U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-22607
MERCHANTONLINE.COM, INC.
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(Name of Small Business issuer in its charter)
FLORIDA 84-1233073
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(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification Number)
1600 S. DIXIE HIGHWAY, SUITE 300 BOCA RATON, FLORIDA 33432
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (561) 395-3585
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $ 204,106
The aggregate market value of the issuer's common stock, $.001 par value, held
by non-affiliates on January 31, 2000 was approximately $74,928,750.
On January 31, 2000, there were 23,860,000 shares of the issuer's common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
FORM 10-KSB ANNUAL REPORT
MERCHANTONLINE.COM, INC.
PAGE
PART I
Item 1. Description of Business..........................................3
Item 2. Description of Property.........................................14
Item 3. Legal Proceedings...............................................15
Item 4. Submission of Matters to a Vote of Security Holders.............15
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.............................................16
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................17
Item 7. Financial Statements............................................31
Item 8. Changes in and Disagreements on Accounting
and Financial Disclosure........................................31
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act...............33
Item 10. Executive Compensation..........................................34
Item 11. Security Ownership of Certain Beneficial Owners and Management..35
Item 12. Certain Relationships and Related Transactions..................36
PART IV
Item 13. Exhibits and Reports of Form 8-K................................36
SIGNATURES...................................................................38
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
OVERVIEW
We are a developer and provider of real-time e-commerce transaction
services. We offer products and services to online merchants as an economical,
easy-to-install service 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. We have developed a proprietary real-time credit
card processing program, MOL E-CHARGE, which we believe meets or exceeds the
capabilities of all currently available software. Our goal is to provide small
and medium sized merchants with a single vendor that furnishes everything needed
to begin participating in E-commerce. Our target client base includes merchants
that already have merchant bankcard accounts that require real-time processing
only.
OUR HISTORY
Tarcyn Corporation was incorporated on March 13, 1993 under the laws of
the State of Colorado to engage in any lawful corporate undertaking, including,
but not limited to, selected mergers and acquisitions. Tarcyn had been in the
developmental stage since inception and had no operations prior to the merger
with MerchantOnline.com. As such, Tarcyn was defined as a "shell" company, whose
sole purpose at the time was to locate and consummate a merger or acquisition
with a private entity.
Effective February 16, 1999, Tarcyn acquired all of the issued and
outstanding securities of Creditco Inc. d/b/a MerchantOnline.com, for 15,750,000
shares of "restricted" common stock of Tarcyn. Subsequent to the acquisition,
Tarcyn changed its name to MerchantOnline.com, Inc., changed its jurisdiction of
incorporation from Colorado to Florida. and changed its fiscal year end from
March 31, to October 31, in order to coincide with the fiscal year end of
Creditco.
On January 15, 2000, we completed the acquisition of Approve.net and
ChargeSolutions, which had previously provided much of our technical support and
back office operations, for 2,000,000 shares of our common stock.
INDUSTRY BACKGROUND
THE RAPID GROWTH OF INTERNET COMMERCE
As the Internet has become an increasingly important communications
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
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that the amount of worldwide commerce conducted over the Web will increase from
$111 billion in 1999 to approximately $1.3 trillion in 2003.
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.
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.
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 should be
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.
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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 had been 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 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.
EVOLUTION OF E-COMMERCE TRANSACTION PROCESSING SYSTEMS
Early adopters of e-commerce business models typically developed custom
transaction processing systems. Merchants that built these systems often faced
long development cycles, which delayed their time-to-market. These custom
systems often had limited functionality and scalability and high ongoing
maintenance costs.
More recently, online merchants have attempted to address their
transaction processing needs by either purchasing or outsourcing discrete
systems. Merchants that turn to discrete systems like payment processing are
still faced with the need to address other potentially costly and time-consuming
transaction processing issues like fraud screening or export control. In
addition, merchants that purchase discrete systems often discover that these
systems cannot scale as their business grows.
As the Internet has become an essential marketplace, merchants are
increasingly turning to e-commerce service providers with the expertise to
deliver a comprehensive solution that shortens time-to-market and maximizes the
value of their investment. These transaction processing solutions should be
available at a low initial and overall cost and, at the same time, be scalable
to support the growth of the online business. A solution should also allow the
merchant to maintain control over its online content and customer relationships
and to integrate new services easily.
THE MERCHANTONLINE.COM SOLUTION
MerchantOnline.com began with the concept of offering real-time credit
card processing services to support e-commerce. A relatively small number of
e-commerce solution providers targeted to smaller merchants exist.
MerchantOnline.com's competitive advantages over the competition include:
o Lower Fees
o Automated Order Fulfillment
o User Friendly Processing
o Ease of Installation
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MerchantOnline.com offers its e-commerce solution to merchants that are
able to acquire their own bank merchant account and require only real-time
credit card processing. MerchantOnline.com has relationships with banks that
allows it to assist clients in obtaining merchant accounts for a fee.
MerchantOnline.com's MOL E-CHARGE product provides real-time processing
service for clients that have or can acquire a merchant account. This economical
service can literally put the merchant in business on the Internet. For an
installation fee of $99 plus a monthly service fee, a customer with a web site
can be accepting credit card transactions within 48 hours of submitting its
application. MerchantOnline.com downloads a credit card processing web page to
the merchant and provides the processing necessary to administer orders. This
allows clients to accept credit card orders and payments entered directly by
consumers on their web sites. MerchantOnline.com 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. MerchantOnline.com also provides its
merchants with a manual screen in which they can enter transactions not
submitted over the Internet. This allows them to use the MOL E-CHARGE system for
telephone/fax orders.
In addition, MerchantOnline.com offers an electronic shopping cart,
called MOL E-CART to merchants that offer several products or services that
customers may order at one time. An "electronic shopping cart" refers to the
ability to combine the purchases of many items from the Internet on one invoice.
MOL E-CART allows consumers to order several items, calculates applicable taxes,
totals the order, and accepts a credit card as payment. The merchant provides
the online catalog of items to put in the shopping cart.
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 24 hours a day, 7
days a week. In addition, we offer our merchants 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.
