions from officers. OTHER INCOME Other income decrease from $244,331 in the six months ended April 30, 2001 to $42,031 in the six months ended April 30, 2002. The reductions were due to the settlement of a lawsuit and cancellation of debt income in the six month period ended April 30, 2001. 38 RESULTS OF OPERATIONS (CONTINUED) INTEREST EXPENSE Interest expense decrease 35% to $37,532 in the three months ended April 30, 2002 from $57,783 in the three months ended April 30, 2001 and increased 32% to $123,285 for the six months ended April 30, 2002 from $93,324 for the six months ended April 30, 2001. The changes in interest expenses is due to changes in the amounts of convertible debentures redeemed for common stock. INTEREST EXPENSE-CONVERTIBLE DEBENTURE-BENEFICIAL CONVERSION FEATURE The Company has issued convertible debt securities with a non-detachable conversion feature 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. Interest expense was $66,666 for the three months ended April 30, 2002 compared to $509,046 for the three months ended April 30, 2001 and $182,880 for the six months ended April 30, 2002 compared to $811,417 for the six months ended April 30, 2001. NET LOSS Net loss from continuing operations decreased to $483,172 for the three months ended April 30, 2002 from a loss of $1,393,654 for the three months ended April 30, 2001 and $1,040,177 for the six months ended April 30, 2002 compared to $2,183,193 for the six months ended April 30, 2001. The loss resulted primarily from the decrease in sales. DISCONTINUED OPERATIONS For the period ended April 30, 2002, the Company completed the process of discontinuing certain segments of its operations. The losses from the discontinued operations were $176,855 for the three months ended April 30, 2002 and $417,702 for the six months ended April 30, 2001. 39 LIQUIDITY AND CAPITAL RESOURCES WORKING CAPITAL Working capital deficit at April 30, 2002 was $3,313,185 compared to a deficit of $3,349,057 at October 30, 2001. The decrease was a result of payments of Company debt through the issuance of common stock. LONG-TERM DEBT As of April 30, 2002, long-term debt was $1,018,316 compared to $758,811 at October 31, 2001. CASH FLOWS FROM OPERATING ACTIVITIES Net cash used by operating activities for the six months ended April 30, 2002 was $273,176 and $1,499,385 for the six months ended April 30, 2001. Reduced sales volumes and increased losses were the main causes for the cash used by operating activities. CASH FLOWS FROM INVESTING ACTIVITIES For the six months ended April 30, 2002 and 2001, the cash flows used and provided were from purchases and sales of property and equipment. CASH FLOW FROM FINANCING ACTIVITIES Cash flows provided by financing activities for the six months ended April 30, 2002 and 2001 were $217,560 and $1,340,869. The increases in cash flow were predominately from receipt of the proceeds from issuance of convertible debentures. GOING CONCERN The Company has continued to incur operating losses. Management is seeking new national retail customers for its products and is negotiating with various investors to receive new financing to provide working capital. 40 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are a defendant in three lawsuits for unpaid accounts payable and wages. We have recorded a liability in the amount of $45,000 for these debts and are negotiating with the creditors to reduce the amounts of the final settlements. ITEM 2. CHANGES IN SECURITIES (c) RECENT SALES OF UNREGISTERED SECURITIES The securities described below represent securities of iBIZ sold by iBIZ during the six month period ended April 30, 2002, 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 not involved these transactions. PRIVATE PLACEMENTS OF COMMON STOCK AND WARRANTS FOR CASH -------------------------------------------------------- None. SALES OF DEBT AND WARRANTS FOR CASH ----------------------------------- Convertible debentures were issued to three accredited investors during our first quarter of 2002. The debentures were in the aggregate principal amount of $222,500. The debentures were convertible into common stock at a conversion price of the lower of 80% of the average of the three lowest closing bid prices for the common stock twenty two days prior to the closing date or 80% of the average of the three lowest closing bid prices for the common stock sixty days prior to conversion. In addition, these same purchasers received an aggregate amount of 5,666,666 warrants to purchase common stock. The offering of convertible debentures and warrants was exempt from registration under Rule 506 of Regulation D and under Section 4(2) of the Securities Act. No advertising or general solicitation was employed in offering the securities. All persons were accredited investors, represented that they were capable of analyzing the merits and risks of their investment. A convertible debenture was issued to one accredited investor during our second quarter of 2002. The debenture was in the principal amount of $100,000. The debenture is convertible into common stock at a conversion price of the lower of 80% of the average of the three lowest closing bid prices for the common stock twenty two days prior to the closing date or 80% of the average of the three lowest closing bid prices for the common stock sixty days prior to conversion. In addition, this same investor received 3,000,0000 warrants to purchase common stock. The offering of convertible debentures and warrants was exempt from registration under Rule 506 of Regulation D and under Section 4(2) of the Securities Act. No advertising or general solicitation was employed in offering the securities. All persons were accredited investors, represented that they were capable of analyzing the merits and risks of their investment. OPTION GRANTS ------------- None. ISSUANCES OF STOCK FOR SERVICES OR IN SATISFACTION OF OBLIGATIONS ----------------------------------------------------------------- None. The above offerings and sales were deemed to be exempt under Regulation D and Section 4(2) of the Securities Act. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were business associates of iBiz or executive officers and/or directors of iBiz, and transfer was restricted by iBiz in accordance with the requirements of the Securities Act. 41 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. Exhibit Number Description -------------- ----------- 99.1 Certification of the Chief Executive Officer and Chief Financial Officer of iBiz Technologies Corp. Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K None. 42 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 22nd day of August 2002 IBIZ TECHNOLOGY CORP. By: /s/ KENNETH W. SCHILLING ----------------------------------------- Kenneth W. Schilling, President By: /s/ MARK H. PERKINS ----------------------------------------- Mark H. Perkins, Executive Vice President 43