As filed with the Securities and Exchange Commission on September 8, 2000
Registration Statement No. 333-_____________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------------
MERCHANTONLINE.COM, INC.
(Exact name of registrant as specified in its charter)
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FLORIDA 84-1233073
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
MICHAEL D. KARSCH
MERCHANTONLINE.COM, INC.
902 CLINT MOORE ROAD, SUITE 114
BOCA RATON, FLORIDA 33487
(561) 864-6000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices and agent
for service of process)
-----------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
========================================================================================================================
PROPOSED PROPOSED
TITLE OF EACH CLASS AMOUNT TO MAXIMUM MAXIMUM AMOUNT OF
OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE FEE
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<S> <C> <C> <C> <C>
Common Stock, $.001 par value 6,480,000 shares $4.25 $27,540,000 $7,271
per share
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</TABLE>
(1) Estimated pursuant to paragraph (c) of Rule 457 under the
Securities Act of 1933, as amended, solely for the purpose of
calculating the registration fee on the basis of the high and
low sales prices for a share of common stock on the OTC
Bulletin Board on September 7, 2000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A), OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
<PAGE>
SUBJECT TO COMPLETION
DATED SEPTEMBER 8, 2000
The information in this prospectus is not complete and may be changed.
MerchantOnline.com may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and MerchantOnline is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
6,480,000 SHARES
MERCHANTONLINE.COM, INC.
COMMON STOCK
-----------------
Swartz Private Equity may use this prospectus in connection with the
following resales of our common stock:
o Swartz may offer up to 5,000,000 shares that we may issue to it when we
exercise our right to "put" shares to Swartz under our equity line
agreement with Swartz;
o 980,000 shares are issuable upon the exercise of warrants previously
issued to Swartz; and
o up to 500,000 shares are issuable upon the exercise of warrants that
may be issued to Swartz under our equity line agreement.
The selling shareholder may sell the common stock at prices and on
terms determined by the market, in negotiated transactions or through
underwriters. Swartz is an "underwriter" within the meaning of the Securities
Act in connection with its sales of our common stock.
We will receive no proceeds from the sale of the shares by the
selling shareholder. However, we may receive proceeds from the sale of shares to
Swartz and, if exercised, will receive proceeds from the sale of shares issuable
upon the exercise of warrants by Swartz.
----------------
The common stock is quoted on the OTC Bulletin Board under the symbol
"MRTO." The last reported sale price of the common stock on the OTC Bulletin
Board on September 7, 2000, was $4.0625 per share.
-----------------
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" ON PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------------
____________, 2000
<PAGE>
TABLE OF CONTENTS
Forward-Looking Statements.................................................iii
Prospectus Summary...........................................................1
Use of Proceeds.............................................................15
Price Range of Common Stock and Dividend Policy.............................16
Capitalization..............................................................17
Business....................................................................18
Management..................................................................33
Principal Shareholders......................................................37
Selling Shareholder.........................................................38
The Investment Agreement....................................................38
Description of Securities...................................................40
Shares Eligible for Future Sale.............................................42
Plan of Distribution........................................................43
Legal Matters...............................................................43
Experts ...................................................................43
Where You Can Find More Information.........................................44
-----------------------------------
As used in this prospectus, the terms "we," "us," "our," the "Company"
and "MerchantOnline" mean MerchantOnline.com, Inc. and our subsidiaries
Innovonics, Inc. and Web Financial Services, Inc. (unless the context indicates
a different meaning), and the term "common stock" means MerchantOnline.com, Inc.
common stock, $0.001 par value per share.
The information in this prospectus gives effect to a 2-for-1 stock
split in May 2000.
You should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with information different from
that which is contained in this prospectus. We are offering to sell shares of
common stock and seeking offers to buy shares of common stock only in
jurisdictions where offers and sales are permitted. The information contained in
this prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or of any sale of the common stock.
ii
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FORWARD-LOOKING STATEMENTS
We caution readers that certain important factors may affect our actual results
and could cause such results to differ materially from any forward-looking
statements which may be deemed to have been made in this prospectus or which are
otherwise made by us or on our behalf. For this purpose, any statements
contained in this prospectus that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the generality of the
foregoing, words such as "may", "will", "expect", "believe", "anticipate",
"intend", "could", "would", "estimate", or "continue" or the negative other
variations thereof or comparable terminology are intended to identify
forward-looking statements. Factors which may affect our results include, but
are not limited to, the risks and uncertainties of being a company with a
limited operating history and which has never reported a profit, relies on new
technologies, faces current and potential competitors with significant technical
and marketing resources, needs future capital and depends on key personnel. We
are also subject to the risks and uncertainties of protecting our intellectual
property and patent infringement and other litigation. We are also subject to
other risks detailed herein or detailed from time to time in our filings with
the U.S. Securities and Exchange Commission.
iii
<PAGE>
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PROSPECTUS SUMMARY
This is only a summary and does not contain all of the information that
may be important to you. You should read the more detailed information contained
in this prospectus and all other information, including the financial
information and statements with notes, referred to in this prospectus as
discussed in the "Where You Can Find More Information" section of this
prospectus.
OVERVIEW
We are a leading developer and provider of real-time e-commerce
transaction services. We offer economical, easy-to-install products and services
to online merchants that allows merchants to accept and fill orders over the
Internet in a manner in which it is obvious to the merchants and their customers
that the transaction is secure. Our system supports any combination of
transactions between companies, consumers and the government anywhere in the
world. Our products include proprietary real-time credit card processing
programs, a proprietary hardware device called PC Pay(R), and a proprietary
ATM/Debit network for the Internet. We have patent coverage in over 50 countries
worldwide on our products for both software and hardware. We believe our network
of products exceeds the capabilities of all suppliers of these services in the
industry. Our goal is to provide online merchants with a single vendor that
furnishes all products and services needed to allow credit and debit
transactions and deal with the various marketing and business issues facing any
company.
There are several products in our network that have the ability to
significantly change the way business is done in both the real and virtual
worlds:
o The proprietary PC Pay device makes every home computer a point-of-sale
or POS device;
o The first cost effective micropayment system;
o The first network that provides for e-payments worldwide which
minimizes the risk of fraud and charge backs;
o Allowing holders of the more than 500 million debit cards worldwide to
use them for electronic payments; and
o PC Pay Agent that creates a one-time use number to substantially
eliminate the risk of theft of a credit card number.
INVESTMENT AGREEMENT
On January 5, 2000, we entered into an Investment Agreement with Swartz
to raise up to $35 million through a series of sales of our common stock to
Swartz. Under the terms and conditions of the Investment Agreement, we have the
right, at our sole discretion, to put shares of our common stock to Swartz for a
dollar amount of up to $2 million in each put, subject to additional limitations
on the timing of our exercise of put rights and on the number of shares Swartz
is obligated to purchase. The dollar amount of each sale is also limited by our
common stock's trading volume. A minimum period of time must occur between
sales. In turn, Swartz will either sell our stock in the open market, sell our
stock to other investors through negotiated transactions or hold our stock in
its own portfolio. We issued Swartz warrants to purchase 980,000 shares of
common stock when we entered into the Investment Agreement. When we exercise a
put, we will issue Swartz one warrant for each ten shares purchased in that put.
This prospectus covers the resale of our stock by Swartz either in the open
market or to other investors. For more information on the Investment Agreement,
see "Investment Agreement."
OUR HISTORY
We were incorporated on November 20, 1997 in the State of Florida under
the name "CreditCo, Inc." On February 16, 1999 we merged with Tarcyn Corporation
and changed our name to
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1
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"MerchantOnline.com, Inc.". We are located at 902 Clint Moore Road, Suite 114,
Boca Raton, Florida 33487. Our telephone number is (561) 864-6000 and our
website address is WWW.MERCHANTONLINE.COM. Information contained on our website
is not part of this prospectus.
MerchantOnline, f/k/a Tarcyn Corporation was incorporated under the
laws of the State of Colorado on March 19, 1993. On February 16, 1999, pursuant
to the terms of an agreement and plan of reorganization, MerchantOnline
undertook a 3.5 - 1 split of its issued and outstanding common stock and
thereafter, MerchantOnline acquired all of the issued and outstanding securities
of CreditCo, Inc. in exchange for 15,750,000 shares of common stock of
MerchantOnline. As a result, MerchantOnline was the surviving entity. As part of
the terms of the aforesaid transaction, MerchantOnline amended its articles of
incorporation, changing its name to its present name, as well as reincorporating
in the State of Florida.
ABOUT THE OFFERING
Common stock outstanding at July 31, 2000.......... 60,097,333 shares (1)
Common stock offered by the selling shareholders... 6,480,000 shares
Common stock to be outstanding after the offering.. 66,577,333 shares (1)(2)
Use of proceeds.................................... Product development,
manufacturing of
products, marketing,
working capital
requirements and other
general corporate
purposes.
Trading symbol..................................... MRTO
----------------
(1) As of July 31, 2000, excludes (a) 13,977,000 shares of common stock
issuable upon the exercise of outstanding stock options, (b) 1,863,000
shares of common stock reserved for future issuance under our stock
option plan, and (c) 1,025,000 shares of common stock issuable upon
exercise of outstanding warrants.
(2) Assumes the sale of all 5,000,000 shares to Swartz and the exercise of
all 1,480,000 warrants held or to be issued to Swartz.
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2
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SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER YEAR ENDED SIX MONTHS
STATEMENT OF 20, 1997 OCTOBER 31, ENDED APRIL
OPERATIONS DATA: (INCEPTION) YEAR ENDED SIX MONTHS SIX MONTHS 1999 30, 2000
TO OCTOBER OCTOBER 31, ENDED APRIL ENDED APRIL ---- --------
31, 1999 1999 30, 2000 30, 1999 PRO FORMA (1) PRO FORMA (1)
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues ................. $ 168,748 $ 204,106 $ 97,770 $ 164,809 $ 505,564 $ 213,071
Costs and expenses:
Cost of sales ............ 43,074 111,064 36,699 90,254 230,478 73,711
General and administrative 351,006 2,533,370 4,157,510 336,976 19,619,381 11,241,778
------------ ------------ ------------ ------------ ------------ ------------
Total costs and expenses.. 394,080 2,644,434 4,194,209 427,230 19,849,859 11,315,489
------------ ------------ ------------ ------------ ------------ ------------
Net loss ................. $ (225,332) $ (2,440,328) $ (4,096,439) $ (262,421) $(19,344,295) $(11,102,418)
============ ============ ============ ============ ============ ============
Net loss per share-- basic
and diluted .............. $ (.01) $ (.07) $ (.09) $ (.01) $ (.37) $ (.19)
============ ============ ============ ============ ============ ============
Weighted average shares
outstanding .............. 31,500,000 36,446,498 46,827,685 32,900,000 51,986,494 59,773,429
============ ============ ============ ============ ============ ============
BALANCE SHEET DATA: APRIL 30, 2000
OCTOBER 31, 1999 APRIL 30, 2000 PRO FORMA (2)
---------------- -------------- --------------
<S> <C> <C> <C>
Cash .............................. $ 5,148 $ 1,146,603 $ 1,178,443
Working capital (deficiency) ...... (307,063) 894,620 342,867
Intangible assets ................. -- 30,974,036 55,962,527
Total assets ...................... 3,166,101 34,781,339 59,837,929
Long term liabilities ............. -- 270,000 270,000
Shareholders' equity .............. 817,640 33,031,689 57,477,046
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</TABLE>
(1) Assumes acquisitions of Approve.net, Inc., Web Financial Services
Corporation and Innovonics, Inc. occurred on the first day of the period
presented.
(2) Assumes acquisition of Innovonics occurred on April 30, 2000.
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3
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RISK FACTORS
You should carefully consider the following risks in evaluating
MerchantOnline. The risks described below are not the only ones that we face.
Additional risks that we do not yet know of or that we currently think are
immaterial may also impair our business operations. Our business, operating
results or financial condition could be materially adversely affected by any of
the following risks. The trading price of our common stock could decline due to
any of these risks, and you may lose all or part of your investment. You should
also refer to the other information set forth in this Report, including our
financial statements and the related notes.
We caution readers that certain important factors may affect our actual
results and could cause those results to differ significantly from any
forward-looking statements made in this report or otherwise made by or on behalf
of MerchantOnline.
WE ARE A NEW BUSINESS OPERATING IN A DYNAMIC BUT TOTALLY NEW MARKET AND HAVE NOT
YET SHOWN A PROFIT
We commenced operations in 1998 and we have not yet operated at a
profit. Our limited history and the lack of history regarding both our PC Pay
device and online credit card processing offers little information on which to
base projections of future profitability. Consideration should be given to risks
inherent to early-stage businesses and the volatility of emerging technology.
Our viability will depend on our ability to anticipate changes in e-commerce
technology and avoid the pitfalls associated with new businesses. Ongoing
concerns include:
o The need to implement our sales and marketing strategy.
o The need to develop and manage strategic relationships to maximize
public recognition of our products and services.
o The need to maintain a strong management team. Management must be
decisive to realize our growth strategy but flexible to deal with
the tactical needs of a company competing in a constantly changing
market place.
o Our ability to attract new customers.
o Our ability to implement new technologies.
o The need to grow and maintain our programming staff.
o The need to attract and maintain qualified employees.
o The need to raise additional capital if necessary.
If we do not succeed in addressing these risks, our business will likely be
adversely affected.
WE WILL NEED ADDITIONAL CAPITAL TO CONTINUE OUR OPERATIONS
We need to obtain additional funds to continue our planned operations.
If we are unable to obtain additional funding on satisfactory terms and reduce
our operating losses, we will have to modify our business plan or reduce or
discontinue some or all of our operations. Our long-term ability to meet our
liquidity requirements and to continue operations will depend on our ability to:
4
<PAGE>
o raise additional capital, including our ability to draw down money
under the Swartz equity line;
o sell PC Pay devices at a profit; and
o adjust to competitive and technological advances that may require us
to modify the design of our products under development.
We have met our capital needs from the sale of our common stock and loans of
approximately $1.9 million from our chief executive officer, who has agreed to
loan us up to $3 million. In the future we intend to use funds from the
investment agreement if there is sufficient availability.
Our acquisition agreement for Innovonics required us to place $1.5 million in
escrow for Innovonics' working capital. We have not yet placed such funds in
escrow although we have been funding Innovonics operations. In September 2000 we
reached an agreement with Dereck Clark, Innovonics president and one of our
directors, pursuant to which we paid $200,000 and have agreed to pay an
additional $300,000 by September 15, 2000 and $200,000 per month from October
2000 until April 2001. If these funds are not paid according to this schedule,
then the former Innovonics shareholders have the right to unwind the
acquisition.
