SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 15, 2000
MERCHANTONLINE.COM, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 0-22607 84-1233073
--------------- ---------------- -------------------
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification No.)
incorporation)
902 CLINT MOORE ROAD, SUITE 114
BOCA RATON, FLORIDA 33487
----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 864-6000
1600 SOUTH DIXIE HIGHWAY
BOCA RATON, FLORIDA 33432
--------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
The audited financial statements of Innovonics, Inc. for the years
ended January 31, 2000 and 1999 are attached.
The unaudited financial statements for the three months ended April 30,
2000 and 1999 are attached.
(b) Pro Forma Financial Information.
The pro forma financial statements for the year ended October 31, 1999
and the six months ended April 30, 2000 are attached.
(c) Exhibits.
2.7* Agreement and Plan of Reorganization dated as of April 27,
2000, by and among MerchantOnline.com, Inc., Innovonics, Inc.
and Innovonics Acquisition Corp., as amended on May 15, 2000
10.10* Employment Agreement dated May 15, 2000 among
MerchantOnline.com, Inc., Innovonics, Inc. and Dereck Clark.
*Previously filed
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MERCHANTONLINE.COM, INC.
Date: July 31, 2000 By: /s/ TAREK KIRSCHEN
-----------------------------
Tarek Kirschen, President
<PAGE>
Report of Independent Certified Public Accountants
The Shareholders
Innovonics, Inc.
We have audited the accompanying balance sheets of Innovonics, Inc. as of
January 31, 2000 and 1999, and the related statements of operations,
shareholders' deficit, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Innovonics, Inc. at January 31,
2000 and 1999, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles in
the United States.
The accompanying financial statements have been prepared assuming Innovonics,
Inc. will continue as a going concern. As more fully described in Note 3, the
Company has sustained operating losses of $216,529 and $291,988 for the years
ended January 31, 2000 and 1999, respectively and has an accumulated deficit of
$2,991,634 and negative working capital of $503,271 at January 31, 2000. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regards to these matters are also described
in Note 3. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
/s/ EY
July 21, 2000
1
<PAGE>
Innovonics, Inc.
Balance Sheets
JANUARY 31,
---------------------------
2000 1999
----------- -----------
ASSETS
Current assets:
Cash $ 152,115 $ --
Accounts receivable 4,006 51,711
Inventory 5,015 13,770
----------- -----------
Total current assets 161,136 65,481
Property and equipment, net 8,209 23,059
----------- -----------
Total assets $ 169,345 $ 88,540
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 55,331 $ 116,226
Deferred revenue 132,000 --
Notes payable to shareholders 12,050 11,050
Accrued compensation 393,055 224,753
Revolving credit arrangements 71,971 82,741
----------- -----------
Total current liabilities 664,407 434,770
Other liabilities 50,000 --
Commitments
Shareholders' deficit:
Common stock, no par value--
10,000,000 shares authorized,
1,998,689 and 1,993,355 shares
issued and outstanding at 2000 and
1999, respectively -- --
Additional paid-in capital 2,446,572 2,428,875
Accumulated deficit (2,991,634) (2,775,105)
----------- -----------
Total shareholders' deficit (545,062) (346,230)
----------- -----------
Total liabilities and shareholders' deficit $ 169,345 $ 88,540
=========== ===========
See accompanying notes
2
<PAGE>
Innovonics, Inc.
Statements of Operations
YEARS ENDED JANUARY 31,
-------------------------
2000 1999
--------- ---------
Revenues:
Sales, net $ 189,714 $ 163,669
Consulting revenue 32,571 115,050
--------- ---------
Total revenues 222,285 278,719
Cost and expenses:
Cost of goods sold 86,441 49,593
General and administrative expense 308,352 491,415
Depreciation expense 9,721 12,500
--------- ---------
Total expenses 404,514 553,508
Operating loss (182,229) (274,789)
Interest expense (34,300) (17,199)
--------- ---------
Net loss $(216,529) $(291,988)
========= =========
See accompanying notes.