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 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, as market demand for such services emerges. To supplement our
internal development efforts, we will consider strategic acquisitions
or form partnerships to acquire complementary technologies and
companies.
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 1999 from 1998 levels and plan to continue to do
so in 2000. We also intend to increase the size of our direct sales
force and enter into additional collaborative relationships to generate
new merchant customers as well as to increase the number of transaction
services used by our existing merchants.
o OFFER NEW PRODUCTS. MerchantOnline.com has agreed to acquire a company,
which has developed a patented encryption hardware and software
product. This device can be used for debit card and smart card
transactions thereby reducing or eliminating charge-back issues of
using credit cards. MerchantOnline.com 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 UTILIZE PARTNERSHIPS TO DRIVE TRANSACTIONS. We intend to utilize
relationships with our channel partners including resellers and banks
to increase our transaction volume and create new markets. We intend to
enter into additional relationships with other companies that offer
similar benefits.
o INCREASE INTERNATIONAL PRESENCE AND OPERATIONS. We intend to expand the
availability and brand recognition of our services throughout the
world. We plan 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.
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MERCHANTONLINE.COM SERVICES
We provide a suite of e-commerce transaction services designed to
simplify merchants' operations and allow them to focus on marketing and
merchandising tasks required for their online businesses. Our services are
transparent to the merchant's customers. We also offer digital product rights
management and professional services.
PRODUCTS AND SERVICES
MerchantOnline.com provides merchants that use the Internet with three
types of services:
1. MOL E-CHARGE credit card processing capabilities;
2. MOL E-MERCHANT merchant accounts for bank clearings; and
3. MOL E-CART electronic shopping carts.
The basic service relating to credit cards involves real-time
processing of transactions. This is for clients that have or can obtain credit
card merchant bank accounts. MerchantOnline.com provides a seamless connection
to credit card approval and completes the processing of the transactions. For
this, MerchantOnline.com receives a competitive one-time setup fee plus a
monthly service fee.
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.
MerchantOnline.com provides a back office system that supports merchants'
efforts to fulfill orders received. The confirmation sent to customers has
reduced the chargebacks as problems are identified and resolved immediately.
MerchantOnline.com previously served as an agent for banks that provide
credit card deposit accounts for Internet merchants. This allowed
MerchantOnline.com to market to clients seeking a merchant account and earn
revenue from both real-time processing fees and charges relating the merchant
account (setup fees, percentage of transaction amounts, and recurring monthly
fees). Currently, the Company seeks to provide its services to customers who do
not require merchant accounts.
PROPOSED ACQUISITION
MerchantOnline.com has a letter of intent to acquire 90.1% of a company
which produces a patented encryption hardware magnetic swipe card/smart card
device in exchange for 5,000,000 shares of common stock and $500,000 in cash.
The closing is expected to occur in late February 2000.
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MerchantOnline.com believes that a hardware/software "swipe" card
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. Our management believes that this product provides the only
simple-to-install and low-cost solution for secure PC-based transactions of
credit, debit, and smart cards. The combination of a PIN pad with built-in
secure encryption, magnetic stripe reading ability and smart card interface
mirrors an automatic teller machine when augmented with the power of a PC and
the Internet connection to the ATM networks.
This technology is patented in the U.S. and 125 other countries under
patents and patent cooperation treaties. Additionally, two more related
significant utility patent applications have been filed. Finally, approximately
30 international patent applications are in process.
SALES AND MARKETING
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
January 31, 2000, we had a total of 3 persons in sales and marketing and over
100 resellers throughout the world.
SALES STRATEGY
MerchantOnline.com's products and services are marketed through direct
and indirect channels. All products and services are also offered directly by
MerchantOnline.com. MerchantOnline.com's efforts in direct selling is
accomplished in four ways:
o its web sites;
o banners placed on other web sites;
o direct sales by its own staff; and
o tradeshows.
For its indirect sales efforts, MerchantOnline.com uses a network of
resellers. Reseller organizations can offer all of MerchantOnline.com's
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
MerchantOnline.com services at a discounted rate and then re-sell them to their
clients. They can either use MerchantOnline.com to bill their customers for
these services or invoice their customers under their own name.
MerchantOnline.com has recently finalized agreements with a number of
independent selling organizations to resell MerchantOnline.com's 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
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fees if the reseller uses MerchantOnline.com's suggested retail pricing. Many
resellers actually charge higher prices when the market will bear it. The use of
resellers allows MerchantOnline.com to leverage its resources to maximize
revenues. By working with companies as resellers who market merchant accounts
and web sites to their customers, MerchantOnline.com strategically develops 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. MerchantOnline.com believes that using a combination of direct and
indirect sales efforts will allow it to expand more rapidly while holding
expenses for salaries, computers, and facilities, at below budget.
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 also co-sponsored an Indy car racing team with Yahoo!
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.
ACCOUNT ACTIVATION. Our account activation level service is intended
for use by merchants that receive technical support from a technically qualified
third party, an organization that resells the MerchantOnline Internet Commerce
Suite, or by those merchants with sufficient in-house technical expertise.
Account activation allows merchants to connect to the MerchantOnline
Internet Commerce Suite, configure all merchant IDs and account information,
access test services, gain secure access to our online merchant support center
and next business day e-mail support.
IMPLEMENTATION AND SUPPORT. 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 6 p.m.,
Eastern Time, Monday through Friday, from our merchant support group with a
guaranteed two hour response time during business hours.
Through toll-free telephone numbers, our merchants can reach our
support desk professionals around the clock.
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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.
E-TRANSACTION DATABASE ARCHITECTURE
Three primary databases form the core of our transaction processing
system: the transaction process database which maintains information necessary
to process each individual transaction; the decision support database, which
processes reports and provides detailed information about merchants'
transactions and the digital products rights management database, which manages
and reports on the digital property rights that customers have purchased. Our
transaction services rely on these databases to store the information necessary
to process transactions. For example, our fraud prevention service relies upon a
proprietary database of millions of transactions to assess the risk of fraud.