WE RECEIVED A GOING CONCERN QUALIFICATION AT OUR LAST AUDIT
The report of independent accountants for the year ended October 31,
1999 includes a going concern qualification due to operating losses since
inception, negative cash flow from operations and negative working capital at
October 31, 1999. A "going-concern" opinion indicates that substantial doubt
about MerchantOnline's ability to continue as a going concern exists and that
the financial statements have been prepared assuming we will continue as a
going-concern and 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.
WE MAY BE UNABLE TO OBTAIN SUFFICIENT FUNDS FROM THE EQUITY LINE AGREEMENT WITH
SWARTZ TO MEET OUR LIQUIDITY NEEDS
To operate at planned levels, we must obtain sufficient funds from the
equity line agreement with Swartz. However, the future market price and volume
of trading of our common stock limits the rate at which we can obtain money
under the equity line agreement with Swartz. Further, we may be unable to
satisfy the conditions contained in the equity line agreement, which would
result in our inability to draw down money on a timely basis, or at all. If the
price of our common stock declines, or trading volume in our common stock is
low, we will be unable to obtain sufficient funds to meet our liquidity needs.
WE MAY CONTINUE TO EXPERIENCE LOSSES, WHICH COULD DECREASE THE VALUE OF OUR
STOCK
As of April 30, 2000, we had an accumulated deficit of $6,762,099 and
losses have continued since then. Since we started our business, our revenues
have been small compared to our expenses. Our ability to generate significant
revenue remains uncertain. We expect to continue to incur operating losses at
least through the first quarter of 2001, and perhaps for some time thereafter.
We may never achieve, or be able to sustain, profitability.
Our lack of an extensive operating history makes prediction of future
operating results difficult. As a result, you should not rely on the results for
any period as an indication of our future performance. There can be no assurance
that we will generate significant revenues. We currently intend to increase our
operating expenses in order to implement additional e-commerce services,
including commercial roll-out
5
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of the PC Pay, end user technical support, advertising, and marketing services.
As a result, we may experience significant losses on a quarterly and annual
basis.
THE FURTHER DEVELOPMENT OF A MARKET FOR OUR PRODUCTS IS UNCERTAIN
The market for our services is changing and evolving rapidly as
e-commerce business develops. Our business growth is predicated upon growth of
e-commerce, since our current business model is to receive transaction fees on
e-commerce transactions. Aspects of Internet commerce including security,
reliability, cost, ease of use, and quality of service, are ongoing issues that
must be resolved to enable Internet business to flourish. There are also
continuing infrastructure concerns that could limit the bandwidth necessary to
provide the graphic and multimedia interactive content that Internet consumers
expect from Internet vendors. Additionally, competitive pressures may make it
difficult, or impossible, for us to operate profitably. An increasing number of
companies have introduced or are developing competing products and services to
enable payment transactions over the Internet.
THE MARKET FOR OUR PRODUCTS AND SERVICES MAY NOT GROW FAST ENOUGH TO SUPPORT OUR
LEVEL OF INVESTMENT
Our growth depends upon acceptance of our products and services by a
broad cross section of the buying public and merchants which sell to these
customers. This is especially true of our PC Pay device. The success of this
product will depend on our ability to convince merchants, banks and consumers
that using this product will increase security of transactions and benefit all
of these parties. Our failure to accomplish these goals, or our inability to
accomplish them in a timely manner, would have an adverse effect on our
business.
OUR QUARTERLY OPERATING RESULTS WILL VARY WIDELY
Our quarterly operating results have varied and probably will continue to
do so because of circumstances beyond our control:
o Sales of PC Pay devices could vary significantly from quarter to
quarter.
o Use of PC Pay devices and other services could be seasonal, such as
increasing near the holidays.
o Our setup fees have varied widely as market conditions have driven us to
deeply discount our services to compete while establishing our market
share. In some cases, our customers pay one-time fees to acquire our
payment services. The timing of the recognition of fees varies, which
contributes to quarterly fluctuations in revenues. In addition, our
resellers often integrate our services with their e-commerce solutions.
The realization of these income streams is therefore unpredictable.
o Our e-commerce service is relatively new, and the pricing structures and
timing of revenues is likewise unpredictable.
o In addition, as part of a long-term strategy of forgoing short-term
gains, we may make pricing, marketing or licensing decisions that may
adversely affect our quarterly revenues or increase our costs in the
short run.
o Extraordinary events such as litigation or acquisitions could adversely
affect our operating results from one reporting period to the next.
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For these reasons, quarterly results will not necessarily be a reliable
indication of future performance. Because of all of the foregoing
considerations, it is likely that our quarterly operating results may
intermittently be below the expectations of market analysts, which may
negatively affect the value of our common stock.
WE FACE INTENSE COMPETITION, WHICH COULD AFFECT OUR REVENUES AND MARKETS
We face intense competition from companies offering both software and
hardware solutions in our markets. Some of these solutions are more appealing to
certain potential customers than our product. Further, some potential customers
may be investors in these entities, which may decrease the likelihood that these
companies will become our customers.
We have identified at least ten companies, many of which are still
relatively small, that provide real-time credit card processing on the Internet.
Currently, there are no providers of this service that are dominating leaders in
the market. Large organizations that are technology- or banking-based are
entering the industry, most of which offer credit card processing as the core
service. Many offer related products typically by partnering with other
companies to provide services that the credit card processor does not provide
in-house. We expect competition to intensify, as the viability of Internet
business becomes more apparent to the buying public.
Most of our competitors have operating histories, name recognition,
installed customer bases, financial resources, technical resources, and
marketing resources that exceed ours. Furthermore, many of our potential
competitors have established distribution channels that they will undoubtedly
use to bundle competing products. If these competitors bundle competing products
for their customers, it could adversely affect our ability to market our
services.
Competition could very well compel us to reduce prices. Profitability
could thus only be maintained as a result of an increase in volume or a
reduction of operating costs, which may not be feasible.
WE COULD BE HELD RESPONSIBLE FOR UNAUTHORIZED CLAIMS
It is possible that we could be held responsible for claims that
payments presented using our products are not authorized by the holder of the
account on which they are drawn. If we were found responsible for unauthorized
payments we could be liable for the amount of the unauthorized payment as well
as other indirect or consequential damages, such as overdraft charges or damage
to the account holders' credit rating. Any findings of such liability could also
significantly impact our marketing of these products and could cause our
business to suffer.
WE MUST ACHIEVE MARKET PENETRATION AND KEEP PACE WITH TECHNOLOGICAL ADVANCES
Broad acceptance of our products is critical to our success because a
majority of our revenues for the next year to 18 months are expected to be
derived from PC Pay product sales. One impediment to widespread acceptance is
that standards for hardware, data transmission, and user interfaces, are still
emerging. Until one or more standards emerge, our development plans must be
contingent on a multiplicity of possible standards. Our technologies have not
been accepted as standard. To be successful, we must obtain widespread
acceptance of our technologies, or modify our products and services to meet
whatever industry standards do ultimately develop. It is not certain that we
will be able to do either.
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WE MAY EXPERIENCE BREAKDOWNS IN OUR PAYMENT PROCESSING SYSTEM
Our business systems depend on the smooth operation of computer systems
that may be affected by circumstances beyond our control. Events that could
cause system interruptions are:
o Fire
o Earthquake
o Hurricane
o Power Loss
o Telecommunications Failure
o Unauthorized Entry or Other Events
We have established an operations center in California that provides
support for our services. We do not yet have a backup site, and if this site
should cease operations because of a power outage, fire, or natural disaster,
then we would not be able to process transactions. Finally, although we back up
data as a matter of course, and take other measures to protect against loss,
there is still some risk of such losses. A system outage or data loss could
adversely affect our business.
Despite the security measures we maintain, our systems may be
vulnerable to computer viruses, hackers, rogue employees or similar sources of
disruption. Any interruptions in our operations could have a material adverse
effect on our business. Any problem of this nature could result in significant
liability to customers or financial institutions and may deter potential
customers from using our services. We attempt to limit this sort of liability
through back-up systems, contractual provisions and insurance. However, we
cannot assure you that these contractual limitations would be enforceable, or
that our insurance coverage would be adequate to cover any liabilities we might
sustain.
OUR RESULTS MAY SUFFER IF WE ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED
MANAGEMENT AND TECHNICAL PERSONNEL
Our performance is dependent on the performance of our executive
officers and key employees. We depend on our ability to retain and motivate high
quality personnel, both management and technical. We are in the process of
obtaining "key person" life insurance policies on some of our executives. The
loss of the services of any of our key employees, particularly our founder and
chief executive officer Tarek Kirschen and our chief operating officer Jim
Gitney, could have a material adverse effect on us. Our future success also
depends on our continuing ability to identify, hire, train and retain other
highly qualified technical and managerial personnel. Competition for these
employees is intense and increasing. We may not be able to attract, assimilate
or retain qualified technical and managerial personnel in the future, and the
failure of us to do so would have a material adverse effect on our business.
OUR COMPETITORS MAY DUPLICATE OUR PRODUCTS AND SERVICES
Our success is somewhat dependent on proprietary technology. We rely
primarily on copyright, trade secret and trademark law to protect our
technology. We intend to file patent applications on inventions that we may make
in the future. There can be no assurance that any of these patents will be
granted, or that if granted such patents would survive a legal challenge to
their validity, or provide meaningful levels of protection.
MOST OF OUR PROCESSING AGREEMENTS ARE SHORT TERM AND WE CAN LOSE CLIENTS
Our standard customer agreements are short-term and can be terminated
without cause by either party. We expect that there will be terminations and
non-renewals from time to time and that we may not be able to replace all of
these clients. Our financial performance could be damaged by a significant
number of terminations or non-renewals.
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WE MAY HAVE DIFFICULTY IN MANAGING GROWTH
We expect to experience rapid growth and change due to our planned
growth, which will place a significant strain on our working capital, personnel
and other resources. There can be no assurance that we will be able to
successfully implement our business strategy, that our operations will generate
sufficient cash flow, that adequate financing will be available on acceptable
terms to fund continuing growth, or that management will successfully manage
continued growth. The failure to manage growth effectively may have a material
adverse effect on our business, financial condition and results of operations.
WE WILL HAVE SIGNIFICANT DEPRECIATION AND AMORTIZATION CHARGES IN FUTURE PERIODS
As a result of our three recent acquisitions, we will have a non-cash
depreciation and amortization charge of approximately $4 million per quarter for
the next few years. This charge may have the result of eliminating any operating
income that we may have during such periods.
WE MAY NOT BE ABLE TO PROTECT OUR PATENTS AND PROPRIETARY TECHNOLOGY, WHICH
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Our ability to compete effectively in the e-commerce industry may
depend on our success in developing and marketing our products and services
and/or acquiring other suitable e-commerce businesses and protecting their
proprietary technology, both in the United States and abroad. The patent
positions of technology companies generally involve complex legal and factual
questions. There can be no assurance that any patent that we apply for will be
issued, or that any patents issued will not be challenged, invalidated, or
circumvented, or that the rights granted thereunder will provide any competitive
advantage. We may incur substantial costs in defending any patent or license
infringement suits or in asserting any patent or license rights, including those
granted by third parties, the expenditure of which we might not be able to
afford.
We have been issued a number of U.S. patents and have filed additional
U.S. patent applications and various foreign patent applications relating to our
PC Pay device. We expect to apply for additional U.S. and foreign patents in the
future. The issuance of a patent is not conclusive as to its validity or as to
the enforceable scope of the claims of the patent. We cannot assure you that:
o our patents or any future patents will prevent other companies from
developing similar or functionally equivalent products or from
successfully challenging the validity of our patents;
o any of our future processes or products will be patentable;
o any pending or additional patents will be issued in any or all
appropriate jurisdictions;
o our processes or products will not infringe upon the patents of
third parties; or
o we will have the resources to defend against charges of patent
infringement by third parties or to protect our own patent rights
against infringement by third parties.
We could be materially adversely affected if we fail to avoid
infringement of the patent or proprietary rights of others or to protect our
patent rights.
We also rely on trade secrets and proprietary knowledge, which we
generally seek to protect by confidentiality and non-disclosure agreements with
employees, consultants and licensees. We cannot
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assure that these agreements will not be breached, that we will have adequate
remedies for any breach or that our trade secrets will not otherwise become
known by competitors.
Although we have and will continue to enter into confidentiality and
invention agreements with our employees and consultants, there can be no
assurance that such agreements will be honored or that we will be able to
adequately protect our rights to our non-patented trade secrets and know-how.
Moreover, there can be no assurance that other individuals or entities will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets and know-how. In
addition, we may be required to obtain licenses to patents or other proprietary
rights from third parties. There can be no assurance that any licenses required
under any patents or proprietary rights would be made available on acceptable
terms, if at all. If we do not obtain required licenses, we could encounter
delays in product development or find that the development, manufacture, or sale
of products requiring such licenses could be foreclosed.
WE ARE DEPENDANT ON THE CONTINUED GROWTH OF THE INTERNET AS A COMMUNICATION
MEDIUM AND AS A VEHICLE FOR COMMERCE
Use of the Internet by businesses and consumers as a medium for
commerce is at an early stage of development. It is therefore subject to
uncertainty. E-commerce is a relatively recent development. We cannot be certain
that acceptance and use of the Internet will continue to develop or that a
sufficiently broad base of merchants and consumers will adopt, and continue to
use, the Internet to exchange goods and services.
The development of the Internet as a commercial marketplace may occur
more slowly than anticipated. Factors influencing its growth include development
of the necessary network infrastructure and associated technologies. Delays in
the development or adoption of new standards and protocols required to handle
increased levels of Internet activity could also have a detrimental effect.
These factors could result in slower response times or adversely affect usage of
the Internet, resulting in lower numbers of e-commerce transactions and
decreased demand for our services.
INTERNET TECHNOLOGY IS RAPIDLY CHANGING, AND WE MUST ADAPT QUICKLY TO COMPETE
EFFECTIVELY
The market for Internet products and services is in a constant state of
flux, characterized by rapid technological developments and changing industry
standards. New products are introduced constantly as bandwidth becomes cheaper.
As Internet access becomes more widely available, we may be required to make
significant changes to the design and content of our products and services.
Failure to effectively adapt to these or any other technological developments
could adversely affect our business, operating results and financial condition.
WE MAY NOT BE ABLE TO PROTECT OUR TRADENAMES AND DOMAIN NAMES AGAINST ALL
INFRINGERS, WHICH COULD DECREASE THE VALUE OF OUR BRAND NAME AND PROPRIETARY
RIGHTS.