3
<PAGE>
Innovonics, Inc.
Statements of Shareholders' Deficit
For the years ended January 31, 2000 and January 31, 1999
<TABLE>
<CAPTION>
COMMON NET
STOCK ADDITIONAL ACCUMULATED SHAREHOLDERS'
SHARES PAID-IN CAPITAL DEFICIT DEFICIT
--------------------------------------------------------------
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 31, 1998 1,982,345 $ 2,361,588 $(2,483,117) $ (121,529)
Sale of stock and warrants in private placement 11,010 33,030 -- 33,030
Stock options granted for services -- 34,257 -- 34,257
Net loss -- -- (291,988) (291,988)
--------------------------------------------------------------
Balance at January 31, 1999 1,993,355 2,428,875 (2,775,105) (346,230)
Sale of stock and warrants in private placement 5,334 16,400 -- 16,400
Stock warrants granted for services -- 250 -- 250
Stock options granted for services -- 1,047 -- 1,047
Net loss -- -- (216,529) (216,529)
Balance at January 31, 2000 1,998,689 $ 2,446,572 $(2,991,634) $ (545,062)
==============================================================
</TABLE>
See accompanying notes
4
<PAGE>
Innovonics, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------
2000 1999
--------- ---------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $(216,529) $(291,988)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation expense 9,721 12,500
Write-off of property and equipment 5,129 --
Issuance of warrants for services 250 34,257
Stock options granted for services 1,047 --
Changes in operating assets and liabilities:
Accounts receivable 47,705 (41,468)
Inventory 8,755 (13,065)
Accounts payable and other (60,895) 92,687
Deferred revenue 132,000 --
Accrued compensation 168,302 132,753
--------- ---------
Net cash provided by (used in) operating activities 95,485 (74,324)
INVESTING ACTIVITY
Purchases of property and equipment -- (12,111)
--------- ---------
Net cash used in investing activity -- (12,111)
FINANCING ACTIVITIES
Proceeds from notes payable to shareholder 1,200 11,050
Payment on notes payable to shareholder (200) --
Proceeds from sale of stock and warrants in private placements 16,400 33,030
Proceeds from investor 50,000 --
Payments on revolving credit arrangements (31,092) (22,659)
Proceeds from revolving credit arrangements 20,322 65,014
--------- ---------
Net cash provided by financing activities 56,630 86,435
--------- ---------
Net increase in cash 152,115 --
Cash at beginning of the year -- --
--------- ---------
Cash at end of the year $ 152,115 $ --
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest and other finance charges $ 12,457 $ 10,255
========= =========
</TABLE>
See accompanying notes
5
<PAGE>
Innovonics, Inc.
Notes to Financial Statements
January 31, 2000
1. NATURE OF BUSINESS
Innovonics, Inc. (the Company) was incorporated on February 16, 1991 under the
laws of the State of Arizona for the primary purpose of developing and marketing
the PC Pay (R) security products which facilitate secure credit, debit, and
smart card transactions over the Internet for all consumers. The Company also
performs engineering consulting services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories are recorded at the lower of cost or market value using the first-in
first-out method (FIFO) and consist of finished goods at January 31, 2000 and
1999.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets.
STOCK BASED COMPENSATION
SFAS No. 123, Accounting for Stock-Based Compensation, defines a fair value
method of accounting for issuance of stock options and other equity investments.
Under the fair value method, compensation cost is measured at the grant date
based on the fair value of the award and is recognized over the service period,
which is usually the vesting period. Pursuant to SFAS No. 123, companies are
encouraged, but not required, to adopt the fair value method of accounting for
employee stock-based transactions. Companies are also permitted to continue to
account for such transactions under Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, but are required to disclose
in a note to the financial statements pro forma net income amounts as if the
Company had applied the new method of accounting.
The Company accounts for employee stock-based compensation under APB No. 25 and
has complied with the disclosure requirements of SFAS No. 123.
6
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, Accounting for Income
Taxes. Deferred income tax assets and liabilities are determined based upon
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. A valuation allowance is recorded
when it is more likely than not that some portion or all of a deferred tax asset
will not be realized.