INTERNET COMMERCE SERVICES APPLICATIONS
We have developed a set of software applications that perform the
services in our products. These services include global payment processing,
fraud prevention, tax calculation, export compliance, territory management,
delivery address verification and fulfillment management. These applications
contain the rules and logic necessary to provide our transaction services to
merchants. The applications share resources with the databases which allow us to
efficiently add new application services to meet our customers needs.
INDUSTRY STANDARDS
The implementation of our architecture is based on and complies with
widely accepted industry standards. Adherence to industry standards provides
compatibility with existing applications, enables ease of modification and
reduces the need for software modules to be rewritten over time, thus protecting
our merchants' investments.
DATA CENTERS AND NETWORK ACCESS
Our data centers are located at leased facilities in Boca Raton,
Florida and 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.
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PRODUCT DEVELOPMENT
Our 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.
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.
We believe that numerous patent applications relating to the Internet
commerce field have been filed or have 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.
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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 comes from online merchants who develop custom
systems. These online merchants who have made large initial investments to
develop custom systems may be less likely to adopt an outsourced transaction
processing strategy. We 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 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.
We compete 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.
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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.
EMPLOYEES
As of January 31, 2000 MerchantOnline.com had 9 full time employees.
None of our employees is represented by a labor union, and we consider employee
relations to be good.
ITEM 2. DESCRIPTION OF PROPERTY
MerchantOnline.com's executive offices are located at 1600 S. Dixie
Highway - Suite 300, Boca Raton, Florida. MerchantOnline.com rents approximately
3,500 square feet on a month to month basis at the rate of $4,770 per month.
Management believes that this space will meet MerchantOnline.com's needs for the
foreseeable future.
MerchantOnline.com's technical back office operations are located at
3465 Camino Del Rio South, Suite 250, San Diego, California, where we rent 3,300
square feet at a rate of $4,950 per month pursuant to a three year lease
expiring in 2003.
We also lease space at Level III Communication's secured data center
for our servers for $2,100 per month.
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ITEM 3. LEGAL PROCEEDINGS
In January 2000, MerchantOnline.com was served with a lawsuit entitled
Global Guarantee Corporation vs. MerchantOnline.com, Inc., Los Angeles State
Court - Case No. BC222369. Global Guarantee Corporation is seeking to collect
$195,000 of outstanding notes. MerchantOnline.com has not yet answered the
complaint and intends to contest jurisdiction in California State Court as well
as to challenge the merits of the claim. MerchantOnline.com also intends to
contest the claimed amount and may also file counterclaims in excess of
plaintiffs claims.
MerchantOnline.com is not a party to any other material legal
proceedings
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
On May 10, 1999 MerchantOnline.com'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.com's common stock as reported on the
OTC Bulletin Board for each quarter from May 10, 1999 through October 31, 1999.
The following quotations are over-the-market quotations and, accordingly,
reflect inter-dealer prices, without retail mark-up, markdown or commission and
may not represent actual transactions.
High Bid Low Bid
-------- -------
May 10, 1999 through July 31, 1999 $ 8.50 $ .87
August 1, 1999 through October 31, 1999 $ 3.82 $ .25
On January 31, 2000, the closing bid price for the common stock as
reported on the OTC Bulletin Board was $9.75. As of December 31, 1999, there
were approximately 1,000 holders of MerchantOnline.com's common stock.
DIVIDENDS
MerchantOnline.com has not paid any cash dividends on its common stock
since its inception. MerchantOnline.com 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.com's earnings, capital
requirements, expansion plans, financial condition and other relevant factors.
SALES OF UNREGISTERED SECURITIES
In February 1999, an aggregate of 15,750,000 shares of common stock
were issued to Tarek Kirschen, Stephen Landau, Douglas Blantz and Kenneth Merkt
in connection with the reverse merger of Creditco into Tarcyn.
In May 1999, MerchantOnline.com sold 25,000 shares to an accredited
investor for $1.00 per share.
In September 1999, MerchantOnline.com issued an aggregate of 500,000
shares of common stock to three parties in connection with the restructuring of
its marketing agreement with Pagan Lewis Motors and an additional 1,000,000
shares of common stock to a software developer in exchange for services. An
additional aggregate of 1,500,000 shares was issued to two consulting firms for
services rendered.
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From September 1999 through January 2000, MerchantOnline.com issued an
aggregate of 900,000 shares of common stock to 12 accredited investors in a Rule
506 private offering.
Effective November 30, 1999 MerchantOnline.com issued an aggregate of
2,000,000 shares of common stock in connection with its acquisition of
Approve.net, Inc.
In December 1999, MerchantOnline.com issued an aggregate of 490,000
warrants to purchase common stock to Swartz Private Equity LLC in connection
with the execution of a letter of intent with respect to financing.
From September through December 1999, an aggregate of 2,580,000 options
to purchase stock have been granted to seven employees and two consultants.
In January 2000, MerchantOnline.com issued an aggregate of 85,000
shares of common stock upon the conversion of outstanding convertible notes held
by two accredited investors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with
MerchantOnline.com's audited financial statements and notes thereto included
herein. In connection with, and because it desires to take advantage of, the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, MerchantOnline.com cautions readers regarding certain forward looking
statements in the following discussion and elsewhere in this report and in any
other statement made by, or on the behalf of MerchantOnline.com, whether or not
in future filings with the Securities and Exchange Commission. Forward looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments.
Forward looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond MerchantOnline.com's
control and many of which, with respect to future business decisions, are
subject to change. These uncertainties and contingencies can affect actual
results and could cause actual results to differ materially from those expressed
in any forward looking statements made by, or on behalf of, MerchantOnline.com.
MerchantOnline.com disclaims any obligation to update forward looking
statements.
MerchantOnline.com, 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.com
undertook a 3.5 - 1 forward split of its issued and outstanding common stock and
thereafter, MerchantOnline.com acquired all of the issued and outstanding
securities of CreditCo, Inc. in exchange for 15,750,000 "restricted" common
shares of MerchantOnline.com. As a result, MerchantOnline.com was the surviving
entity. As part of the terms of the aforesaid transaction, MerchantOnline.com
amended its articles of incorporation, changing its name to its present name, as
well as reincorporating in the State of Florida.