We currently hold the Internet domain name "merchantonline.com" as well
as various other related names and we use "MerchantOnline" as a tradename.
Domain names generally are regulated by Internet regulatory bodies and are
subject to change and may be superseded, in some cases, by the laws, rules and
regulations governing the registration of tradenames and trademarks with the
United States Patent and Trademark Office and certain other common law rights.
In the event the domain registrars are changed, new ones are created or we are
deemed to be infringing upon another's tradename or trademark, we could be
unable to prevent third parties from acquiring or using, as the case may be, our
domain name, tradenames or trademarks, which could adversely affect our brand
name and other proprietary rights.
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OUR LIMITED MARKETING AND SALES RESOURCES COULD PREVENT US FROM EFFECTIVELY
MARKETING OUR PRODUCTS AND SERVICES
We have limited internal marketing and sales resources and personnel.
In order to market any products and services we may develop, we will have to
develop a marketing and sales force with technical expertise and distribution
capability (or outsource such duties to independent contractors). There can be
no assurance that we will be able to establish sales and distribution
capabilities or that we will be successful in gaining market acceptance for any
products or services we may develop. There can be no assurance that we will be
able to recruit and retain skilled sales, marketing, service or support
personnel, that agreements with distributors will be available on terms
commercially reasonable to us, or at all, or that our marketing and sales
efforts will be successful. Failure to successfully establish a marketing and
sales organization, whether directly or through third parties, would have a
material adverse effect on our business, financial condition, cash flows, and
results of operations. To the extent that we arrange with third parties to
market our products or services, the success of such products and services may
depend on the efforts of such third parties. There can be no assurance that any
of our proposed marketing schedules or plans can or will be met.
OUR STOCK PRICE IS EXTREMELY VOLATILE
The trading price of our common stock has been, and in the future is
expected to be, volatile and we expect to experience further market fluctuations
as a result of a number of factors. These factors include, but are not limited
to, current and anticipated results of operations as well as changes in our
business, operations or financial results, the timing of sales of common stock
by selling shareholders, prospects of general market and economic conditions and
other factors.
SHARES OF OUR COMMON STOCK MAY BE SOLD IN THE FUTURE, WHICH COULD AFFECT THE
MARKET PRICE
Of the 60,097,333 shares of our common stock currently issued and
outstanding, approximately 54 million shares are "restricted securities" as that
term is defined under the Securities Act and may only be sold pursuant to an
effective registration statement under the Securities Act or in compliance with
Rule 144 under the Securities Act or other exemption from registration. Rule 144
provides that a person holding restricted securities for a period of one year
may sell such securities during any three-month period, subject to certain
exceptions, in limited amounts. Our chief executive officer and largest
shareholder has a bank loan pursuant to which he has pledged assets that include
a portion of his merchantonline common stock. He has lent proceeds from the loan
to us. If he should default on the loan, the lender may be able to sell the
shares into the market. Future sales of shares of common stock by existing
shareholders or by this lender under Rule 144 could materially adversely affect
the market price of our common stock. We cannot predict the effect, if any, that
market sales of common stock or the availability of such shares for future sale
will have on the market price of the common stock prevailing from time to time.
THE ANTI-TAKEOVER PROVISIONS OF OUR CHARTER DOCUMENTS AND FLORIDA LAW COULD
AFFECT SHAREHOLDERS
Our articles of incorporation authorize 25,000,000 shares of preferred
stock, none of which are issued and outstanding. As provided in our Articles of
Incorporation, preferred stock may be issued by our Board of Directors from time
to time without any action of the shareholders. The Board of Directors is
empowered, without shareholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or the right of the holders of our common stock. The preferred
stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control. Although we have no
present intention to issue any preferred stock, there can be no assurance that
we will not do so in the future.
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Certain provisions of our articles of incorporation and bylaws may have
anti-takeover effects and may delay, defer or prevent a takeover attempt of
MerchantOnline. In addition, Florida has enacted legislation that may deter or
hinder takeovers of Florida corporations. The Florida Control Share Act
generally provides that shares acquired in excess of certain specified
thresholds will not have any voting rights unless such voting rights are
approved by a majority of the corporation's disinterested shareholders. The
Florida Affiliated Transactions Act generally requires supermajority approval by
disinterested shareholders of certain specified transactions between a public
corporation and holders of more than 10% of the outstanding voting shares of the
corporation or their affiliates.
OUR COMMON STOCK IS TRADED ON THE OTC BULLETIN BOARD
Our common stock is currently traded on the OTC Bulletin Board and is
not listed for trading on an exchange or Nasdaq. An issuer must meet certain
quantitative criteria relating to its total assets, its capital and the trading
prices of its securities to be included on an exchange or Nasdaq. In May 2000,
we met the minimum quantitative standards and applied for the Nasdaq National
Market. The Nasdaq staff may consider other factors, such as the issuer's
management and the circumstances surrounding the issuer's operations, when
determining whether to approve an issuer's application for inclusion in the
Nasdaq system. In August 2000 we determined not to pursue the Nasdaq listing and
instead applied for listing on the American Stock Exchange. Our application is
currently under review. We cannot guarantee you that we will ever by listed. As
a result, you may find it more difficult to dispose of, or to obtain adequate
quotations as to, the prices of the common stock.
WE OPERATE IN AN EVOLVING MARKET DEPENDENT ON THE INTERNET AND MAY HAVE LOSSES
FOR THE FORESEEABLE FUTURE
We operate in a market that is at an early stage of development, is
rapidly evolving and is characterized by an increasing number of market entrants
who have introduced or developed competing products and services. We have not
realized significant revenues from our credit card processing services or PC Pay
sales. As is typical in the case of a new and rapidly evolving industry, demand
and market acceptance for our products and services are subject to a high level
of uncertainty and risk. We are also dependent on the adoption of the Internet
for commerce and broad acceptance of new methods of conducting business and
exchanging information, particularly by those individuals and companies in the
healthcare industry that historically have relied upon traditional means of
commerce. We cannot guarantee that the market for our products and services will
develop or that demand for our services will emerge or be sustainable. Moreover,
operating on the Internet raises a number of additional risks, including
possible system failures and possible security breaches that could harm our
business. If the market fails to develop, develops more slowly than expected or
becomes saturated with competitors, or if our products or services do not
achieve or sustain market acceptance, our business would be harmed.
THE VOLATILITY OF OUR STOCK PRICE COULD AFFECT AN INVESTMENT IN OUR STOCK.
The market prices for securities of companies engaged in Internet
development activities have been and historically are highly volatile. The
market price of our common stock may be impacted by:
o announcements of technological innovations or new products by us or
our competitors;
o delays in the introduction of our products;
o developments or disputes concerning patent or proprietary rights;
o publicity regarding products under development by us or our
competitors;
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o regulatory developments in both the U.S. and foreign countries;
o privacy concerns;
o economic and other external factors;
o period-to-period fluctuations in financial results;
o the volatility of the market price for our common stock; and
o reported losses.
Our common stock also could be subject to fluctuations in response to
the above and other more specific factors. The market prices of equity
securities of technology companies generally and Internet-related companies in
particular, the business in which we operate, is characterized by highly
volatile stock prices.
OWNERSHIP OF OUR COMMON STOCK IS CONCENTRATED AMONG DIRECTORS AND EXECUTIVE
OFFICERS
Our directors, officers and principal shareholders currently own
approximately 65% of the outstanding common stock. Management has the ability to
control our affairs and operations.
WE WILL HAVE SUBSTANTIAL DISCRETION OVER THE USE OF THE NET PROCEEDS WE RECEIVE
IN THIS OFFERING
We estimate that the net proceeds from the sale of the 5,000,000 shares
of common stock to Swartz by us will be approximately $35 million. We intend to
use the net proceeds for various purposes. Consequently, our board of directors
and management will have significant flexibility in applying the net proceeds of
this offering. The failure of management to apply such funds effectively could
harm our business.
WE DO NOT PLAN TO DECLARE DIVIDENDS
We have not paid any cash dividends on our common stock and we do not
plan to pay any cash dividends in the foreseeable future. We plan to retain any
earnings for the operation and expansion of our business.
THE EXERCISE OF OUR PUT RIGHTS MAY SUBSTANTIALLY DILUTE THE INTERESTS OF OTHER
SECURITY HOLDERS
We will issue shares to Swartz upon exercise of our put rights at a
price equal to the lesser of:
o the market price for each share of our common stock minus $.10; or
o 91% of the market price for each share of our common stock.
Accordingly, the exercise of our put rights may result in substantial dilution
to the interests of the other holders of our common stock. Depending on the
price per share of our common stock during the three year period of the
investment agreement, we may need to register additional shares for resale or
seek an amendment to our articles of incorporation, to access the full amount of
financing available. Registering additional shares could have a further dilutive
effect on the value of our common stock. If we are unable to register the
additional shares of common stock, we may experience delays in, or be unable to,
access some of the $35 million available under our put rights.
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THE SALE OF MATERIAL AMOUNTS OF OUR COMMON STOCK COULD REDUCE THE PRICE OF OUR
COMMON STOCK AND ENCOURAGE SHORT SALES
If and when we exercise our put rights and sell shares of our common
stock to Swartz, if and to the extent that Swartz sells the common stock, our
common stock price may decrease due to the additional shares in the market. If
the price of our common stock decreases, and if we decide to exercise our right
to put shares to Swartz, we must issue more shares of our common stock for any
given dollar amount invested by Swartz, subject to a designated minimum put
price that we specify. This may encourage short sales, which could place further
downward pressure on the price of our common stock.
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USE OF PROCEEDS
We expect to sell to Swartz Private Equity, LLC, subject to
effective registration and applicable volume and other limitations, up to
$35,000,000 of common stock under the Investment Agreement. Additional amounts
may be received if the warrants to purchase common stock are exercised.
We intend to use the net proceeds of this offering for:
o manufacturing devices;
o expansion of our sales, distribution and administrative facilities;
o product development;
o acquisitions of products and/or companies; and
o working capital and other general corporate purposes.
The amount and timing of the above expenditures may vary and will
depend on numerous factors, including, but not limited to, sales efforts,
product development, industry development and other factors.
We periodically evaluate possible acquisitions of or investments in
complementary businesses and products. We may use net proceeds from the offering
for these purposes. While we from time to time consider potential investments or
acquisitions, we have no firm plans, commitments or agreements with respect to
any of these types of investments or acquisitions.
Pending use of the proceeds as described above, we intend to invest the
net proceeds of the offering in government securities and other
investment-grade, interest-bearing securities.
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PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
On May 10, 1999 MerchantOnline's common stock began trading on the OTC
Bulletin Board under the symbol "MRTO". The following table sets forth the high
and low bid prices of MerchantOnline's common stock as reported on the OTC
Bulletin Board for each quarter from May 10, 1999 through Septemver 7, 2000. The
following quotations are over-the-counter quotations and, accordingly, reflect
inter-dealer prices, without retail mark-up, markdown or commission and may not
represent actual transactions.
High Bid Low Bid
---------------- --------------
Fiscal 1999
May 10, 1999 through July 31, 1999 $4.25 $.56
August 1, 1999 through October 31, 1999 1.65 .19
Fiscal 2000
November 1, 1999 through January 31, 2000 4.91 .84
February 1, 2000 through April 30, 2000 11.50 4.75
May 1, 2000 through July 31, 2000 8.75 5.44
August 1, 2000 through September 7, 2000 6.44 3.50
On September 7, 2000, the closing bid price for the common stock as
reported on the OTC Bulletin Board was $4.0625. As of June 1, 2000, there were
approximately 1,700 holders of MerchantOnline's common stock.
DIVIDENDS
MerchantOnline has not paid any cash dividends on its common stock
since its inception. MerchantOnline presently intends to retain future earnings,
if any, to finance the expansion of its business and does not anticipate that
any cash dividends will be paid in the foreseeable future. Future dividend
policy will depend on MerchantOnline's earnings, capital requirements, expansion
plans, financial condition and other relevant factors.
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CAPITALIZATION
The following table sets forth as of April 30, 2000 (1) our actual
capitalization; and (2) the pro forma capitalization, as adjusted to give effect
to the acquisition of Innovonics, Inc. This table should be read in conjunction
with our consolidated financial statements and the notes thereto incorporated by
reference into this prospectus.
<TABLE>
<CAPTION>
APRIL 30, 2000
------------------------------------
ACTUAL PRO FORMA
---------------- ----------------
<S> <C> <C>
Long term liabilities ........................................ $ 270,000 $ 270,000
Shareholders equity:
Preferred Stock, $.001 par value, 25,000,000 shares
authorized, no shares issued and outstanding .......... -- --
Common Stock, $.001 par value, 100,000,000 shares
authorized; 51,537,240 shares issued and
outstanding, actual and 60,513,728 shares, pro forma(1) 51,537 60,513
Additional paid-in capital ............................... 39,767,251 64,203,632
Accumulated deficit ...................................... (6,762,099) (6,762,099)
Subscription receivable .................................. (25,000) (25,000)
---------------- ----------------
Total shareholders' equity ................................... 33,031,689 57,477,046,929
---------------- ----------------
Total capitalization ......................................... $ 33,301,689 $ 57,747,046
================----================
</TABLE>
----------------
(1) Excludes (a) 13,977,000 shares of common stock issuable upon the
exercise of outstanding stock options, (b) 1,863,000 shares of common
stock reserved for future issuance under our stock option plan, and (c)
1,025,000 shares of common stock issuable upon exercise of outstanding
warrants.
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BUSINESS
OVERVIEW
We are a leading developer and provider of real-time e-commerce
transaction services. We offer economical, easy-to-install products and services
to online merchants that allows merchants to accept and fill orders over the
Internet in a manner in which it is obvious to the merchants and their customers
that the transaction is secure. Our system supports any combination of
transactions between companies, consumers and the government anywhere in the
world. Our products include proprietary real-time credit card processing
programs, a proprietary hardware device called PC Pay(R), and a proprietary
ATM/Debit network for the Internet. We have patent coverage in over 50 countries
worldwide on our products for both software and hardware. We believe our network
of products exceeds the capabilities of all suppliers of these services in the
industry. Our goal is to provide online merchants with a single vendor that
furnishes all products and services needed to allow credit and debit
transactions and deal with the various marketing and business issues facing any
company.
There are several products in our network that have the ability to significantly
change the way business is done in both the real and virtual worlds:
o The proprietary PC Pay device makes every home computer a point-of-sale
or POS device;
o The first cost effective micropayment system;
o The first network that provides for e-payments worldwide which minimizes
the risk of fraud and charge backs;
o Allowing holders of the more than 500 million debit cards worldwide to
use them for electronic payments; and
o PC Pay Agent that creates a one-time use number to substantially
eliminate the risk of theft of a credit card number.