REVENUE RECOGNITION
Revenue from the sale of services or products is recognized as services are
rendered or shipments are made.
At January 31, 2000, the Company had $132,000 in deferred revenue related to the
prepayment for products that will be shipped over a ten-month period beginning
March 2000. The revenue will be recognized as sales when shipments are made.
During the year ended January 31, 1999, the Company entered into a consulting
agreement to provide engineering service to an unrelated party. The Company
earned $32,571 and $115,050 under this agreement for the year ended January 31,
2000 and 1999, respectively.
ADVERTISING
The Company expenses the cost of advertising as incurred. Advertising expense
was $3,299 and $3,647 for the years ended January 31, 2000 and 1999,
respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Management believes that the estimates utilized in preparing its financial
statements are reasonable and prudent; however, actual results could differ from
these estimates.
3. MANAGEMENT'S PLANS AND ISSUES AFFECTING LIQUIDITY
The Company's financial statements have been prepared assuming that the Company
will continue as a going concern. The Company sustained operating losses of
$216,529 and $291,988 for the years ended January 31, 2000 and 1999,
respectively. In addition, the Company has an accumulated deficit of $2,991,634
and negative working capital of
7
<PAGE>
3. MANAGEMENT'S PLANS AND ISSUES AFFECTING LIQUIDITY (CONTINUED)
$503,271 at January 31, 2000. As a result, the financial statements do not
include any adjustments to reflect the possible effects on the recoverability
and classification of liabilities. As more fully described in Note 14, the
Company was acquired by MerchantOnline.com, Inc.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
January 31,
Useful Lives ---------------------
(Years) 2000 1999
-------------------------------------
Computer hardware and software 3 $ 27,420 $ 36,052
Furniture and fixtures 5 10,429 10,429
-------- --------
37,849 46,481
Less accumulated depreciation
and amortization (29,640) (23,422)
-------- --------
$ 8,209 $ 23,059
======== ========
5. NOTES PAYABLE TO SHAREHOLDERS
At January 31, 2000, the Company had three notes payable to shareholders
totaling $12,050 in the aggregate. At January 31, 1999, the Company had four
notes payable to shareholders totaling $11,050. Two of the notes, totaling
$7,050 and $5,850 on January 31, 2000 and 1999, respectively, bear interest at
8% per annum and are due upon demand. The third note in the amount of $5,000 on
January 31, 2000 and 1999 bears interest at 6% per annum and is due upon demand.
The fourth note in the amount of $200 on January 31, 1999 has no stated interest
rate and was also due upon demand. This note was paid off in fiscal year ended
January 31, 2000. The Company incurred approximately $848 and $546 of interest
expense related to these notes during the years ended January 31, 2000 and
January 31, 1999, respectively.
6. ACCRUED COMPENSATION
The Company has recorded $393,055 and $224,753 for the years ended January 31,
2000 and January 31, 1999, respectively, in accrued compensation to a key
employee. The unpaid wages accrue interest at 12% per annum, compounded monthly.
The wages are due and payable upon demand. Subsequent to the Company's
acquisition by MerchantOnline.com (see Note 14), the then outstanding balance of
$429,383 was paid in
8
<PAGE>
6. ACCRUED COMPENSATION (CONTINUED)
full. The Company recorded interest expense related to the agreement of $33,559
and $16,653 for the years ended January 31, 2000 and 1999, respectively.
7. REVOLVING CREDIT ARRANGEMENTS
The Company has several unsecured revolving credit arrangements with various
institutions. These arrangements bear interest at rates ranging from 12.25% to
29.87%. The Company incurred and paid financing charges of $12,457 and $10,255
during the years ended January 31, 2000 and 1999, respectively.