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MerchantOnline.com's principal business is to provide a diverse
selection of services which it has developed to allow Internet merchants to
quickly and easily establish a method of conducting business on the Internet
with a minimal initial investment and with low transaction costs.
MerchantOnline.com intends to attempt to take advantage of the anticipated
enormous growth of the Internet by providing an electronic payment solution for
merchants that market and sell their products and services on the Internet. The
electronic commerce services or e-commerce provided by MerchantOnline.com
include allowing merchants to accept credit cards, debit cards and online checks
from customers in a secure, technologically advanced environment.
MerchantOnline.com is currently a single source of customer service which offers
a variety of Internet services including electronic shopping carts, web site
development and hosting, merchant accounts and real-time credit card processing
in a single package for one installation fee and only one, combined monthly
billing. To date, most of MerchantOnline.com's revenues have been generated from
credit card transactions and set up fees.
MerchantOnline.com has developed proprietary real-time credit card
processing programs which it calls MOL E-CHARGE, which management believes meets
or exceeds the capabilities of all currently available software. It intends to
provide small and medium sized merchants with a single vendor that furnishes
everything needed to begin participating in E-commerce. Its proposed client base
includes merchants that already have merchant bankcard accounts that require
real-time processing only. MerchantOnline.com commenced marketing its business
in February 1998 and, in September 1998, it began offering complete services to
allow merchants to become active on the Internet.
RESULTS OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 1999 AND THE PERIOD FROM
NOVEMBER 20, 1997 (INCEPTION) TO OCTOBER 31, 1998
During the year ended October 31, 1999 (fiscal 1999),
MerchantOnline.com's revenues were $204,106, compared to $168,748 for the period
from November 20, 1997 (inception) to the period ended October 31, 1998. This
increase was attributable to the growth of MerchantOnline.com's business. Cost
of revenue was $111,064 for fiscal 1999, compared to $43,074 for the period
ended October 31, 1998. Gross margins decreased from 74% in fiscal 1998 to 46%
for fiscal 1999 due to competitive pressures in the marketplace which required
MerchantOnline.com to lower its initial setup fees and monthly maintenance
charges to its customers.
During the year ended October 31, 1999, sales and marketing expense
totaled $1,296,774, compared to $143,964 in the period ended October 31, 1998.
The large increase was due to $765,000 expensed for sponsorship of a car-racing
team. General and administrative expense for fiscal 1999 was $721,023 compared
to $195,853 for the period ended October 31, 1998. General and administrative
expense increased during the year ended October 31, 1999 compared to the period
ended October 31, 1998 as a result of MerchantOnline.com moving its principal
place of business to a larger facility in order to accommodate the growth of the
business and salaries of MerchantOnline.com's increased number of employees.
MerchantOnline.com retained nine separate independent contractors in fiscal 1999
who provided MerchantOnline.com with technical support, website design, public
relations and marketing. In fiscal 1999, there was also $325,000 of noncash
compensation due to stock issuances for services. In fiscal 1999
MerchantOnline.com also recognized
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a settlement expense of $455,000 relating to the issuance of common stock to
satisfy certain advertising obligations.
It is expected that these expenses will continue to increase in the
foreseeable future by reason of anticipated expanded volume of transactions
processed by MerchantOnline.com and development of the swipe card business.
As a result, MerchantOnline.com generated a net loss of $(2,440,328)
during the year ended October 31, 1999 ($.13 per share) compared to a net loss
of $(225,332) for the period ended October 31, 1998 ($.01 per share).
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1999, MerchantOnline.com had current assets of $5,148 in
cash, $1,472,500 in prepaid consulting services, $63,170 in prepaid advertising,
and $500,000 in deferred advertising. MerchantOnline.com also had $914,184 in
property and equipment, net of depreciation. Current liabilities included
accounts payable of $263,808, accrued advertising liabilities of $1,402,500,
accrued liabilities of $96,029, other liabilities of $226,564, and notes payable
of $330,000, of which $195,000 were satisfied subsequent to year end through the
issuance of 160,000 shares of common stock. As a result, MerchantOnline.com had
a working capital deficit of $307,063.
In May 1999, MerchantOnline.com entered into an agreement with Pagan
Lewis Motors, Inc.(PLM) to purchase Internet advertising blocks and to sponsor a
car-racing team with Yahoo!.MerchantOnline.com was required to make bi-weekly
payments but did not have sufficient cash. An agreement has reached with PLM
such that this amount would be paid in 12 monthly installments, starting in
September 1999, and PLM would release the advertising on Yahoo! in amounts equal
to what the Company has paid to PLM. MerchantOnline.com is not current with
these payments and currently has a verbal agreement to restructure the
arrangement such that accelerated payments of $375,000 will be made in February
2000 and full payment will be made by August 2000. MerchantOnline.com sold
approximately $306,000 of this advertising in May 1999 and has collected
approximately $216,000 of such amount. The $306,000 of sold advertising may not
be used until the buyer makes all of its payments and has accordingly recorded
this amount as a liability.
During the year ended October 31, 1999, MerchantOnline.com used
$558,887 of cash in operating activities. Net cash provided by financing
activities was $585,534, consisting of proceeds from notes and stock issued in
private placements.
MerchantOnline.com had five outstanding notes payable, including two
loans from affiliates, including one note to Tarek Kirschen,
MerchantOnline.com's President, with an outstanding principal balance of $4,560
which bears interest at 1% per month on the outstanding balance and the other to
Steven Landau in the principal amount of $25,000, which accrues interest at the
rate of 8% per annum and both are due on demand. The Landau note was converted
subsequent to year end into 25,000 shares of common stock. The remaining
outstanding notes aggregate $330,000 and are payable to minority shareholders
pursuant to the same terms and conditions as Mr. Kirschen's loan.