INDUSTRY BACKGROUND
The Rapid Growth of Internet Commerce
As the Internet has become an increasingly important medium, merchants
and consumers have begun using the Internet to buy and sell goods and services.
The number of Internet users worldwide has grown dramatically and is expected to
grow significantly in the next few years. Increasingly, these Internet users are
becoming online consumers. International Data Corporation has forecasted that
the actual number of Web buyers worldwide will expand from 48 million in 1999 to
approximately 183 million in 2003 and that the amount of worldwide commerce
conducted over the Web will increase from $111 billion in 1999 to approximately
$7.5 trillion in 2004.
The phenomenal growth of the Internet is one of the most significant
industry trends affecting information processing today. The Gartner Group has
reported that by 2004, "the Internet will become the predominant mechanism for
conducting business, whether it be business-to-consumer or business-to-
business." As a result, many organizations are now looking for entirely new
solutions that enable distribution of financial payment information using the
Internet.
E-commerce offers both merchants and consumers numerous benefits:
o Merchants and consumers can interact 24 hours a day, 7 days a week,
regardless of their respective locations.
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o Merchants can customize Web site content to match the needs and preferences
of individual users by personalizing content for users.
o The online store enables merchants to readily increase the number of products
and services offered, thereby enhancing the product selection available to
customers.
o Online merchants can avoid investments in physical retail locations.
o Much of the interaction between merchants and consumers can be automated,
resulting in reduced operating costs.
These benefits allow merchants to focus on growing their customer base
and to market and sell their products around the world in a cost-effective and
efficient manner.
The early adopters of e-commerce were often Internet-centric companies,
such as Amazon.com and Beyond.com, which were founded specifically to transact
business on the Internet. Today, many businesses consider it essential to offer
their goods and services online, and many traditional retailers such as
department stores, car dealers, and toy stores have opened online stores to
supplement their traditional retail models. An increasingly broad selection of
products is now being sold online, ranging from the initial online product
offerings of books, music, computers and software to more traditional consumer
goods such as clothes, movie tickets, vitamins and prescription drugs.
Accordingly, the need for online transaction processing is affecting virtually
all industries.
With the advent of the Internet and the explosion of eCommerce, four
overriding themes have been at the forefront:
o security and privacy
o a common transaction model for both the real and virtual worlds that is
global in scope
o payment systems that provide differentiation for each business segment
o the need to digitally sign a legal document
As a result of the staggering growth and security issues, new
businesses with the Internet as their only platform, or existing businesses that
want to utilize the Internet as an additional platform, are dealing with many
incompatible and constantly changing alternatives making fraud more likely and
security more difficult. This is especially true in developing regions, where
transaction controls are less rigorous.
Various sources have stated that although real world credit card fraud
in the U.S. is relatively low, the Internet world is a completely different
story. Data indicate that fraud and charge backs constitute a much higher
percentage of top line revenues:
United States..... 4.5 -26.0%:
Latin America..... 30 - 40%
Western Europe.... 3.5 - 8 %
Eastern Europe.... 8 - 18%
Recent events with security issues, such as fraud and identity theft,
have caused Internet users to focus on the security of their systems and their
personal information. This issue will continue to grow as people and businesses
realize that their sensitive transaction data resides on email order forms,
ISPs, web sites, merchant accounts, merchants and other databases. Recent
activities by the National Automated Clearing House Association, or NACHA, Visa,
MasterCard, the Presidential Council on Security, the US Senate and American
Express have demonstrated their desire to significantly improve the level of
security on the Internet. This has caused many companies to form consortiums
that consist of Internet, existing bricks and mortar and financial institutions.
The consortiums realize that even on the Internet, mass provides competitive
advantage. Until a completely safe system is available that is also a worldwide
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standard, we believe that the Internet will not be able to reach its full
potential, especially in the business-to-business "B2B" sector. MerchantOnline
has developed such a standard.
TRANSACTION PROCESSING DEMANDS
To succeed online, a merchant must attract customers to its Web site
and provide an appealing and easy-to-use environment that encourages customers
to place an order by clicking on the "buy" button. Once the customer places an
order, the merchant must process the order by effectively and efficiently
executing numerous transactions. With the rapid increase in the number of online
merchants and the vast array of products and services becoming available online,
competition among online merchants is increasingly intense. Due to these
competitive pressures, merchants must focus their resources on attracting
customers to their Web sites and providing compelling content to keep customers
in their online stores. However, as a merchant succeeds in these efforts, the
increased number of resulting orders creates another set of complex challenges.
These challenges include:
o Payment processing. The vast majority of online consumer purchases are
conducted using credit cards. These credit card transactions are processed
in real-time to confirm an order while the customer is online.
Increasingly, merchants are also seeking to process transactions in local
currencies around the world.
o Fraud prevention. Because of the anonymity offered by the Internet and the
speed with which one can make purchases, the opportunity for fraud is
significant. In e-commerce transactions, because the credit card is not
present, a merchant is generally held liable by its bank for the full value
of the transaction in the event of credit card fraud even if a
pre-authorization was obtained. Online merchants must find ways to combat
this fraud to avoid losing both the product being sold and the related
revenue.
The online merchant must often address these demands while the customer
is waiting online. Information that a traditional retailer can collect during a
period of hours, such as a fraud screen, often must be available to the online
merchant immediately. In addition, the merchant must have an e-commerce system
that scales as the business grows, provides a high level of reliability and
handles peak loads. The merchant's e-commerce system should also integrate
smoothly into its existing business and technology and must support secure,
authenticated messaging.
THE MERCHANTONLINE SOLUTION
MerchantOnline has developed a complete front-end to back-end
transaction platform designed to become a secure transaction network for the
industry. We offer businesses and financial institutions a fully secure system
for making transactions and provide for a significant reduction in charge backs
and fraud. This platform starts with the PC Pay, a patented hardware device that
encrypts sensitive debit/ATM/credit card and PIN data, prior to the data
entering the personal computer. Because we control the process from customer
initiation to funds transfer by the bank, no other suppliers have access to the
data and the consumer's credit card number is not on the merchant's database. We
also offer anonymous surfing, further protecting personal information, a
complete line of merchant account services, website systems, shopping carts,
ATM/Debit card programs and loyalty programs for the merchant to use in
developing their Internet and/or bricks and mortar business model.
PC PAY
The PC Pay card-swipe device, similar to those in retail stores and gas
stations, plugs into home and office PCs, and acts as a retail point of sale or
POS terminal for credit, ATM, debit and smart cards.
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PC Pay has a numeric keypad for entry of PIN numbers, which also are immediately
encrypted using bank ATM network standards. The PC Pay incorporates patented
"next generation" encryption technology using bank ATM network standards. Unlike
other encryption technology for PCs, card data are encrypted within the secure
device before entering a computer, offering a higher-level of security. With
typical eCommerce software-only encryption systems, data typed on a PC keyboard
enter the user's personal computer not encrypted, and could be retrieved by an
intelligent virus before being encrypted in software running in an infected PC.
Recently, the STAR ATM network has certified the PC Pay for use as an ATM/debit
terminal.
PC Pay is capable of reading single and dual tracks on any magnetic
strip card (including driver's licenses) and reading and writing to ISO 7816
compliant smart cards. Using this device provides a card present transaction for
the merchant, potentially reducing their cost per transaction and virtually
eliminating charge backs. For the customer, this device provides a high level of
confidence that no one will have access to their sensitive financial
information. When coupled with an anonymous surfing option, the consumer
protects not only their financial information but also protects their
demographic data.
The PC Pay device utilizes hardware encryption with its keypad to
provide off-line encryption prior to transmission across the Internet. The
encrypted data reaches our processing facility over the Internet, are decrypted
and processed for authorization through our proprietary network. At that point,
approval is given to the merchant for payment. This system bypasses the need to
have third party processors, further reducing the cost to the merchant and
increasing our revenue stream. This process supports multiple merchant account
products, shopping cart products and web development tools. Unique products are
offered for the small Internet merchant and the established larger merchants
through our website.
We expect that the majority of the users of PC Pay will be consumers
who use the device for eCommerce transactions. However, there are many other
uses of PC Pay. For example, the U.S. Park Service has purchased 450 devices and
installed them at the entrance of national parks to collect park admission fees
using credit cards. The National Insurance Administration Company of Jordan has
purchased 400 PC Pay devices and installed them in healthcare providers in
Amman, Jordan. The healthcare provider is able to examine insurance and medical
information for the patient by inserting the provider card and the companion
card presented by the patient at the point of care. Everything from blood type
to benefits status can be viewed, updated and stored on the two cards
simultaneously, ensuring accurate records and appropriate care. The cards must
be used at the same time, providing patient control and privacy.
USE OF THE PC PAY PROVIDES BENEFITS TO THE CUSTOMER, MERCHANT AND ISSUER:
Customers:
o feel secure that their credit card and other personal information is
encrypted within the secure PC Pay device before being sent to the PC,
reducing the security threats posed by hacker programs and viruses;
o use their bank ATM/debit cards for online purchases;
o securely enter their bank account number and PIN for home banking
services;
o reload their smart card with cash from their PC using their credit card,
debit card, ATM card or bank account;
o store their digital signature on a PIN-protected smart card;
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o use a
smart card for anonymous "pay-as-you-view" payments and micropayments;
o use a smart card for secure authentication with online merchants for
loyalty programs;
o use a smart card for storage of emergency medical and insurance
information or maybe to quickly access the list of doctors and dentists
that participate in their insurance program;
o use a smart card to store their frequent flyer program and
travel-related information;
MERCHANT:
o An overall increase in online transactions from customers who have been
hesitant or unwilling to make online purchases due to concerns about the
security of their credit card and personal information;
o Reduced transaction costs as they move from traditional "card not
present" (keyboard) credit card rates to Debit/Bank ATM card rates;
o Merchants can receive "Card Present" rates versus "Card Not Present" or
Mail Order/Telephone Order (MOTO) rates. Because the PC Pay device reads
the entire Track II data from the magnetic stripe of a credit card, the
merchant can negotiate card present or retail rates with their
processor, possibly saving a point or more on their processing rates;
o Because a card must be present to swipe through the PC Pay device to
perform an online transaction, the merchants can reduce their exposure
to fraud and charge backs;
o Merchants can process their debit card transactions for less than credit
card costs, regardless of the dollar amount involved. Because the
customer can securely enter their debit card PIN into the encrypted PC
Pay device PIN pad, the merchant benefits from card present and PIN
verified transactions;
o Merchants can expand their customer base by accepting ATM cards as there
are millions of potential online customers who have ATM cards but do not
have credit or debit cards everywhere else in the world outside of the
U.S.;
o Merchants can use the PC Pay device and our NewCash system to award
loyalty points such as frequent flier miles or VIP customer benefits
ISSUER
o Placing their logo on the PC Pay devices deployed by them, providing a
valuable source of customer recognition and advertising
NEWCASH
MerchantOnline offers a software based stored value system that
provides a full line of network access products. These products provide the
merchant a unique opportunity to customize their payment acceptance products to
their business needs, offering all merchants a competitive advantage in their
marketplace. We will be able to issue ATM, debit and affinity cards that cater
to the needs of the merchant and consumer. The consumer will have the ability to
load cash onto the card and use it at any merchant location that accepts
ATM/Debit cards: eCommerce or bricks and mortar. The software-based system
provides the merchant with the ability to offer cash off discounts for the user
programmatically. It has been demonstrated that if a consumer goes to a web site
more than a few times, that website becomes a destination. This system will
provide the ability to have anonymous surfing and purchase programs since the
vendor does not receive the card information, further enhancing consumer
security, loyalty and privacy.
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NewCash(TM) is a new form of electronic cash, to be used for securely
purchasing products or content anonymously over the Internet. When a customer
purchases a NewCash Card, they transfer money - $10, $20, $50 - to a digital
card that essentially functions as a real ATM card, accepted by participating
merchants throughout the Internet or in the real world. The NewCash Card accepts
charges as low as $.01, ideal for micropayment pay-per-view such as
pay-per-click web sites or content-based web sites such as newspapers.
A NewCash Card can be obtained instantly by completing a simple
one-page online registration form. On the Internet, NewCash cardholders each
have a personal Global Shopping Cart to shop at an unlimited number of websites,
and then pay for the purchases with a single, secure transaction. In the real
world, NewCash cardholders can use the card anywhere a standard ATM card is
accepted. NewCash cardholders can login to the 24-hour customer center at any
time to track purchases and view account status in real time. Customers are not
required to use any special software to use any part of the system, as it works
with any Internet browser, on any computer.
The NewCash proprietary product offering encompasses several unique
features that make it the only product of its kind.
o I-ATM allows the NewCash Card and account to be used for all bank and
financial services, both online and real world. As an added convenience,
NewCash cardholders can transfer money to other cardholders with online
accounts with one click.
o Global Shopping Cart enables the consumer to shop an infinite number of
NewCash-enabled E-commerce sites using one universal cart, and pay for
purchases in a single transaction.
o Micropayments handles micropayments as low as $0.01, ideal for
pay-per-view, pay-per-click and content-based web sites.
o Virtual Escrow Services provides an independent, trusted third party to
manage the financial transactions between buyer and seller such as for
online auctions.
o Click For Cash enables a NewCash cardholder to earn money by clicking on
banner ads or viewing online commercials.
o Affinity Programs offers every NewCash cardholder immediate and full
access to merchant-offered perks, including discounts for products and
services.
o Reseller Program enables merchants to issue ATM/debit cards to their
sales agents and make payments to them online. NewCash online real-time
accounting eliminates the need for issuing paper checks.
The following are some of the advantages to vendors:
o Browser-based Vendor Studio adds E-commerce to a vendor's website easily
in minutes at no charge, with no software to download and no programming
skills.
o Eliminates need for credit card processing account and merchant
application fees. Increases customer purchasing confidence, increasing
sales.
o Real instant and direct payouts of funds.
o Enables sale of web-based content (newspaper articles, games, streaming
audio/video) along with products.
o Real-time accounting and E-commerce statistics of the web site at no
charge.
o Optional private labeling available.
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PC PAY AGENT
We have developed a technology called PC Pay Agent designed to change
the way consumers transact with merchants on the Internet. This system protects
the consumer from the possibility of a card number being intercepted over the
Internet or stored on merchant databases and protects the merchant from the
liability of storing and protecting sensitive personal and financial data. As a
result, charge backs and fraud will be significantly reduced.