8. INCOME TAXES
SFAS No. 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a $487,605 valuation allowance at January 31, 2000 is necessary
to reduce the deferred tax assets to the amount that will more likely than not
be realized. The change in the valuation allowance for the current year is
$81,952. At January 31, 2000, the Company has available net operating loss
carryforwards of $800,000, which expires in the year 2020.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred income taxes are as follows:
January 31,
----------------------------
2000 1999
----------------------------
Deferred tax assets:
Accrued salary $ 147,906 $ 84,575
Depreciation 8,820 7,496
Interest payable 525 205
Accrued vacation 11,411 7,710
NOL carryforward 318,943 309,667
--------- ---------
Total deferred tax assets 487,605 405,653
Less valuation allowance (487,605) (405,653)
--------- ---------
Total deferred tax assets $ 0 $ 0
========= =========
9
<PAGE>
9. OTHER LIABILITIES
During January 2000, the Company entered into a letter of intent with
MerchantOnline.com (MOL) to purchase a percentage of the outstanding stock (see
Note 14). In connection therewith, the Company received a $50,000 non-refundable
deposit. This amount has been recorded as other liabilities as of January 31,
2000 on the accompanying balance sheet. Subsequent to January 31, 2000, the
Company consummated the merger transaction with MOL. Upon consummation of the
merger, this amount was reclassified as contributed capital to the Company by
MOL.
10. COMMON STOCK AND CAPITAL CONTRIBUTIONS
During the year ended January 31, 1999, the Company sold 11,010 shares of common
stock to third party investors in a private placement. In connection therewith,
the Company issued warrants to purchase 23,030 shares with an exercise price
ranging from $3.00 to $4.00 per share. The warrants expire over the period from
June 2000 to September 2001. At January 31, 2000, none of the warrants were
exercised.
During the year ended January 31, 2000, the Company sold 5,334 shares of common
stock to third party investors in a private placement. In connection therewith,
the Company issued warrants to purchase 8,000 shares with an exercise price
ranging from $3.10 to $4.10 per share. The warrants expire over the period from
June 2000 to September 2001. At January 31, 2000, none of the warrants were
exercised.
11. STOCK BASED COMPENSATION
STOCK OPTIONS
In accordance with APB No. 25, compensation expense is recognized for employee
stock options when the market price of the underlying stock exceeds the exercise
price on the date of grant. During January 31, 2000 and 1999, the exercise price
of stock options issued to employees and directors equaled to fair value of the
underlying stock on the date of grant. The market price of the underlying stock
was determined by management, based on, among other things, transactions with
third party investors. Accordingly, the Company did not record any compensation
expenses related to these grants. For options issued to consultants, the Company
expensed the fair value of the options granted (as determined at the grant date)
over the service or vesting period of the options. The Company recognized $1,047
and $34,257 in compensation expense for the years ended January 31, 2000 and
1999, respectively.
All options vest over a three to four year period and are exercisable over a
seven-year period after the date of grant. Of the options issued to employees
and the options issued to consultants, 193,750 and 100,750 respectively, are
currently exercisable.
10
<PAGE>
STOCK OPTIONS (CONTINUED)
The fair value for these options was estimated at the date of grant using the
minimum value method option pricing model with the following assumptions;
risk-free interest
11. STOCK BASED COMPENSATION (CONTINUED)
rates equal to the five year U.S. Treasury Bill rate on the grant date; expected
dividends of $-0-; expected life equal to the life of the options; and market
price of the stock on the date of grant ranging from $2.50 to $5.00 for options
issued prior to January 31, 1998, $3.00 for options issued between January 31,
1998 and January 31, 1999 and $3.10 for options issued after January 31, 1999.