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MerchantOnline.com has operated with limited cash flow for the last 12
months and has recognized the need for additional operating capital. In May
1999, MerchantOnline.com commenced a private offering of its common stock at a
price of $1.00 per share for aggregate gross proceeds of up to $2 million, of
which an aggregate of 25,000 shares were sold. A second offering for $2.00 per
share commenced in September 1999 which raised an aggregate of $1,800,000
through January 31, 2000. It is expected that the proceeds of this offering will
be utilized primarily for funding the proposed acquisition and operations,
advertising MerchantOnline.com's services using electronic banners on the major
internet services, attendance of MerchantOnline.com at trade shows, research and
development, and repayment of debt. In addition, in January 2000
MerchantOnline.com entered into a investment agreement with Swartz Private
Equity LLC to provide up to $35 million of equity, as described below.
In January 2000, Swartz also entered into a letter of intent to
purchase up to $3 million of common stock in a private placement upon the
request of MerchantOnline.com until such time as the registration statement for
this $35 million placement is effective.
We have incurred operating losses for all periods from inception
through October 31, 1999, and therefore have not recorded a provision for income
taxes. We have recorded a valuation allowance for the full amount of our net
deferred tax assets, as the realizability of the deferred tax assets is not
currently predictable.
Since MerchantOnline.com does not have a definitive alternate financing
arrangement in place in the event the proceeds from private equity financings,
described above, are not sufficient to fund its working capital needs through
the date that cash proceeds would be available under the investment agreement,
described below, there is substantial doubt about MerchantOnline's ability to
continue as a going concern.
CHANGES IN ACCOUNTING POLICIES
In December 1999, the Securities and Exchange Commission staff issued
Staff Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS. The SAB establishes certain criteria for net versus gross recording
of sales transactions and requires companies to comply with the SAB no later
than the first fiscal quarter of the fiscal year beginning after December 15,
1999 and to retroactively reclassify for all periods presented.
MerchantOnline.com has decided to early adopt the SAB. Prior to implementation
of the SAB, MerchantOnline.com recorded gross revenues from customers that used
its merchant accounts and recorded corresponding expenses, net of its fees, for
distribution to its customers. The 1998 audited financial statements have been
reclassified to comply with this SAB. Revenues, net includes approximately
$21,000 and $25,700 for the year ended October 31, 1999 and the period from
November 20, 1997 (inception) through October 31, 1998, respectively, related to
fees earned under these arrangements.
SEASONALITY
Due to the methods in which MechantOnline.com charges its customers for
its services, there is not a significant variation in the Company's revenues
during the year.
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SWARTZ 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 also 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 as a consequence of the invocation of that put right.
Additionally, we must give at least ten but not more than twenty 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 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 shall 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 ten 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 $5 million,
o 9.9% of our common stock outstanding 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 inter-day trade price for the common stock during the
applicable pricing period, one of which is the ten business days
following the date notice of the put was provided to Swartz and the
other of which is the ten business days following the first pricing
period. However, the purchase price may not be less than the designated
minimum per share price, if any, that we indicated in our notice.
WARRANTS. We have delivered to Swartz warrants to purchase 490,000
shares of our common stock at anytime for five years at an exercise price of
$1.93. Within five business days after the end of the second 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 average closing bid price for five days
immediately preceding the put date. The warrants will have semi-annual reset
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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, 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 which Swartz has agreed to not unreasonably withhold. 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
shall not apply to acquisitions, option plans or primary offerings of our common
stock.
YEAR 2000 DISCLOSURE
MerchantOnline.com believes that it is Year 2000 compliant. Costs
incurred in compliance were not material. Nonetheless we may experience material
unexpected costs caused by undetected errors or defects in the technology used
in our systems or because of the failure of a material vendor to be Year 2000
compliant.
Notwithstanding our Year 2000 compliance efforts, the failure of a
material system or vendor, or the Internet generally, to be Year 2000 compliant
could harm the operation of our systems or prevent or delay the delivery of our
service being offered, or produce other unforeseen material adverse
consequences.
FACTORS THAT MAY AFFECT FUTURE RESULTS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS IN EVALUATING
MERCHANTONLINE.COM. 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.
MERCHANTONLINE.COM CAUTIONS READERS THAT CERTAIN IMPORTANT FACTORS MAY
AFFECT MERCHANTONLINE.COM'S 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.COM.
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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 Internet
business and online credit card processing offers little information on which to
base projections of future profitability. Consideration should be given to risks
inherent to start up 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 a sales and marketing strategy.
o The need to obtain and 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 assemble and maintain a programming staff.
o The need to keep our system compatible with computer hardware
advances without alienating our installed user base.
o The need to develop and manage strategic relationships to maximize
public recognition of our products and services.
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 MAY CONTINUE TO EXPERIENCE LOSSES, WHICH COULD DECREASE THE VALUE OF OUR
STOCK
As of October 31, 1999, we had an accumulated deficit of $2,665,660 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 2000, 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, end
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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 e-charge service, our primary e-commerce vehicle. The
success of this service will depend on our ability to network with collateral
service vendors, including merchant banks, developers of server and client side
software applications, and shopping cart integrators, to have the service
accepted by Internet merchants as a means of buying and selling goods via the
Internet. In addition, our ability to convince merchants to use our service will
depend on consumer acceptance of our interface and their trust of the Internet
in general. 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 Our setup fees have varied widely as market conditions have driven us
to deeply discount our services to compete while establishing our
market share. 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.
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o In addition, as part of a long-term strategy of forgoing short-term
gains, we may make pricing, marketing, licensing or 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.
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.
COMPETITION IS INTENSE
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. Internet e-commerce is new, dynamic, and rapidly evolving. 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, including Microsoft, 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 MUST ACHIEVE MARKET PENETRATION AND KEEP PACE WITH TECHNOLOGICAL ADVANCES
Broad acceptance of our market offerings is critical to our success
because most of our revenues derive from one-time fees charged to customers. In
addition, our ability to realize revenues from our e-charge service will depend
on its acceptance by prominent online merchants. One impediment to widespread
acceptance is that standards for hardware, data transmission, and user
interfaces, are still emerging. As a result, merchants and financial
institutions have been slow to select which service to use. 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 DAMAGE CUSTOMER RELATIONS IF WE EXPERIENCE SOFTWARE DEFECTS OR DELAYS IN
PRODUCT DEVELOPMENT
Internet commerce applications are complex and rely on sophisticated
software, technologically advanced hardware, and the integration of
often-incompatible operating systems. For this reason, system development often
encounters developmental delays. Software may contain undetected errors.