PC Pay Agent is activated on the consumer's computer when the user
installs a PC Pay swipe terminal. PC Pay Agent populates the merchant's payment
screen with a one-time use card number that routes the encrypted card data to
the appropriate processing center. Our system then decodes the data and sends an
approval code to the merchant. The number is then discarded and may not be used
again. PC Pay Agent provides the major credit card companies the tools they need
to truly protect their credit card numbers from being resident on unsecured
databases and computer systems.
STRATEGY
Our objective is to be the leading worldwide provider of real-time
e-commerce transaction services. Key elements of our strategy include the
following:
o Increase the Number of PC Pay Devices in the Field. We are actively
engaged in discussions with various parties to increase the
distribution of PC Pay devices to users. Possible partners include
banks, brokerage firms, other financial service firms, eCommerce
merchants and multilevel marketing firms, computer manufacturers and
distributors and independent selling organizations.
o Market Our Products as the Most Secure Solutions Available. We believe
that our product is the most secure system available in the marketplace
and are seeking third-party endorsements of our system. Of most
importance is the acceptance of our security strategy by major
governing bodies. The Benton Group has completed a report for the STAR
ATM network that identifies PC Pay(R) as the best solution for online
transaction security.
o Enhance and Extend Our Suite of E-commerce Services. We intend to build
upon our scalable, state-of-the-art transaction processing systems to
enhance and extend the suite of services we currently offer. By
continuing to invest resources in our core transaction processing
engine, we intend to further improve availability, reliability and
scalability. Based on input from our merchants, we plan to introduce
new services to solve e-commerce problems as they emerge. We also plan
to develop support for other payment methods in addition to credit
cards and ATM/debit cards, as market demand for such services
increases. To supplement our internal development efforts, we will
consider additional strategic acquisitions or form partnerships to
acquire complementary technologies and companies.
o Continuing To Develop And Market E-Commerce Payment Solutions. As
current industry trends indicate that the Internet will play a
significant role in future commerce, we intend to focus significant
technical effort toward the continued development and marketing of
e-commerce payment solutions, such as Newcash and PC Pay. By enhancing
our current products, we believe that we will have significant
competitive advantages in this market.
o Expand Merchant Customer Base through Improved Brand Recognition and
Increased Marketing. To date, we have made significant investments in
marketing and branding. We substantially increased our sales and
marketing expenses in 2000 from 1999 levels and plan to
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continue to do so in 2001. We also intend to increase the size of our
direct sales force and enter into additional collaborative
relationships such as the recently announced Cardservice International
relationship, to generate new merchant customers as well as to increase
the number of transaction services used by our existing merchants.
o Offer New Products. In May 2000 we acquired Innovonics, Inc., the
developer of the PC Pay device and in April 2000 we acquired Web
Financial Services Corporation, the developer of Newcash.
MerchantOnline believes that a hardware/software solution including a
smart card reader, magnetic card reader, a PIN pad, and
"point-of-entry" encryption are crucial elements for e-commerce to
become widely accepted.
o Increase International Presence and Operations. We intend to expand the
availability and brand recognition of our services throughout the
world, as fraud is a major concern outside the U.S. We are negotiating
plans to enhance these and similar relationships that will allow us to
offer payment processing services in all major currencies and sales
tax/VAT services in all major nations. We intend to continue building
our sales, marketing and operational presence outside of the United
States to serve merchants worldwide.
GATEWAY ACCOUNT AND PROCESSING SERVICES
We provide a suite of other e-commerce transaction services for online
merchants that are able to acquire their own bank merchant account and require
only real-time credit card processing. Our services are transparent to the
merchant's customers. We have relationships with banks that allows us to assist
clients in obtaining merchant accounts for a fee.
The basic service is real-time processing of credit card transactions.
This is for clients that have or can obtain credit card merchant bank accounts.
MerchantOnline provides a seamless connection to credit card approval and
completes the processing of the transactions.
The real-time processing system provides its clients with a wide range
of services. These include obtaining approval of the credit card transaction and
completing fraud checks that relate to the cardholder's physical address, credit
card number, and e-mail address. An electronic mail message then is
automatically sent to the merchant and the customer to confirm the transaction.
The confirmation sent to customers has reduced the charge backs as problems are
identified and resolved immediately.
We offer merchants four different plans that have various features and
pricing. All include a gateway account, a service that allows the merchant to
connect its existing credit-card merchant account to the web for real-time
credit card processing, and allows merchants to accept PC Pay. The premium
services include the Global Shopping Cart, Virtual Escrow Services and European
payment services. All of the plans provide for a set-up fee and ongoing monthly
service fees. A merchant will also pay its bank fees for processing
transactions. Merchants accepting the PC Pay device will generally be charged
lower rates than those for typed transactions.
Our software obtains the approval or rejection of the credit card
transaction and performs routines to protect against fraud. The fraud protection
routines include address verification, comparing the credit card to a negative
database, and determining that the individual ordering has a valid email
address. If any problems occur with these checks, the orders are not approved.
For all transactions, both the consumer and the merchant receive electronic
receipts. We also provide merchants with a manual screen in which they can enter
transactions not submitted over the Internet. This allows them to use the system
for telephone/fax orders.
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STRATEGIC RELATIONSHIPS
In July 2000, we entered into an agreement with Cardservice
International Inc., the nation's leading provider of integrated merchant
accounts and payment technology, to utilize and co-market each other's services.
We will utilize Cardservice International as our premiere merchant services
provider. Cardservice International will integrate PC Pay with Cardservice
International's state-of-the-art LinkPoint Secure Payment Gateway, allowing
merchants to accept secure online payments as fully-encrypted, card-present
transactions from consumers using PC Pay. Cardservice processes for over 55,000
online merchants, all of which will be PC Pay-enabled. Because PC Pay-enabled
merchants can significantly reduce fraud, while increasing access to new
customers around the world with the ability to accept ATM/debit cards online on
a broad scale, this arrangement will permit online merchants to reduce
fraud-related expenses as well as reduce processing charges.
We will receive monthly fees from Cardservice for active accounts as
well as certain transaction-based fees.
We also entered into an agreement with ID Certify, a company providing
digital signature-based e-commerce solutions. Under the agreement, which gives
ownership of secured digital signature certificates to consumers, MerchantOnline
and ID Certify will jointly develop a secure, end-to-end system to support the
use of digital signatures using the PC Pay device. Combining smart card
technology with PC Pay's triple DES encryption capabilities enables consumers to
buy products using a number of different payment methods and legally bind
themselves to contracts online with digital signatures. Implementation of
digital signatures with PC Pay assures users that their PINs or passwords cannot
be compromised. The companies will share fees for both payments and signatures.
ID Certify issues digital certificates (secure identity credentials for
use over the Internet) and provides digital signing applications - or can
integrate its identity management products and services into existing
applications - allowing the customer to digitally sign electronic forms and
documents sent over the Internet, intranets, extranets and wireless networks.
SALES AND MARKETING
We believe that our product offering is unique and is not available via
any other method. We market our e-commerce payment solutions directly to
Internet merchants, and virtually every Internet web site that offers e-commerce
is a potential client. There are more than 10 market segments that the complete
product can support. They include:
AUTHENTICATION DEBIT/SMART CARD APPLICATIONS
o eCommerce o Loading eCash or discount coupons
o government projects o medical/insurance ID
o home banking/bill pay o medical alert card
o commercial POS o software protection
o stock trading o loyalty programs
o email access control o private key storage/digital signatures
o website access control o student ID card
Given the magnitude of these potential markets, we are currently
focusing on eCommerce, loyalty programs, ATM/debit and selected B2B
applications. We also intend to find one or more partners to assist in retail
sales of PC Pay devices.
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There are also multiple advertising opportunities that we will pursue,
including placing logos on PC Pay devices and selling advertising on the
computer screens that are used during the course of a transaction.
Target customers for our e-commerce transaction services include
Internet-centric merchants, including those who have developed custom
transaction processing systems and established retailers that have opened online
stores to supplement their traditional retail models. We reach these merchants
worldwide through a direct sales force as well as through an indirect sales
channel that leverages existing sales and marketing infrastructures developed by
our partners. In addition to our direct and indirect sales efforts, we work with
several strategic partners to promote our e-commerce transaction services. As of
August 15, 2000, we had a total of eight persons in sales and marketing and over
200 resellers throughout the world.
Sales Strategy
Our products and services are marketed through direct and indirect
channels. Our direct selling is accomplished in eight ways:
o our web sites;
o banners placed on other web sites such as Yahoo!;
o direct sales by our own staff;
o affiliate programs;
o original equipment manufacturers;
o value-added resellers;
o resellers; and
o tradeshows.
For our indirect sales efforts, we use a network of resellers. Reseller
organizations can offer all of our services. These third party sales
organizations are either already involved in marketing credit card merchant
account services or are developers of websites or Internet Service Providers.
Those in the reseller program purchase our services at a discounted rate and
then re-sell them to their clients. They can either use us to bill their
customers for these services or invoice their customers under their own name.
We have recently finalized agreements with a number of independent
selling organizations to resell our services. For resellers, the key element is
residual, transaction-based income. Resellers that manage the entire
transactions will receive a per transaction fee, plus sign-up fees if the
reseller uses our suggested retail pricing. Many resellers actually charge
higher prices when the market will bear it. The use of resellers allows us to
leverage our resources to maximize revenues. By working with companies as
resellers who market merchant accounts and web sites to their customers, we
strategically develop an outside sales organization that already has sound,
existing relationships with merchants. These resellers recognize that income
derived from MerchantOnline installation fees and recurring transaction charges
provide them with a significant revenue potential. Most competitors sell
products using a direct sales force.
We use a variety of marketing activities to increase market awareness
of our services and educate our target audience. In addition to building
awareness of our brand, our marketing activities focus on generating leads for
our sales efforts. To build awareness and attract new merchants we conduct
marketing and partnership programs including advertising, public relations
activities, referral programs, co-branded initiatives, virtual seminars and
trade shows. We have an in-house marketing team of seven people and have also
recently retained Manning, Salvage and Lee, one of the leading public and
investor relations firms in the e-commerce world.
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MERCHANT SUPPORT
We provide a range of merchant activation and sustaining support
services to ensure a high level of performance and reliability and to enable
merchants to get to market more quickly. We offer two levels of rapid start
implementation and two levels of sustaining support services in addition to
basic account activation: standard support and premier support. All of these
services include transaction reporting, fraud list updating and notification of
scheduled and unscheduled system downtime and self-help merchant support tools
on our Web site. Merchants may select any combination of implementation and/or
sustaining support packages, according to their needs.
Our service is designed to provide support to merchants during regular
business hours. It provides all of the services of account activation as well as
toll free telephone support from 8 a.m. to 9 p.m., Eastern Time, Monday through
Friday, from our merchant support group with a guaranteed two hour response time
during business hours. Online support is available 24 hours a day, seven days a
week.
TECHNOLOGY
Our proprietary transaction processing system employs a modular
architecture that was designed to scale rapidly and handle the transaction
processing demands of our merchants across the Internet. This system is composed
of multiple groups of servers and routers acting as a single point of contact
for our merchants' transaction processing requirements. This system utilizes
industry standards to maximize our compatibility with our merchants' e-commerce
systems.
In July 2000, we entered into a letter of intent to acquire the source
code for a state of the art software platform to interface with all of the
leading processing platforms. We will issue an aggregate of 500,000 shares of
our common stock, which will be released as each of up to 15 platforms are
certified. We have guaranteed that the shares issued will have an aggregate
value of $5 million on the first anniversary of the first delivery, which will
occur in September 2000.
DATA CENTERS AND NETWORK ACCESS
Our data center is located at leased facilities in San Diego, California. A data
center is a facility containing servers, modem banks, network circuits and other
physical equipment necessary to connect users to the Internet. These data
centers have multiple levels of redundant connectivity to the Internet, back-up
power, fire suppression, seismic reinforcement and security surveillance 24
hours a day, 7 days a week. This facility is Visa certified (the strictest
processing and security standards in effect today). We use Level 3
Communications as our exclusive network backbone supplier.
The technology underlying our e-commerce transaction services provides
the following benefits:
o Scalability. Our services allow merchants to deliver consistent quality
of service as their transaction volumes grow, and to handle daily and
seasonal peak periods. As a result, merchants do not have to expand
these areas of their transaction processing infrastructure as their
businesses grow.
o High reliability. Our systems are engineered to provide high
reliability, and we provide transaction processing and support 24 hours
a day, 7 days a week.
o Secure messaging. All communications between the merchant's Web server
and our system are facilitated by an encrypted protocol that allows for
digital signature processing, message integrity, and identity
verification of all communications between the merchant and us.
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o Real-time responses. Because our services enable online merchants to
process e-commerce transactions in real-time, merchants can improve
their level of customer satisfaction and reduce their support costs by
avoiding delayed responses and minimizing the need for follow-up
communications.
SECURITY
MerchantOnline realizes that security of a transaction is the most
important part of our product offerings. While our interface products provide
encrypted data security, we have enlisted Ernst & Young LLP to do a SysTrust
audit on our IT system. The SysTrust audit is a relatively new activity that
subjects a company's systems to a complete review of system architecture,
documentation, quality assurance programs and hacking. As part of this
engagement, Ernst &Young will routinely dedicate resources to try to find
security breaches. Every quarter, the system will undergo another complete audit
validating system integrity. While this type of audit is expensive, the SysTrust
gold seal will provide us and all users a high level of confidence that their
financial and personal information cannot be compromised.
PRODUCT DEVELOPMENT
Our Florida-based product development team is responsible for the
design, development and release of our core infrastructure and services. We have
a well-defined software development methodology that we believe enables us to
deliver services that satisfy real business needs for the global market while
meeting commercial quality expectations. We emphasize quality assurance
throughout our software development lifecycle. We believe that a strong emphasis
placed on analysis, design and rapid prototyping early in the project lifecycle
reduces the number and costs of defects that may be found in later stages. Our
development methodology focuses on delivery of product to a global market,
enabling localization into multiple languages, multi-currency payment
processing, global fraud detection, and local regulatory compliance from a
single code base.
When appropriate, we utilize third parties to expand the capacity and
technical expertise of our internal product development organization. On
occasion, we have licensed third-party technology that we feel provides the
strongest technical alternative. We believe this approach shortens time-to-
market without compromising our competitive position, product quality or
service.
Our Phoenix-based development team is concentrating on the PC Pay
device, including development of the ASIC chip, interfaces with different
programs and other design updates.
MANUFACTURING
We intend to engage contract manufacturers for our PC Pay device, which
is the only product that will require significant manufacturing. Clare Micronix
is developing an ASIC chip for the device, which will simplify the manufacturing
process and significantly decrease the cost per unit. The chip is expected to be
completed in early 2001. We believe that there are multiple vendors and
manufacturers and that we will not rely on any one source.