A summary of the Company's stock option activity through January 31, 2000
follows:
EMPLOYEES CONSULTANTS
------------------------------------------------
AVERAGE NUMBER AVERAGE NUMBER
EXERCISE OF EXERCISE OF
PRICE SHARES PRICE SHARES
------------------------------------------------
Outstanding--January 31, 1998 $ 3.31 198,000 $ 3.42 107,000
Granted 3.00 69,000 3.13 16,000
Exercised -- -- -- --
Forfeited 3.57 (5,250) -- --
Expired/Cancelled -- -- -- --
------------------------------------------------
Outstanding--January 31, 1999 3.22 261,750 3.38 123,000
Granted 3.10 22,000 -- --
Exercised -- -- -- --
Forfeited 3.00 (32,000) 3.19 (19,250)
Expired/Cancelled -- -- -- --
------------------------------------------------
Outstanding--January 31, 2000 $ 3.25 251,750 $ 3.42 103,750
================================================
The weighted-average remaining contractual life of these options are 2.9 and 4.0
years at January 31, 2000, and 1999, respectively. The estimated
weighted-average fair value of options granted during fiscal year ended January
31, 2000, with an estimated stock price equal to exercise price was $1.08. The
estimated weighted-average fair value of options with an estimated stock price
equal to exercise price and an estimated stock price less than exercise price
for options granted during fiscal year ended January 31, 1999, was $0.90 and
$0.80, respectively, per share.
Pro forma information regarding net loss is required by FASB Statement No. 123,
as if the Company had accounted for its stock options issued to employees,
directors and advisors under the fair value method is as follows:
YEARS ENDED JANUARY 31
----------------------
2000 1999
------------------------------------
Pro forma net loss ($243,912) ($353,365)
11
<PAGE>
11. STOCK BASED COMPENSATION (CONTINUED)
The pro forma effect on net loss is not representative of the pro forma effect
on operational results in future years.
STOCK WARRANTS
On January 31, 2000, the Company had 32,096 warrants outstanding, including the
warrants issued in connection with the sale of stock (see Note 10), which were
issued to investors and independent consultants for the purchase of an equal
amount of shares of stock. The remaining 1,066 warrants have exercise prices
ranging from $3.00 to $3.10 and expire over the period from August 2000 to
September 2000. For the year ended January 31, 2000, the Company recognized
consulting expense of $250 related to the issuance of 1,000 warrants. No expense
was recognized during the year ended January 31, 1999.
12. MAJOR CUSTOMERS
For the year ended January 31, 2000, the Company had one major customer that
represented 19% of total sales.
For the year ended January 31, 1999, the Company had three major customers that
represented 50%, 19% and 12% of total sales.
13. COMMITMENTS
The Company leases its office space under a month-to-month agreement that is
subject to termination with a 30-day prior written notice by either party.
Rental expense amounted to approximately $9,970 and $9,153 for the years ended
January 31, 2000 and January 31, 1999, respectively.
The Company enters into commitments with third parties to construct certain
parts of its products. At January 31, 2000 and 1999, the Company was committed
to purchase inventory totaling $24,438 and $10,655, respectively.
14. SUBSEQUENT EVENTS
14. SUBSEQUENT EVENTS
On April 24, 2000, the Company entered into a reverse triangular merger
agreement with Innovonics Acquisition Corporation, a wholly owned subsidiary of
MerchantOnline.com (MOL) and the majority shareholder, with the Company becoming
the surviving corporation. Upon the effectiveness of the merger, on May 15,
2000, MOL became a 90.1 percent owner and the majority shareholder a 9.9 percent
owner. The 90.1 percent of the outstanding shares of the Company were converted
into 8,976,488 shares of common stock of MOL and stock options and warrants were
issued to purchase 1,023,512 shares of common stock in exchange for all of the
outstanding stock options and warrants of Innovonics, Inc.
12
<PAGE>
INNOVONICS, INC.
UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS
INNOVONICS, INC.
CONDENSED BALANCE SHEET
(UNAUDITED)
April 30, 2000
--------------
ASSETS
CURRENT ASSETS:
Cash $ 31,840
Inventory 19,175
----------
Total current assets 51,015
Property and equipment, net 4,609
----------
Total assets $ 55,624
==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 32,484
Notes payable to shareholders 7,050
Deferred revenue 133,790
Revolving credit arrangements 69,792
Accrued compensation 429,383
----------
Total current liabilities 672,499
13
<PAGE>
Shareholders' deficit:
Common stock, no par value--
1,998,689 shares authorized, issued and
outstanding --
Additional paid-in-capital 2,496,572
Accumulated deficit (3,113,447)
----------
Total shareholders' deficit (616,875)
----------
Total liabilities and shareholders' deficit $ 55,624
==========
See accompanying notes to condensed financial statements.