Systematic failure may occur when revisions are brought on line or when demand
for services increases. We may experience unanticipated delays in the
development of our software or implementation on systems underlying our
services. Despite testing by potential customers, and us it is possible that our
software may nevertheless contain errors, and this could have an adverse effect
on our business.
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 two separate operations centers in Florida and
California that provide backup support for our services. If one of these sites
should cease operations because of a power outage, fire, or natural disaster,
the others should be able to take over with only a minimal disruption in
service. However, we have not been able to test the transfer of operations under
emergency conditions, and we cannot be sure that the transfer would be
successful. In addition, we have experienced growing transaction volumes that
have occasionally exceeded our ability to process them. There is a possibility
that our existing systems may be inadequate if demand increases substantially.
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.
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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 do not have "key person"
life insurance policies on any of our employees. The loss of the services of any
of our key employees, particularly our founder and Chief Executive Officer,
Tarek Kirschen, 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.
WE HAVE A LIMITED SALES FORCE AND OUR DISTRIBUTION CHANNELS ARE NEW
We have only a limited number of sales and marketing employees and,
therefore, we rely heavily on distribution channels for sales of our products.
Because of the rapidly evolving nature of Internet business, we are not certain
that the established distribution channels will be an adequate network for us to
achieve our goals, or that we will be able to develop alternative channels.
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 THE AGREEMENTS ARE SHORT TERM AND WE CAN LOSE CLIENTS
Our standard customer agreement are short-term and can be terminated
without cause by the 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.
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, or 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.
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WE INTEND TO ACQUIRE VARIOUS COMPANIES, WHICH WILL SUBJECT US TO ALL OF THE
RISKS ASSOCIATED WITH A GROWING COMPANY.
We will use a portion of the net proceeds from our private offering and
future financings to acquire healthcare and e-commerce businesses. There can be
no assurance that suitable acquisitions will be available or that acquisitions
can be negotiated on acceptable terms, or that the operations of acquired
businesses can be integrated effectively into our operations. Competition for
suitable acquisition candidates is expected to be intense and many of our
competitors will have greater resources than we have. Our failure to implement
our acquisition strategy could have a material adverse effect on our financial
performance and, moreover, the attendant risks of expansion could also have a
material adverse effect on our business.
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.
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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.
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.
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 assurances 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.
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
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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.
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.
WE DO NOT ANTICIPATE PAYING DIVIDENDS
We have never paid any cash dividends on our common stock and we do not
anticipate paying cash dividends on our common stock in the foreseeable future.
The future payment of dividends is directly dependent upon our future earnings,
capital requirements, financial requirements and other factors to be determined
by our Board of Directors. For the foreseeable future, it is anticipated that
earnings, if any, which may be generated from our operations will be used to
finance our growth, and that cash dividends will not be paid to common
shareholders.
SHARES OF OUR COMMON STOCK THAT MAY BE SOLD IN THE FUTURE
Of the 23,860,000 shares of our common stock currently issued and
outstanding, approximately 21 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. Future sales of shares of common stock by
existing shareholders 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.
WE MAY USE PREFERRED STOCK TO RESIST TAKEOVERS
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
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present intention to issue any additional shares of preferred stock, there can
be no assurance that we will not do so in the future.
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 the Nasdaq system. 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 the Nasdaq system. In addition, 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. We intend to
apply for Nasdaq when we meet the listing criteria. 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 HAVE NEVER FILED A REGISTRATION STATEMENT
We have never filed a registration statement with the SEC and cannot
assure you that once filed, that it we be declared effective on a timely basis,
which would not permit us to exercise Puts under the Swartz Investment
Agreement.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements are located after the signature page.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 19, 2000, Millward & Co. was dismissed as
MerchantOnline.com's principal accountant. Millward had served as
MerchantOnline.com's principal accountant since October 1, 1998.
The report of Millward on MerchantOnline.com's financial statements for
the past fiscal year ended October 31, 1998 did not contain an adverse opinion
or a disclaimer of opinion and was not qualified or modified as to audit scope
or accounting principles. The report however, was modified as to an uncertainty
of MerchantOnline.com's ability to continue as a going concern.
In connection with the audit of the 1999 financial statements, Millward
did not commence any audit procedures and there are no disagreements between
MerchantOnline.com and Millward for the period since it was engaged as the
auditor, on any matters of accounting principles and practices, financial
statement disclosure, or auditing scope and procedure which, if not resolved to
the satisfaction of Millward, would have caused Millward to make reference to
the matter in their report.
MerchantOnline.com requested Millward to furnish it with a letter
addressed to the Securities and Exchange Commission stating whether or not
Millward agrees with the statements made by MerchantOnline.com in response to
this Item 4 and, if not, stating the respects in which it does not agree.
MerchantOnline.com delivered a copy of its Form 8-K report to Millward on
January 19, 2000.
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On January 24, 2000 MerchantOnline's engaged Ernst & Young LLP as its
independent public accountant for the fiscal year ended October 31, 1999. The
decision to change accountants was approved by MerchantOnline's Board of
Directors.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth the names, ages and positions held for
MerchantOnline.com's directors, executive officers and significant employees.
- - --------------------------------------------------------------------------------
NAME AGE POSITION
- - --------------------------------------------------------------------------------
Tarek Kirschen 38 President and Chief Executive Officer and Director
Jim Gitney 44 Chief Operating Officer
Angel Rodriguez 50 Vice President/ Credit/Debit Card Operations
SIGNIFICANT EMPLOYEES
Donald Hughes 46 Vice President and Chief Operations Officer-West
Coast Technical Operations Center
Jim Terhune 32 Vice President of IT Development-West Coast
Technical Operation Center
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.com's
predecessor company. Mr. Kirschen is an entrepreneur with experience in
marketing and management of technology-based companies. Prior thereto, 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. Mr.