INTELLECTUAL PROPERTY
Our success depends upon our proprietary technology. We rely on a
combination of patent, copyright, trademark and trade secret rights,
confidentiality procedures and licensing arrangements to establish and protect
our proprietary rights.
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The PC Pay technology is patented in the United States (see U.S.
Patents No. 5,517,569, 5,815,577, and Des. No. 367,472) and 125 other countries
under patents and patent cooperation treaties. Additionally, two more related
significant utility patent applications have been filed. An additional four
applications were filed relating to the Newcash system. Finally, approximately
30 international patent applications are in process, including patent
applications for the Company's PC keyboard version.
We believe that numerous patent applications relating to the Internet
commerce field have been filed or have been issued as patents. From time to
time, in the ordinary course of business, we become aware of one or more patents
of third parties that we choose to evaluate for a variety of purposes. These
purposes may include determining the general contents of patents, reviewing the
technological developments of their assignees, and determining whether our
technology may overlap. We have not conducted any search to determine whether
any of our services or technology could be alleged to infringe upon any patent
rights of any third party. We cannot assure you that none of our products,
services, and technology infringes any patent of any third party.
As part of our confidentiality procedures, we generally enter into
non-disclosure agreements with our employees, distributors, and corporate
partners and into license agreements with respect to our software, documentation
and other proprietary information. Despite these precautions, third parties
could reverse engineer, copy or otherwise obtain our technology without
authorization, or develop similar technology independently. While we police the
use of our services and technology through online monitoring and functions
designed into our products, an unauthorized third-party may nevertheless gain
unauthorized access to our services or pirate our software. We are unable to
determine the extent to which piracy of our intellectual property or software
exists. Software piracy is a prevalent problem in our industry. Effective
protection of intellectual property rights may be unavailable or limited in
foreign countries. We cannot assure you that the protection of our proprietary
rights will be adequate or that our competitors will not independently develop
similar technology, duplicate our services or design around any intellectual
property rights we hold.
COMPETITION
The market for our services is intensely competitive and subject to
rapid technological change. We expect competition to intensify in the future.
Our primary source of competition for the PC Pay comes from competing
technologies that attempt to achieve the same results. We may also face
competition from developers of other systems for e-commerce transaction
processing such as Cybersource, Clear Commerce, CyberCash, Digital River,
Hewlett-Packard (VeriFone), HNC Software, Open Market, PaylinX, ShopNow.com and
Signio. In addition, companies, including financial services and credit
companies such as First Data Corporation, AT&T and GE Capital, may enter the
market for our services. In the future, we also may compete with large
Internet-centric companies that derive a significant portion of their revenues
from e-commerce and may offer, or provide a means for others to offer,
e-commerce transaction services.
Many of our competitors have longer operating histories, substantially
greater financial, technical, marketing or other resources, or greater name
recognition than we do. Our competitors may be able to respond more quickly than
we can to new or emerging technologies and changes in customer requirements.
Competition could seriously impede our ability to sell additional services on
terms favorable to us. Our current and potential competitors may develop and
market new technologies that render our existing or future services obsolete,
unmarketable or less competitive. Our current and potential competitors may make
strategic acquisitions or establish cooperative relationships among themselves
or with other e-commerce transaction service providers, thereby increasing the
ability of their services to address the needs of our prospective customers. Our
current and potential competitors may establish or strengthen cooperative
relationships with our current or future channel partners, thereby limiting our
ability to sell services through these channels. Competitive pressures could
reduce our market
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share or require the reduction of the prices of our services, either of which
could materially and adversely affect our business, results of operations or
financial condition.
While there are many competitors to our individual products, we believe
that we are the only competitor with a complete integrated package.
We compete in the processing business on the basis of certain factors,
including:
o system reliability;
o product performance;
o breadth of service offering;
o ease of implementation;
o time to market;
o customer support; and
o price.
We believe that we presently compete favorably with respect to each of
these factors. However, the market for our services is still rapidly evolving,
and we may not be able to compete successfully against current and potential
future competitors.
REGULATIONS
The following regulations can impact our business now or in the future:
FAIR CREDIT REPORTING ACT. Because our Internet fraud screening system
assesses the probability of fraud in an Internet credit card transaction, we may
be deemed a consumer reporting agency under the Fair Credit Reporting Act. As a
precaution, we are implementing changes to our systems and processes so that we
will be in compliance with the act. Complying with this act requires us to
provide information about personal data stored by us. Failure to comply with
this act could result in claims being made against us by individual consumers
and the Federal Trade Commission.
EXPORT CONTROL REGULATIONS. Current export control regulations prohibit
the export of strong encryption technology without a license, thereby preventing
us from using stronger encryption technology to protect the security of data
being transmitted to and from Internet merchants outside of the United States.
We have obtained a license to use 168-bit encryption technology with our
international merchants, and have applied for a license to use higher levels of
encryption technology. We cannot be sure that the license to use stronger
encryption technology will be issued. If our application is denied, we will be
unable to use stronger than 168-bit encryption technology with our international
merchants.
INTERNET TAX FREEDOM ACT. Enacted in October 1998 and effective through
October 2001, the act bars state or local governments from imposing taxes that
would subject buyers and sellers of electronic commerce to taxation in multiple
states. The act also bars state and local governments from imposing taxes on
Internet access through October 2001. When the act expires or if the act is
repealed, Internet access and sales across the Internet may be subject to
additional taxation by state and local governments, thereby discouraging
purchases over the Internet and adversely affecting our business.
REGULATION E. Any transfer of funds initiated through a terminal or
computer for the purpose of ordering, instructing or authorizing a financial
institution to debit or credit an account is subject to Regulation E. Portions
of Regulation E may apply to our products and services. Much of this regulation
was enacted several years ago and does not specifically apply to our business
and available interpretations
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may also not give us the necessary guidance. We will attempt to comply with this
regulation or seek interpretative guidance in conducting our operations.
EMPLOYEES
As of September 1, 2000 MerchantOnline had 45 full time employees. None
of our employees are represented by a labor union, and we consider employee
relations to be good.
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MANAGEMENT
Set forth below is certain information concerning the directors,
executive officers and significant employees:
NAME AGE POSITION
Tarek S. Kirschen 39 Chairman, President and Chief
Executive Officer and Director
James J. Gitney 45 Executive Vice President, Chief
Operating Officer and Director
Robert L. Hausman 44 Vice President and Chief
Administrative Officer
Michael D. Karsch 40 Vice President, General Counsel and
Secretary
Thomas B. Walker 59 Vice President and Chief Financial
Officer
Lee Goldstein 63 Vice President and Director
Dereck Clark 42 Director and President of
Innovonics, Inc.
James Degracia (1) 41 Director
Robert Hildreth (1) 66 Director
Susan Tedesco (1) 39 Director
Donald Hughes 46 Director and Chief Operating Officer
Technical Operations Center
Angel Rodriguez 50 Vice President Credit/Debit Card
Operations
Scott Dueweke 36 Vice President Strategic Development
Jeffrey L. Ice 38 Chief Technology Officer--East Coast
Operations
Jim Terhune 32 Vice President IT and
Development-West Cost Operations
--------------------
(1) Member of Audit Committee.
TAREK S. KIRSCHEN has been President and Chief Executive Officer since
February 1999. Previously, and since its inception in November 1997, he was
founder and served as President and CEO of CreditCo, Inc., MerchantOnline's
predecessor company. Mr. Kirschen is an entrepreneur with experience in
marketing and management of technology-based companies. From May 1997 through
November 1997, Mr. Kirschen was employed as President of Worldnetcard, Inc., Ft.
Lauderdale, Florida, a company which issued secure credit cards over the
Internet. From January 1997 through April 1997, Mr. Kirschen was self-employed
as a consultant to Net-Tel, Inc., Ft. Lauderdale, Florida, a long distance
telephone reseller. From February 1993 through December 1996, Mr. Kirschen was
Vice President of Marketing for Worldtel Saver, Inc., Miami, Florida, a company,
which sold pre-paid telephone calling cards.
JAMES J. GITNEY has been Chief Operating Officer since January 2000.
From 1998 to 1999 he was vice president of operations, household division and
from 1997 to 1998 vice president outdoor manufacturing for Sunbeam Corporation.
From 1988 to 1996 he held several management positions with Black and Decker
including plant manager for its U.S. housewares division. Prior to that he also
worked for General Electric Company for 10 years including as a manager of
production engineering for a manufacturing facility.
ROBERT L. HAUSMAN has been Chief Administrative Officer since March
2000. From 1997 to December 1999, he was president of American Risk Management
Group, Inc. (formerly known as Coventry Industries Corp.), a public company
engaged in the fire protection distribution and supply and other businesses. He
started the fire protection distribution company, Federal Supply, in 1994 and
was president until its acquisition by American Risk in 1997. From 1978 to 1994;
Mr. Hausman was a principal in a specialty textile manufacturing company in New
York.
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MICHAEL D. KARSCH has been Vice President, General Counsel and Secretary
since June 2000. He has 15 years experience representing public companies. From
June 1998 to June 2000, he was affiliated with the law firm of Broad and Cassel
in Miami and Boca Raton, Florida, as partner and counsel. From May 1997 to May
1998 he was a partner in the law firm of Bernstein and Wasserman and from June
1996 to March 1997 he was Executive Vice President of US Diagnostic, Inc., a
public company owning and operating diagnostic imaging centers. From 1990 to
1996 he was affiliated with the law firm of Bachner, Tally, Polevoy & Misher in
New York, as a partner and associate. From 1986 to 1990 he was an associate at
Skadden, Arps, Slate, Meagher & Flom in New York.
THOMAS B. WALKER has been Vice President and Chief Financial Officer
since April 2000. Mr. Walker's recent experience includes serving as CFO for a
Florida thrift and a publicly held bank holding company, assisting the
organization with charter and regulatory consolidation. His financial
institution business and finance experience includes managing acquisitions,
consolidations and mergers. Mr. Walker was chairman, president and CEO of First
National Bank in Palm Beach, the private banking division of Southeast Banking
Corp., among the most profitable and highly rated service providing banks in
Florida. He also supervised the bank's international offices in Europe and South
America.
JAMES DEGRACIA has been a director since May 2000. Since September 2000
he has been the head of marketing and advertising for UNX, Inc., an electronic
brokerage firm focusing on the professional investment community. Formerly Visa
U.S.A. Inc. senior vice president, Mr. Degracia recently led Visa's e-commerce
activities, including overall direction for Visa's product marketing, public
relations, alliances, technology and operations. Mr. Degracia helped position
Visa to increase its market share lead through business-to-business and
business-to-consumer efforts, particularly in the areas of small business
e-commerce, consumer promotions and exploring new payment systems. Additionally,
he developed smart card strategies for government, closed campus, mass transit
and retail loyalty. Prior to joining Visa, Mr. Degracia was a vice president and
technology leader for American Express from 1996 to 1998. In that role he worked
with businesses in finding applications for e-commerce technology and
multi-application smart cards. Mr. Degracia was vice president and director in
various marketing roles with Household Credit Services from 1990 to 1996, and he
was product manager with Discover Card Services from 1987 to 1990.
LEE GOLDSTEIN has been a director and Vice President of Business
Development since April 2000. Mr. Goldstein was formerly president of Web
Financial Services, which MerchantOnline acquired in April 2000, since its
founding in 1999. As was President and CEO of Virginia Design Packaging from1984
to 1997, a major manufacturer, printer and distributor of injection molded
plastic packaging, Mr. Goldstein was responsible for a period of increased
revenue and profitability. Mr. Goldstein invented plastic leak proof pails for
the seafood industry, which replaced metal packages. Mr. Goldstein was also a
member of the board for the Society of Plastic Industries, which developed ISO
plastic standards and national recycling symbols for plastics including
packaging.
DERECK B. CLARK has been a director since May 2000 when MerchantOnline
acquired Innovonics. He is founder and has been president of Innovonics since he
founded it in 1991 to design innovative electronic systems. For over seven years
Mr. Clark worked at Honeywell in Phoenix, where he was the systems lead engineer
directing Honeywell engineers and Chengdu Aero Instrument Corporation engineers
from Chengdu, China during the joint development of the MD-90 Central Air Data
Computer. He helped define and develop the flight management system for the
Airbus A-320 and vertical guidance system for five corporate jets, including the
Gulfstream G-IV. He also worked for United Airlines for over four years in the
United Airlines' engineering department designing automatic test equipment
hardware and software used to test avionics systems. He served in the United
States Air Force as an Avionics Communications Specialist and has four college
degrees.
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<PAGE>
ROBERT HILDRETH, JR., has been a director since March 2000. He is
currently President of Hildreth Associates, a consulting firm, and was formerly
the International Director of the law firm of LeBouef, Lamb, Leiby & McRae, a
Senior Utility Advisor to Goldman Sachs & Co., a Managing Director of Investment
Banking for Merrill Lynch and a Director of Merrill Lynch International Bank in
London. Mr. Hildreth is also a director of Intraco Systems, Inc., a provider of
application service provider and integrator of speech recognition based products
and services, where he is chairman of the board and Baby's Best Laboratories,
Inc., a marketer of infant formula and related products.
SUSAN TEDESCO has been a director since August 2000. She has been
associated with Citibank since 1986 and is currently vice president and regional
distribution head for Citibank International Latin American Consumer Bank. She
was also a vice president for Citicorp Services, Inc. from 1992 to 1998 in the
information management and financial areas.
DONALD D. HUGHES has been the Vice President and Chief Operating
Officer- Technical Operations Center since January 2000 and a director since
July 2000. Prior to joining MerchantOnline, Mr. Hughes was one of the principal
developers of Approve.net, ChargeSolutions.com and CS-VPOS Payment Processing
Software since 1998. From 1994 to 1998 Mr. Hughes, as Director of Technical
Services for Multi-Micro Systems, Inc. (Right Connection) San Jose, California,
was an industry innovator and leader in the design and engineering of security
devices. Mr. Hughes created and contracted with manufacturers, dealers and the
United States Government to provide advanced vehicle security, anti-terrorism
and surveillance devices. Earlier employment includes Design Engineering for
Toyota Motor Sales, Inc., through affiliate Fujitsu Ten, Inc. (Los Angeles,
California), Autoguard Inc., (San Diego, California) and the San Diego Police
Department.