INNOVONICS, INC.
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
Three-months ended
---------------------------------
April 30, 2000 April 30, 1999
-------------- --------------
Revenues:
Sales, net 15,649 63,050
Consulting revenue -- 32,000
--------- ---------
Total revenues 15,649 95,050
Cost of goods sold 13,651 38,359
General and administrative expense 108,282 63,697
Depreciation expense 3,442 3,354
--------- ---------
Total expenses 125,375 105,410
Operating loss (109,726) (10,360)
Interest expense (11,929) (7,094)
--------- ---------
Net loss $(121,655) $ (17,454)
========= =========
See accompanying notes to condensed financial statements.
14
<PAGE>
INNOVONICS, INC.
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three-months ended
------------------------------
April 30, 2000 April 30, 1999
-------------- --------------
OPERATING ACTIVITIES
Net loss $(121,655) $ (17,454)
Adjustments to reconcile net loss to
net cash (used in) provided by
operating activities:
Depreciation expense 3,442 3,354
Changes in operating assets and liabilities:
Accounts receivable 4,006 51,193
Inventory (14,160) 301
Accounts payable (22,847) (77,561)
Deferred revenue 1,790 --
Accrued compensation 36,328 43,235
--------- ---------
Net cash (used in) provided by
operating activities (113,096) 3,068
INVESTING ACTIVITY
Purchases of property and equipment -- (741)
--------- ---------
Net cash used in investing activity -- (741)
FINANCING ACTIVITIES
Payments on note payable to shareholders (5,000) --
Proceeds from notes payable to shareholder -- 1,000
Revolving credit arrangement (2,179) (3,327)
--------- ---------
Net cash used in financing activities (7,179) (2,327)
--------- ---------
Net decrease in cash (120,275) --
Cash at beginning of the period 152,115 --
--------- ---------
Cash at end of the period $ 31,840 $ --
========= =========
See accompanying notes to condensed financial statements
15
<PAGE>
INNOVONICS, INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The unaudited interim financial statements of Innovonics, Inc. (the Company) as
of April 30, 2000 and for the three-month periods ended April 30, 2000 and 1999
do not provide all the disclosures included in the annual financial statements.
These interim financial statements should be read in conjunction with the
audited financial statements and footnotes included therein. In the opinion of
management, the accompanying interim financial statements reflect all
adjustments necessary for a fair presentation of the financial position and
results of operations of the Company.
Note 2. Subsequent Events
On April 24, 2000, the Company entered into a reverse triangular merger
agreement with Innovonics Acquisition Corporation, a wholly owned subsidiary of
MerchantOnline.com (MOL) and the majority shareholder, with the Company becoming
the surviving corporation. Upon the effectiveness of the merger, on May 15,
2000, MOL became a 90.1 percent owner and the majority shareholder a 9.9 percent
owner. The 90.1 percent of the outstanding shares of the Company were converted
into 8,976,488 shares of common stock of MOL and stock options and warrants were
issued to purchase 1,023,512 shares of common stock in exchange for all of the
outstanding stock options and warrants of Innovonics, Inc.
16
<PAGE>
PRO FORMA FINANCIAL INFORMATION
MERCHANTONLINE.COM, INC. AND INNOVONICS, INC.
PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
INTRODUCTION TO PRO FORMA CONDENSED FINANCIAL
STATEMENTS
(UNAUDITED)
Effective May 15, 2000, MerchantOnline.com, Inc. (MOL), consummated an agreement
and plan of reorganization (the "Agreement") with Innovonics, Inc. (the
Company), and Innovonics Acquisition Corp., a wholly-owned subsidiary of
MerchantOnline.com, Inc. In connection with the Agreement, Innovonics
Acquisition Corporation merged with and into Innovonics, Inc. in a reverse
triangular merger (the"Merger"), with Innovonics, Inc. to be the surviving
corporation. Pursuant to the Merger, MerchantOnline.com, Inc. issued 8,976,488
shares of common stock for 90.1 percent of the outstanding shares and issued
stock options and warrants to purchase 1,023,512 shares of common stock in
exchange for all of the outstanding stock options and warrants of Innovonics,
Inc. Additionally, MOL agreed to issue additional shares to the Company if on
the first anniversary date of the transaction, the fair value of the outstanding
shares, as determined by the trading price of the stock for a specific period of
time, is less than $25,000,000.
MOL has determined that the fair value of the issued common stock, adjusted by
the fair value of guarantee future security price is ($19,000,252) and the fair
value of the issued stock options and warrants ($609,887).
The Merger was accounted for using the purchase method of accounting. The
purchase price included the assumption of $548,405 of net liabilities, for an
aggregate purchase price of $20,158,544. The pro forma balance sheet and the pro
forma adjustments described in the notes to pro forma financial statements
reflect the purchase price as "Purchase Price to be Allocated". The Company is
currently in the process of evaluating the fair values of assets acquired,
including identifiable intangible assets, if any. This amount is currently being
amortized over a five-year period.
The accompanying unaudited pro forma balance sheet as of April 30, 2000,
presents the financial position of MerchantOnline.com, Inc. and Innovonics, Inc.
at April 30, 2000, assuming the Merger had been at that date. The unaudited pro
forma condensed statement of operations for the year ended October 31, 1999,
combines the statements of operations of MerchantOnline.com,Inc. for the year
ended October 31, 1999 and of Innovonics, Inc. for the year ended January 31,
2000, and assumes the transaction occurred on November 1, 1998. The unaudited
pro forma condensed statement of operations for the six month period ended April
30, 2000 combines the statements of operations of MerchantOnline.com, Inc. for
the six month period ended April 30, 2000 and of Innovonics, Inc. for the six
month
17
<PAGE>
period ended April 30, 2000 and assumes the transaction occurred on November 1,
1999. The fourth quarter of fiscal year 2000 (November 30, 1999 to January 31,
2000) for Innovonics, Inc. was included in both the annual and the six-month
period presentations.
The unaudited pro forma financial information does not purport to be indicative
of the results which would have actually have been obtained had such
transactions been completed as of the assumed dates and for the periods
presented or which may be obtained in the future.
MERCHANTONLINE.COM, INC. AND INNOVONICS, INC.
PRO FORMA BALANCE SHEET
APRIL 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
Merchant
Online.com, Inc. Innovonics, Inc.
Period ended Period ended Pro Forma
April 30, 2000 April 30, 2000 Adjustments Combined
-------------- -------------- -------------- --------------
Assets
<S> <C> <C> <C> <C>
Cash $ 1,146,603 $ 31,840 $ 1,178,443
Prepaid services 672,525 -- 672,525
Prepaid advertising 464,166 -- 464,166
Deferred advertising 50,834 -- 50,834
Accounts receivable 23,894 -- 23,894
Accounts receivable from
related party 7,525 -- 7,525
Due from shareholder 8,723 -- 8,723
Inventory -- 19,175 19,175
----------------------------------------------------------
Total current assets 2,374,270 51,015 2,425,285
Property and equipment, net 1,153,956 4,609 1,158,565
Deferred advertising 250,000 -- 250,000
Other assets 29,077 -- 29,077
Purchase price to be
allocated 14,132,326 -- 20,158,544(A) 34,290,870
----------------------------------------------------------
Total assets $ 17,939,629 $ 55,624 $38,153,797
==========================================================
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Liabilities and equity
<S> <C> <C> <C> <C>
Accounts payable $ 869,543 $ 32,484 $ 902,027
Accrued expenses and other 353,011 -- 353,011
Notes payable 25,000 -- 25,000
Other liabilities 215,600 -- 215,600
Notes payable to shareholder -- 7,050 7,050
Deferred revenue 16,496 133,790 (68,470)(A) 81,816
Accrued compensation -- 429,383 429,383
Revolving credit arrangements -- 69,792 69,792
----------------------------------------------------------
Total current liabilities 1,479,650 672,499 2,083,679
Note payable to shareholder 270,000 -- 270,000
Equity:
Common stock 51,537 -- 8,976 (A) 60,513
Additional-paid-in capital 22,444,349 2,446,572 19,601,163 (A)
(2,446,572)(A) 42,045,512
Subscriptions receivable (25,000) -- -- (25,000)
Accumulated deficit (6,280,907) (3,113,447) 3,113,447 (A) (6,280,907)
----------------------------------------------------------
Total liabilities and equity $17,939,629 $ 55,624 $38,153,797
==========================================================
</TABLE>
19
<PAGE>
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Merchant
Online.com, Inc. Innovonics, Inc.