Kirschen is a member of the FISPA (Florida Internet Service Provider
Association), ISOC (The Internet Society), and is a trustee of the Boca Raton
Chamber of Commerce.
JIM 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.
ANGEL M. RODRIGUEZ has been Vice President of Credit/Debit Card
Operations since February 2000. He joined MerchantOnline.com in January 1999 as
operations manager. Prior to joining MerchantOnline.com, 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.
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SIGNIFICANT EMPLOYEES
DONALD D. HUGHES has been the Vice President and Chief Operations Officer-West
Coast Technical Operations Center since August 1999. Prior to joining
MerchantOnLine.com., Mr. Hughes was one of the principal developers of
Approve.net, ChargeSolutions.com and CS-VPOS Payment Processing Software. Before
entering the e-commerce world, Mr. Hughes was an industry leader and design
engineer for the security market with innovative designs including advanced
vehicle security, bomb detection and surveillance devices for law enforcement.
JAMES A. TERHUNE has been the Vice President of IT Development-West Coast
Technical Operation Center since August 1999. Prior to joining
MerchantOnLine.com., Mr. Hughes was one of the principal developers of
Approve.net, ChargeSolutions.com and CS-VPOS Payment Processing Software He was
also one of the creators of the acclaimed IPOSS Internet Point Of Sale payment
processing system used by many Internet processing centers. His technical and
computer sciences background extends for 14 years, including Director of
Technical Services positions, Software Engineering and the United States Navy in
Computer Sciences and Avionics.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
To MerchantOnline.com's knowledge, based solely on a review of the
copies of such reports furnished to MerchantOnline.com and on representations
that no other reports were required, a Form 3 for Tarek Kirschen and Stephen
Landau were not timely filed during fiscal 1999 as required under Section 16(a)
of the Securities Exchange Act of 1934.
ITEM 10. EXECUTIVE COMPENSATION
The following table summarizes all compensation accrued by
MerchantOnline.com in each of the last three fiscal years for
MerchantOnline.com's chief executive officer and each other executive officer
serving as such whose annual compensation exceeded $100,000. Directors of
MerchantOnline.com do not receive compensation for serving in such capacity.
Long Term
Annual Compensation Compensation
Name and ------------------- ------------
Principal Position Year Salary($)(1)(2) Bonus Other Options
----------------------- ---- ------------------- ----- ------ ------------
Tarek Kirschen, 1999 $92,912 0 $6,600 0
President 1998 $52,000 0 $6,600 0
EMPLOYMENT AGREEMENTS
In December 1999, MerchantOnline.com and Tarek Kirschen entered into a
new five-year employment agreement effective January 1, 2000. The agreement
provides for a base salary of $250,000 per year, periodic bonuses and the
granting of 1,500,000 options to purchase common stock, which have an exercise
price of $2.00 per share and vest over the five-year term. The agreement
provides for additional payments upon a change of control or termination without
cause.
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MerchantOnline is preparing a three year employment agreement for Jim Gitney
that will provide for a base salary of $125,000 per year, periodic bonuses and
the granting of 300,000 options to purchase common stock with an exercise price
of $10.00 per share which was the price on his first day of employment. The
agreement provides for additional payments upon a change of control or
termination without cause.
CONSULTING AGREEMENTS
In December 1999, MerchantOnline.com entered into a one-year consulting
agreement with Robert Hausman providing for an annual fee of $125,000 and
options to purchase 300,000 shares of common stock with an exercise price of
$1.87 per share.
In September 1999, MerchantOnline.com entered into a one-year financial
consulting agreement with Excel Communications providing for compensation of
1,000,000 shares of restricted common stock and a one-year financial consulting
agreement with SBZ Investments providing for compensation of 500,000 shares of
restricted common stock.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of January 31, 2000 there were 23,860,000 shares of common stock
issued and outstanding. The following table sets forth, as of the close of
business on January 31, 2000 (a) the name, address and number of shares of each
person known by MerchantOnline.com to be the beneficial owner of more than 5% of
our common stock and (b) the number of shares owned by each director, each
director nominee and all officers and directors as a group, together with their
respective percentage holdings of such shares before and after the exchange:
Name of Beneficial Owner Number of Shares Percentage of Class
------------------------ ---------------- -------------------
Tarek Kirschen 9,450,000 (1) 39.6%
Stephen Landau 4,725,000 19.8%
5440 Little Neck Pkwy
Little Neck, N.Y. 11362
(1) Does not include options to purchase up to 1,500,000 shares of common stock
not currently exercisable.
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the merger with MerchantOnline.com, Creditco had three
shareholders. Tarek Kirschen owned 60% of the outstanding shares, Doug Blanz
owned 35%, and Kenneth Merkt owned 5%. In a private transaction, Stephen Landau,
who is the father in law of Tarek Kirschen, acquired a 30% interest in Creditco
from Doug Blanz, who retained a 5% interest in Creditco.
MerchantOnline.com has five outstanding notes payable, including two
loans from affiliates, including one note to Tarek Kirschen,
MerchantOnline.com's President, with an outstanding principal balance of $4,560
that bears interest at 1% per month on the outstanding balance, and the other to
Steven Landau in the principal amount of $25,000, which accrues interest at the
rate of 8% per annum and is due on demand. The remaining outstanding notes
aggregate $330,000 and are payable to minority shareholders pursuant to the same
terms and conditions as Mr. Kirschen's loan.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
2.4 Agreement and Plan of Reorganization between MerchantOnline.com and
Creditco, Inc. are hereby incorporated by reference to the Report on
Form 8-K as filed with the Securities and Exchange Commission on
February 24, 1999.
2.5 Merger Agreement dated as of November 30, 1999, by and among
Approve.net, Inc., a California corporation, Kim Wilson, Jim Terhune
and Vince Mazziotti and MerchantOnline.com, Inc., incorporated by
reference to the Form 8-K filed January 19, 2000
3.1 Articles of Incorporation and Amendments thereto are hereby
incorporated By reference to the report filed by Tarcyn Corp. on Form
10-SB with the Securities and Exchange Commission on May 27, 1997.