Significant Employees
ANGEL M. RODRIGUEZ has been Vice President of Credit/Debit Card
Operations since February 2000. He joined MerchantOnline in January 1999 as
operations manager. Prior to joining MerchantOnline, Mr. Rodriguez was Vice
President of Operations, Latin America for MasterCard International for over 10
years. Prior to MasterCard, Mr. Rodriguez served as a Vice President of
Security/Risk Management for Citicorp.
SCOTT DUEWEKE has been Vice President of Strategic Development since May
2000. He began his career in politics, first working in congressional and
presidential campaigns in Michigan, Mr. Dueweke interned for Congressman Jack
Kemp and also worked for his early presidential campaign. After graduating from
college, Scott was appointed by President Reagan to the U.S. Agency for
International Development at the U.S. Department of State. Mr. He then went on
to work for Owens Online and Lexis/Nexis before joining NaBANCO/First Data to in
the field of secure ecommerce payments. Mr. Dueweke joined IBM in April 1996 as
Marketing Manager for the Electronic Payments and Certification Group of the
Internet Division. There he worked with companies around the world in the area
of secure internet payments and the use of digital certificates. Scott joined
Cardservice International in June 1999 and focused on creating programs and
partnerships to meet the secure payments needs of the small and medium
businesses community. Chief among his accomplishments there was the creation and
branding of the NanoMerchant offering which is reshaping the payments world
through its use of transactional pricing and through allowing any individual to
accept credit cards as payment.
JEFFREY L. ICE has been Chief Technology Officer--East Coast Operations
since April 2000 when MerchantOnline acquired Web Financial Services. Mr. Ice
was a founder and vice president research and development of Web Financial
Services since February 1999 and was head of research and development of Pipe
Dream, Inc., a company engaged in broadcasting over the Internet, from 1995
through 1999. From 1994 to 1996, Mr. Ice worked for International Business
Machines Corporation and was in charge
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<PAGE>
of converting IBM's voice recognition products to Windows 95 and NT. From 1982
to 1994 he was employed by StreetWise Systems, Inc. developing premium finance
software for loan institutions.
JAMES A. TERHUNE has been Vice President of IT and Development since
January 2000 when MerchantOnline acquired Approve.net. Prior to joining
MerchantOnline, from 1998 to 1999, Mr. Terhune was one of the principal
developers of Approve.net, ChargeSolutions.com, and the developer of CS-VPOS
Payment Processing Software currently used by MerchantOnline. From November 1994
to May 1998, he was systems and network engineer for Right Connection
(1995-1999), a San Diego (California) based e-commerce company. Mr. Terhune is a
highly trained computer programmer and the creator of the IPOSS (Internet Point
of Sale System) payment processing system used by many Internet processing
centers.
36
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the common stock as of the date of this prospectus. No
person listed below is selling any securities in this offering.
BENEFICIAL OWNERSHIP (2)
NAME AND ADDRESS (1) SHARES PERCENT
DIRECTORS AND EXECUTIVE OFFICERS
Tarek S. Kirschen 21,900,000 (3) 34.7
James J. Gitney 922,000 (4) 1.5
Robert L. Hausman 948,240 (5) 1.6
Michael D. Karsch 1,100,000(6) 1.8
Thomas B. Walker 600,000 (7) 1.0
Lee Goldstein 1,605,792 (8) 2.6
Dereck Clark 7,384,354 (9) 11.9
Robert Hildreth, Jr. 200,000 (10) *
James DeGracia 200,000 (10) *
Don Hughes 1,540,000(11) --
Susan Tedesco 200,000 (10) *
All directors and executive officers
as a group (11 persons) 36,600,386 (12) 52.4
5% OR GREATER HOLDERS
Steven Landau 9,450,000 15.7
---------------------
*Less than 1%
(1) Except as indicated, the address of each person named in the table is
c/o MerchantOnline.com, Inc., 902 Clint Moore Road, Boca Raton, Florida
33487.
(2) Except as otherwise indicated, the persons named in this table have sole
voting and investment power with respect to all shares of common stock
listed, which include shares of common stock that such persons have the
right to acquire a beneficial interest within 60 days from the date of
this prospectus.
(3) Includes 18,900,000 shares of common and 3,000,000 shares issuable upon
the exercise of stock options.
(4) Includes 4,000 shares held in a retirement account, 38,000 shares held
by Mr. Gitney's wife, 30,000 shares held by his minor children and
options to purchase 850,000 shares issuable upon the exercise of stock
options.
(5) Includes 148,240 shares and 800,000 shares of common stock issuable upon
the exercise of stock options.
(6) Includes 100,000 shares and 1,000,000 shares of common stock issuable
upon the exercise of stock options.
(7) Represents 480,000 shares of common stock issuable upon the exercise of
stock options held by Mr. Walker and 120,000 shares of common stock
issuable upon the exercise of stock options held by Tatum CFO Partners
LLP, of which Mr. Walker is a member.
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<PAGE>
(8) Includes 269,750 shares owned by Mr. Goldstein, 273,542 shares held by
Mr. Goldstein's wife, 162,500 shares held by a family trust and 900,000
shares issuable upon the exercise of stock options.
(9) Includes 4,887,130 shares held jointly by Mr. Clark and his wife,
497,224 shares held by a corporation of which Mr. Clark is a principal
stockholder and president and 2,000,000 shares of common stock issuable
upon exercise of stock options.
(10) Includes 200,000 shares of common stock issuable upon the exercise of
the stock options.
(11) Includes 1,540,000 shares of common stock owned by Ms. Kim Wilson, who
currently resides with Mr. Hughes, for which he disclaims beneficial
ownership. Excludes options to purchase 400,000 shares of common stock
that are expected to be granted to Mr. Hughes.
(12) Includes 26,850,386 shares and 9,750,000 shares of common stock issuable
upon the exercise of stock options.
SELLING SHAREHOLDER
The following table sets forth certain information with respect to the
selling shareholder as of August 15, 2000. The selling shareholder is not
currently an affiliate of MerchantOnline, and has not had a material
relationship with MerchantOnline during the past three years, other than as a
holder of securities of MerchantOnline and the negotiation of the Investment
Agreement.
<TABLE>
<CAPTION>
Name Shares Maximum of Shares Amount Owned After
Beneficially Offered Offering (1)
Owned
Number %
<S> <C> <C> <C> <C>
Swartz Private Equity, LLC............. 980,000 6,480,000 (2) -- --
</TABLE>
* Less than 1%
(1) Assumes that the selling shareholder will sell all of the shares of common
stock offered hereby. We cannot assure you that the selling shareholder will
sell all or any of the shares offered hereunder. Includes 980,000 shares of
common stock issuable upon exercise of outstanding warrants which are currently
exercisable.
(2) This number includes (solely for purposes of this prospectus) up to an
aggregate of 5,000,000 shares of our common stock that we may sell to Swartz
pursuant to the Investment Agreement, 500,000 shares of common stock underlying
warrants issuable in connection with the Investment Agreement, which shares
would not be deemed beneficially owned within the meaning of Sections 13(d) and
13(g) of the Exchange Act before their acquisition by Swartz, and the 980,000
warrants currently outstanding. It is expected that Swartz will not beneficially
own more than 9.9% of our outstanding common stock at any time.
THE INVESTMENT AGREEMENT
OVERVIEW. On January 5, 2000, we entered into an investment agreement
with Swartz Private Equity, LLC. The investment agreement entitles us to issue
and sell, at our option, our common stock for up to an aggregate of $35 million
from time to time during a three-year period commencing on the effective date of
a registration statement. This is referred to as a put right.
PUT RIGHTS. In order to invoke a put right, we must have an effective
registration statement on file with the SEC registering the resale of the common
shares which may be issued upon exercise of that put right. Additionally, we
must give at least ten but not more than 20 business days' advance notice to
Swartz of the date on which we intend to exercise a particular put right and we
must indicate the number of shares of common stock we intend to sell to Swartz.
At our option, we may also designate a maximum
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<PAGE>
dollar amount of common stock (not to exceed $2 million) which we will sell to
Swartz during the put and/or a minimum purchase price per common share, if
applicable, at which Swartz may purchase shares during the put. The designated
minimum purchase price per common share will be no greater than 80% of the
closing bid price of our common stock on the advanced put notice date. The
number of common shares sold to Swartz in a given put may not exceed the lesser
of:
o 15% of the aggregate daily reported trading volume (excluding certain
block trades) during a period which begins on the business day
immediately following the day we invoked the put right and ends on and
includes the day which is 20 business days after the date we invoked the
put right (excluding certain days where the common shares trade below a
Company specified minimum price),
o the intended put amount,
o the number of our shares which when multiplied by the put share price
equals $2 million,
o 9.9% of our common stock outstanding on a fully diluted basis upon
completion of the put.
o For each common share, Swartz will pay us the lesser of the market price
for the applicable pricing period, minus $.10, or 91% of the market
price for the applicable pricing period. Market price is defined as the
lowest closing bid price for the common stock during the applicable
pricing period, which is the 20 business days following the date notice
of the put was provided to Swartz. However, the purchase price may not
be less than the designated minimum per share price, if any, that we
indicated in our notice.
SAMPLE EXERCISE OF A PUT. After the effectiveness of the registration
statement, we may draw down the maximum initial amount permitted under the
investment agreement. Based on the 20-day lowest closing bid price of our common
shares of $3.50 and our 20-day aggregate daily reported trading volume of
910,000 shares as of August 22, 2000, we would be entitled to draw down
approximately $434,752 under our first put and issue 136,500 shares and a
warrant to purchase 13,650 shares of common stock.
In the period beginning January 1, 2000 through August 25, 2000, the
20-day aggregate trading volume ranged from 315,300 to 2,612,000 shares. Closing
bid prices ranged from $2.75 to $11.06 per share. The table below illustrates
the dollar amounts that could have been available to us and the corresponding
number of shares that we would have issued per put had this agreement been in
effect during that time:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Price/Share 20 Day Volume 400,000 1,200,000 2,500,000
-------------------------------------------------------------------------------------------------
$2.75 Dollars per Put $150,000 $450,000 $938,000
Shares per Put 60,000 180,000 375,000
-------------------------------------------------------------------------------------------------
$5.00 Dollars per Put $273,000 $819,000 $1,706,000
Shares per Put 60,000 180,000 375,000
-------------------------------------------------------------------------------------------------
$7.50 Dollars per Put $410,000 $1,228,000 $2,000,000
Shares per Put 60,000 180,000 293,000
-------------------------------------------------------------------------------------------------
$11.00 Dollars per Put $600,000 $1,800,000 $2,000,000
Shares per Put 60,000 180,000 200,000
-------------------------------------------------------------------------------------------------
</TABLE>
SHORT SALES. Swartz and its affiliates are prohibited from engaging in
short sales of our common stock unless they have received a put notice and the
amount of shares involved in a short sale does not exceed the number of shares
specified in the put notice.
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<PAGE>
CANCELLATION OF PUTS. We must cancel a particular put if, between the
date of the advance put notice and the last day of the pricing period:
o we discover an undisclosed material fact relevant to Swartz's investment
decision;
o the registration statement registering resales of the common shares
becomes ineffective; or
o shares are delisted from the then primary exchange.
However, the put will remain in effect for the number of shares
specified in the put notice for the shortened pricing period which will end on
the day prior to the date of delivery of the put cancellation notice.
WARRANTS. In December 1999, we delivered to Swartz warrants to purchase
980,000 shares of our common stock at anytime for five years at an exercise
price which was initially $.965. Within five business days after the end of the
pricing period for each put, we are required to issue and deliver to Swartz a
warrant to purchase a number of shares of common stock equal to 10% of the
common shares issued to Swartz in the applicable put. Each warrant will be
exercisable at a price which will initially equal 110% of the market price for
applicable put. The warrants will have semi-annual reset provisions. Each
warrant will be immediately exercisable and have a term beginning on the date of
issuance and ending five years thereafter.
NON-USAGE FEE. On the last business day of each six-month period
following the date of the Investment, if we have not put $1,000,000 of our stock
to Swartz, we will be required to pay Swartz a non-usage fee equal to the
difference between $100,000 and 10% of the aggregate put amounts to Swartz
during such six month period.
TERMINATION OF INVESTMENT AGREEMENT. We may also terminate our right to
initiate further puts or terminate the investment agreement by providing Swartz
with notice of such intention to terminate; however, any such termination will
not affect any other rights or obligations we have concerning the investment
agreement or any related agreement.
RIGHT OF FIRST REFUSAL. During the term of the investment agreement and
for 90 days after its termination, we are prohibited from issuing or selling any
capital stock or securities convertible into our capital stock for cash in
private capital raising transactions, without obtaining the prior written
approval of Swartz. In addition, Swartz has the option for 10 days after
receiving notice to purchase such securities on the same terms and conditions.
This right of first refusal does not apply to acquisitions, option plans or
primary offerings of our common stock.
SWARTZ'S RIGHT OF INDEMNIFICATION. We are obligated to indemnify
Swartz (including their shareholders, officers, directors, employees and agents)
from all liability and losses resulting from any misrepresentations or breaches
we made in connection with the Investment Agreement, our registration rights
agreement, other related agreements, or the registration statement.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of (1) 100,000,000 shares of
common stock, par value $.001 per share, 60,097,333 shares of which were
outstanding (assuming no exercise of options and warrants) at August 15, 2000
and (2) 25,000,000 shares of preferred stock, par value $.001 per share, none of
which are outstanding.
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<PAGE>
COMMON STOCK
Subject to the rights of the holders of any preferred stock that may be
outstanding, each holder of common stock on the applicable record date is
entitled to receive such dividends as may be declared by the Board of Directors
out of funds legally available therefor, and, in the event of liquidation, to
share pro rata in any distribution of our assets after payment or providing for
the payment of liabilities and the liquidation preference of any outstanding
preferred stock. Each holder of common stock is entitled to one vote for each
share held of record on the applicable record date on all matters presented to a
vote of shareholders, including the election of directors. Holders of common
stock have no cumulative voting rights or preemptive rights to purchase or
subscribe for any stock or other securities, and there are no conversion rights
or redemption or sinking fund provisions with respect to such stock. All
outstanding shares of common stock are, and the shares of common stock offered
hereby will be when issued, fully paid and nonassessable.
PREFERRED STOCK
Our Board of Directors has the authority to issue 25,000,000 shares of
preferred stock in one or more series and to fix, by resolution, conditional,
full, limited or no voting powers, and such designations, preferences and
relative, participating, optional or other special rights, if any, and the
qualifications, limitations or restrictions thereof, if any, including the
number of shares in such series (which the Board may increase or decrease as
permitted by Florida law), liquidation preferences, dividend rates, conversion
or exchange rights, redemption provisions of the shares constituting any series
and such other special rights and protective provisions with respect to any
class or series as the Board may deem advisable without any further vote or
action by the shareholders. Any shares of preferred stock so issued could have
priority over the common stock with respect to dividend or liquidation rights or
both and could have voting and other rights of shareholders. We have no present
plans to issue shares of preferred stock.