Period ended Period ended Pro Forma
October 31, 1999 January 31, 2000 Adjustments Combined
---------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues, net $ 204,106 $ 222,285 $ -- $ 426,391
Costs of revenues 111,064 86,441 -- 197,505
Sales and marketing 1,296,774 3,299 -- 1,300,073
General and administrative 721,023 305,053 255,000(C) 1,281,076
Depreciation and amortization 30,649 9,721 4,031,709(B) 4,072,079
Other expenses - settlement 455,000 -- 455,000
----------- --------- --------- -----------
Total costs and expenses 2,614,510 404,514 4,286,709 7,305,733
Operating loss (2,410,404) (182,229) (6,879,342)
Interest expense (29,924) (34,300) (64,224)
----------- --------- --------- -----------
Net loss $(2,440,328) $(216,529) 4,286,709 $(6,943,566)
=========== ========= ========= ===========
Net loss per share - Basic and Diluted ($0.12)
Weighted average shares outstanding 56,446,498(D)
</TABLE>
20
<PAGE>
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTH PERIOD ENDED APRIL 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
Merchant
Online.com, Inc.
Six month Six month
period ended period ended Pro Forma
April 30, 2000 April 30, 2000 Adjustments Combined
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues, net $ 97,770 $ 91,867 $ 189,637
Costs of revenues 36,699 25,097 61,796
General and administrative 2,628,303 250,318 127,500(C) 3,006,121
Depreciation and amortization 1,040,866 13,163 2,015,854(B) 3,069,883
----------- ---------- --------- -----------
Total costs and expenses 3,705,868 288,578 2,143,354 6,137,800
Operating loss (3,608,098) (196,711) (5,948,163)
Interest expense (7,149) (8,316) (15,465)
----------- ---------- --------- -----------
Net loss $(3,615,247) $ (205,027) 2,143,354 $(5,963,628)
=========== ========== ========= ===========
Net loss per share - Basic and Diluted ($0.09)
Weighted average shares outstanding 66,454,757(D)
</TABLE>
21
<PAGE>
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
BALANCE SHEET ADJUSTMENTS
(A) Reflects the accounting for the purchase of Innovonics, Inc. for a total
purchase price of approximately $20,158,544, consisting of the issuance of
8,976,488 shares of MerchantOnline.com, Inc.'s common stock, the fair value of
the 1,023,512 stock options and warrants the fair value of the future security
price guarantee and the assumption of net liabilities of $548,405.
INCOME STATEMENT ADJUSTMENTS
(B) Reflects the amortization of the "purchase price to be allocated" over a
five-year amortization period. Actual amortization for future periods will be
dependent upon the final allocation of the purchase price, when completed, to
identifiable intangible assets and goodwill, if any, and the evaluation of
appropriate useful lives for such assets. The Company is currently in the
process of evaluating such allocations and useful lives.
(C) Reflects increase of compensation expense for key employees of Innovonics,
Inc. based on new employment agreements entered into in connection with the
Merger.
(D) Reflects the weighted average number of shares outstanding for the period,
after giving effect to the Merger, calculated as the historical weighted average
common shares for MerchantOnline.com, Inc.
22