CERTAIN FLORIDA LEGISLATION
Florida has enacted legislation that may deter or hinder takeovers of
Florida corporations. The Florida Control Share Act generally provides that
shares acquired in a "control share acquisition" will not possess any voting
rights unless such voting rights are approved by a majority of the corporation's
disinterested shareholders. A "control share acquisition" is an acquisition,
directly or indirectly, by any person of ownership of, or the power to direct
the exercise of voting power with respect to, issued and outstanding "control
shares" of a publicly held Florida corporation. "Control shares" are shares,
which, except for the Florida Control Share Act, would have voting power that,
when added to all other shares owned by a person or in respect to which such
person may exercise or direct the exercise of voting power, would entitle such
person, immediately after acquisition of such shares, directly or indirectly,
alone or as a part of a group, to exercise or direct the exercise of voting
power in the election of directors within any of the following ranges: (1) at
least 20% but less than 33-1/3% of all voting power; (2) at least 33-1/3% but
less than a majority of all voting power; or (3) a majority or more of all
voting power. The Florida Affiliated Transactions Act generally requires
supermajority approval by disinterested shareholders of certain specified
transactions between a public corporation and holders of more than 10% of the
outstanding voting shares of the corporation (or their affiliates). Florida law
and our Articles and Bylaws also authorize MerchantOnline to indemnify our
directors, officers, employees and agents. In addition, our Articles and Florida
law presently limit the personal liability of corporate directors for monetary
damages, except where the directors (1) breach their fiduciary duties, and (2)
such breach constitutes or includes certain violations of criminal law, a
transaction from which the directors derived an improper personal benefit,
certain unlawful distributions or certain other reckless, wanton or willful acts
or misconduct.
TRANSFER AGENT
The transfer agent for the common stock is American Stock Transfer &
Trust Company, New York, New York.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have up to 66,577,333 shares
of common stock outstanding. Of these shares, approximately 13,000,000 shares
will be freely tradable without restriction under the Securities Act, except for
such shares which may be acquired by an "affiliate" of MerchantOnline as that
term is defined in Rule 144 under the Securities Act, which shares generally may
be sold publicly without registration under the Securities Act only in
compliance with Rule 144. The remaining outstanding shares are held by
affiliates or will become eligible for sale under Rule 144 within the next 12
months.
In general, under Rule 144 as currently in effect, if a period of at
least one year has elapsed since the later of the date the "restricted shares"
(as that phrase is defined in Rule 144) were acquired from MerchantOnline and
the date they were acquired from an affiliate, then the holder of such
restricted shares (including an affiliate) is entitled to sell a number of
shares within any three-month period that does not exceed the greater of 1% of
the then outstanding shares of the common stock or the average weekly reported
volume of trading of the common stock during the four calendar weeks preceding
such sale. The holder may only sell such shares through unsolicited brokers'
transactions or directly to market makers. Sales under Rule 144 are also subject
to certain requirements pertaining to the manner of such sales, notices of such
sales and the availability of current public information concerning
MerchantOnline. An affiliate of MerchantOnline, may sell shares not constituting
restricted shares in accordance with the foregoing volume limitations and other
requirements but without regard to the one-year holding period.
Under Rule 144(k), if a period of at least two years has elapsed between
the later of the date restricted shares were acquired from MerchantOnline and
the date they were acquired from an affiliate, as applicable, a holder of such
restricted shares who is not an Affiliate at the time of the sale and has not
been an affiliate for at least three months prior to the sale would be entitled
to sell the shares immediately without regard to the volume limitations and
other conditions described above.
We can make no predictions as to the effect, if any, that sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of significant amounts of the
common stock in the public market, or the perception that such sales may occur,
could adversely affect prevailing market prices.
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<PAGE>
PLAN OF DISTRIBUTION
The selling shareholder is free to offer and sell its common stock at
such times, in such manner and at such prices as it may determine. The types of
transactions in which the shares are sold may include transactions in the
over-the-counter market (including block transactions), negotiated transactions,
the settlement of short sales of shares, or a combination of such methods of
sale. The sales will be at market prices prevailing at the time of sale or at
negotiated prices. Such transactions may or may not involve brokers or dealers.
The selling shareholder has advised us that they have not entered into
any agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their securities. The selling shareholder
does not have an underwriter or coordinating broker acting in connection with
the proposed sale of the common shares.
The selling shareholder may effect such transactions by selling common
stock directly to purchasers or to or through broker-dealers, which may act as
agents or principals. Such broker-dealers may receive compensation in the form
of discounts, concessions, or commission from the selling shareholder. They may
also receive compensation from the purchasers of common shares for whom such
broker-dealers may act as agents or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions).
The selling shareholder is, and any broker-dealer that acts in
connection with the sale of common shares may be deemed to be, an "underwriter"
within the meaning of Section 2(11) of the Securities Act. Any commissions
received by such broker-dealers and any profit on the resale of the common
shares sold by them while acting as principals might be deemed to be
underwriting discounts or commissions.
Because the selling shareholder is an "underwriter" within the meaning
of Section 2(11) of the Securities Act, it will be subject to prospectus
delivery requirements.
We have informed the selling shareholder that the anti-manipulation
rules of the SEC, including Regulation M promulgated under the Securities and
Exchange Act, may apply to its sales in the market and have provided the selling
shareholder with a copy of such rules and regulations.
The selling shareholder also may resell all or a portion of the common
shares in open market transactions in reliance upon Rule 144 under the
Securities and Exchange Act, provided it meets the criteria and conforms to the
requirements of such Rule. MerchantOnline is responsible for all costs, expenses
and fees incurred in registering the shares offered hereby. Swartz is
responsible for brokerage commissions, if any, attributable to the sale of such
securities.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of
common stock offered hereby will be passed upon for us by Michael D. Karsch,
Vice President and General Counsel.
EXPERTS
The consolidated financial statements of MerchantOnline.com, Inc.
appearing in MerchantOnline.com, Inc.'s Annual Report (Form 10-KSB) for the year
ended October 31, 1999 have been audited by Ernst & Young LLP, independent
certified public accountants, as set forth in their report thereon included
therein and incorporated herein by reference. Such consolidated financial
43
<PAGE>
statements are incorporated herein by reference in reliance upon such report
given on the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any report or document we
file at the public reference facilities maintained by the SEC at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549 and at the SEC's regional
offices located at Seven World Trade Center, Suite 1300, New York, New York
10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Please
call the SEC at 1-800-SEC-0880 for more information about the public reference
rooms. Our SEC filings are also available from the SEC's website located at
http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and later information that we file
with the SEC will automatically update and supersede this information. We
incorporate by reference the following:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
SEC FILING PERIOD COVERED OR DATE OF FILING
<S> <C>
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Annual Report on Form 10-KSB Year ended October 31, 1999
---------------------------------------------------------------------------------------
Quarterly Report on Form 10-QSB Three months ended January 31, 2000
---------------------------------------------------------------------------------------
Quarterly Report on Form 10-QSB Three months ended April 30, 2000
---------------------------------------------------------------------------------------
Quarterly Report on Form 10-QSB/A Three months ended April 30, 2000
---------------------------------------------------------------------------------------
Form 8-K January 19, 2000
---------------------------------------------------------------------------------------
Form 8-K January 24, 2000
---------------------------------------------------------------------------------------
Form 8-K May 5, 2000
---------------------------------------------------------------------------------------
Form 8-K May 30, 2000
---------------------------------------------------------------------------------------
Form 8-K/A March 21, 2000
---------------------------------------------------------------------------------------
Form 8-K/A June 30, 2000
---------------------------------------------------------------------------------------
Form 8-K/A July 31, 2000
---------------------------------------------------------------------------------------
Form 8-K/A August 3, 2000
---------------------------------------------------------------------------------------
Form 8-K/A August 3, 2000
---------------------------------------------------------------------------------------
Form 8-K/A August 29, 2000
---------------------------------------------------------------------------------------
Description of our common stock contained in
our Registration Statement on Form 10-SB and
any amendment or report filed for the purpose
of updating such description
---------------------------------------------------------------------------------------
</TABLE>
We have filed with the SEC a registration statement on Form S-3 under
the Securities Act with respect to the common stock covered by this prospectus.
This prospectus, which is a part of the registration statement, does not contain
all the information set forth in, or annexed as exhibits to, the registration
statement, as permitted by the SEC's rules and regulations. For further
information about us and the common stock offered under this prospectus, please
refer to the registration statement, including the exhibits. Copies of the
registration statement, including exhibits, may be obtained from the SEC's
public reference facilities listed above upon payment of the fees prescribed by
the SEC, or may be examined without charge at these facilities. Statements
concerning any document filed as an exhibit are not necessarily complete and, in
each instance, we refer you to the copy of the document filed as an exhibit to
the registration statement.
44
<PAGE>
We will provide without charge to each person, including any beneficial
owner, to whom a prospectus is delivered, upon written or oral request of that
person, a copy of any and all of the information that has been incorporated by
reference in this prospectus (excluding exhibits unless those exhibits are
specifically incorporated by reference into the documents requested). Please
direct such requests to Chief Administrative Officer, Robert Hausman, 902 Clint
Moore Road, Suite 114, Boca Raton, Florida 33487, telephone number (561)
864-6000 x 112, by fax to (561) 864-6022, or by e-mail to
[email protected].
45
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Registrant estimates that expenses payable by the Registrant in
connection with the offering described in this registration statement (other
than underwriting discounts and commissions) will be as follows:
Securities and Exchange Commission registration fee................ $ 7,271
Printing and engraving expenses.................................... 2,500
Accounting fees and expenses....................................... 15,000
Legal fees and expenses............................................ 1,000
Transfer Agent's fees and expenses................................. 1,000
Miscellaneous...................................................... 3,229
-------
TOTAL.............................................................. 30,000
=======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant has authority under Section 607.0850 of the Florida
Business Corporation Act to indemnify its directors and officers to the extent
provided for in such statute. The Registrant's Amended and Restated Articles of
Incorporation and Bylaws provide that the Registrant may insure, shall indemnify
and shall advance expenses on behalf of our officers and directors to the
fullest extent not prohibited by law. We are also a party to indemnification
agreements with each of our directors and officers. The Registrant has also
agreed to indemnify the selling shareholders named in the Registration Statement
against certain liabilities, including liabilities under the Securities Act.
ITEM 16. EXHIBITS.
EXHIBIT DESCRIPTION
2.8 Amendment No. 2 to Agreement and Plan of Reorganization dated
as of April 24, 2000, by and among MerchantOnline.com, Inc.,
Innovonics, Inc. and Innovonics Acquisition Corp.
5.1 Opinion of Michael D. Karsch, Esq.
10.6(1) Investment Agreement dated January 5, 2000 between Swartz
Private Equity LLC and MerchantOnline.com.
10.7(1) Registration Rights Agreement dated January 5, 2000 between
Swartz Private Equity LLC and MerchantOnline.com.
10.8(1) Form of Swartz Private Equity LLC Warrant
10.9 Amendment dated August 29, 2000 to the Investment Agreement
dated January 5, 2000 between Swartz Private Equity LLC and
MerchantOnline.com
23.1 Consent of Michael D. Karsch, Esq. (included in its opinion
filed as Exhibit 5.1)
23.2 Consent of Ernst & Young LLP
24.1 Powers of Attorney (included on the signature page of this
Registration Statement)
(1) Filed as an Exhibit of the same number to our Annual Report on Form
10-KSB (File No. 0-22607) and incorporated herein by reference.
II-1
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(a) That, for purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plans annual report pursuant to Section 15(d)
of the Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) To deliver or cause to be delivered with the prospectus, to each
person to whom the prospectus is sent or given, the latest annual report to
security holders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3
under the Securities Exchange Act of 1934; and, where interim financial
information required to be presented by Article 3 of Regulation S-X are not set
forth in the prospectus, to deliver, or cause to be delivered to each person to
whom the prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide such interim
financial information.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other that the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registrant Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Boca Raton, State of Florida, on September 8, 2000.
MERCHANTONLINE.COM, INC.
Date: September 8, 2000 By: /s/ TAREK KIRSCHEN
------------------------------------
Tarek S. Kirschen
Chairman and Chief Executive Officer
Each person whose signature appears below constitutes and appoints Tarek
S. Kirschen and James J. Gitney, or any one of them, as his or her true and
lawful attorneys-in-fact and agents with full power of substitution and
resubstitution for him or her and in his or her name, place and stead in any and
all capacities to execute in the name of each such person who is then an officer
or director of the Registrant any and all amendments (including post-effective
amendments) to this Registration Statement, and any registration statement
relating to the offering hereunder pursuant to Rule 462 under the Securities Act
of 1933, as amended, and to file the same with all exhibits thereto and other
documents in connection therewith with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents and each of them full power and
authority to do and perform each and every act and thing required or necessary
to be done in and about the premises as fully as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents; or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Tarek Kirschen Chairman, Chief Executive September 8, 2000
-----------------------------------------
Tarek S. Kirschen Officer and President
(Principal Executive Officer)
/s/ James J. Gitney Executive Vice President, Chief September 8, 2000
----------------------------------------- Operating Officer and Director
James J. Gitney
/s/ Thomas B. Walker Vice President and Chief September 8, 2000
----------------------------------------- Financial Officer
Thomas B. Walker (Principal Financial and
Accounting Officer)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Dereck Clark Director September 8, 2000
-----------------------------------------
Dereck Clark
/s/ Lee Goldstein Director September 8, 2000
-----------------------------------------
Lee Goldstein
/s/ Bob Hildreth, Jr. Director September 8, 2000
-----------------------------------------
Bob Hildreth, Jr.
/s/ James Degracia Director September 8, 2000
-----------------------------------------
James Degracia
/s/ Donald Hughes Director September 8, 2000
-----------------------------------------
Donald Hughes
/s/ Susan Tedesco Director September 8, 2000
-----------------------------------------
Susan Tedesco
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
EXHIBIT
2.8 Amendment No. 2 to Agreement and Plan of Reorganization dated as of
April 24, 2000, by and among MerchantOnline.com, Inc., Innovonics, Inc.
and Innovonics Acquisition Corp.
5.1 Opinion of Michael D. Karsch, Esq.
10.9 Amendment dated August 29, 2000 to the Investment Agreement dated
January 5, 2000 between Swartz Private Equity LLC and MerchantOnline.com
23.2 Consent of Ernst & Young LLP