3.2 Bylaws are hereby incorporated by reference to the report filed by
Tarcyn Corp. on Form 10SB12G with the Securities and Exchange
Commission on May 27, 1997.
3.3 Articles of Incorporation reincorporating MerchantOnline.com in the
State of Florida are hereby incorporated by reference to the Report on
Form 8-K as filed with the Securities and Exchange Commission on
February 24, 1999.
3.4 Certificate of Designation for Series A Preferred Stock incorporated by
reference to the Report on Form 8-K as filed with the Securities and
Exchange Commission on October 19, 1999.
10.1 Consulting Agreement with SBZ Investments, incorporated by reference to
the Form S-8 filed December 23, 1999
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10.2 Employment Agreement between Don Hughes and MerchantOnline.com, Inc.
dated August 1, 1999, incorporated by reference to the Form 8-K filed
January 19, 2000
10.3 Employment Agreement between Jim Terhune and MerchantOnline.com, Inc.
dated August 1, 1999, incorporated by reference to the Form 8-K filed
January 19, 2000
10.4 Employment Agreement between Vince Mazziotti and MerchantOnline.com,
Inc. dated February 1, 2000, incorporated by reference to the Form 8-K
filed January 19, 2000
10.5 Employment Agreement between Tarek Kirschen and MerchantOnline.com
dated December 3, 1999.
10.6 Investment Agreement dated January 5, 2000 between Swartz Private
Equity LLC and MerchantOnline.com.
10.7 Registration Rights Agreement dated January 5, 2000 between Swartz
Private Equity LLC and MerchantOnline.com.
10.8 Form of Swartz Private Equity LLC Warrant
10.9 Consulting Agreement dated December 1, 1999 between MerchantOnline.com
and Robert Hausman
27.0 Financial Data Schedule
(b) Reports on Form 8-K
During the three months ended October 31, 1999, MerchantOnline.com
filed a Report on Form 8-K with the Securities and Exchange Commission
On October 19, 1999, MerchantOnline.com filed a Report on Form 8-K
disclosing under Item 5 information relating to the proposed conversion from
common stock to preferred stock by the two principal shareholders.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has caused its Annual Report on Form 10-KSB to be signed
on its behalf by the undersigned, thereunto duly authorized.
MERCHANTONLINE.COM, INC.
Date: February 14, 2000 By: /s/ Tarek Kirschen
-----------------------------
Tarek Kirschen, President
In accordance with 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:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ TAREK KIRSCHEN Chairman of the Board February 14, 2000
- - ------------------ President and Director
Tarek Kirschen (Chief Financial and
Accounting Officer)
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Index to Financial Statements
Report of Independent Certified Public Accountants...........................F-2
Report of Independent Certified Public Accountants...........................F-3
Balance Sheet................................................................F-4
Statements of Operations.....................................................F-5
Statements of Shareholders' Equity...........................................F-6
Statements of Cash Flows.....................................................F-7
Notes to Financial Statements................................................F-9
F-1
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Shareholders
MerchantOnline.com, Inc.
We have audited the accompanying balance sheet of MerchantOnline.com, Inc. as of
October 31, 1999 and the related statements of operation, shareholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MerchantOnline.com, Inc. at
October 31, 1999, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming
MerchantOnline.com, Inc. will continue as a going concern. As more fully
described in Note 2, the Company has sustained operating losses since inception
and had negative cash flow from operations of approximately $558,900 for the
year ended October 31, 1999 and negative working capital at October 31, 1999 of
approximately $307,063. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
West Palm Beach, Florida /s/ ERNST & YOUNG, LLP
February 7, 2000
F-2
<PAGE>
To the Stockholder
Creditco, Inc. d/b/a MerchantOnline.com, Inc.
Boca Raton, Florida
Report of Independent Certified Accountants
We have audited the statements of operation, and shareholders' equity
(accumulated deficit), and cash flows for the period from inception (November
20, 1997) to October 31, 1998 of Creditco, Inc. d/b/a MerchantOnline.com, Inc.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on those financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of Creditco, Inc. d/b/a MerchantOnline.com,
Inc. operations and its cash flows for the initial period then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred a net loss
from operations of $225,332, and has a net capital deficiency of $175,332, and a
working capital deficiency of $162,732 as of October 31, 1998, which raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. Management's plans as to these matters are included
in Note 2.
/s/ MILLWARD & CO. CPAs
- - ------------------------------
Millward & Co. CPAs
Fort Lauderdale, Florida
December 22, 1999
F-3
<PAGE>
MerchantOnline.com, Inc.
Balance Sheets
October 31, 1999
ASSETS
Current assets:
Cash $ 5,148
Prepaid consulting services 1,472,500
Prepaid advertising 63,750
Deferred advertising 500,000
-----------
Total current assets 2,041,398
Property and equipment, net 914,184
Deferred advertising 201,250
Other assets 9,269
-----------
Total assets $ 3,166,101
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 263,808
Accrued advertising liability 1,402,500
Other accrued liabilities 96,029
Notes payable 270,000
Note payable and convertible note payable to shareholders 29,560
Convertible note payable 60,000
Other liabilities 226,564
-----------
Total current liabilities 2,348,461
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.01 par value--25,000,000 shares authorized,
no shares issued and outstanding --
Common stock, $0.001 par value--100,000,000 shares authorized,
21,025,000 shares issued and outstanding 21,025
Additional paid-in capital 4,137,275
Subscriptions receivable (675,000)
Accumulated deficit (2,665,660)
-----------
Total shareholders' equity 817,640
-----------
Total liabilities and shareholders' equity $ 3,166,101
===========
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
MerchantOnline.com, Inc.
Statements of Operations
PERIOD FROM
NOVEMBER 20, 1997
YEAR ENDED (INCEPTION)
OCTOBER 31, TO OCTOBER 31,
1999 1998
------------ -----------------
Revenues, net $ 204,106 $ 168,748
Costs and expenses:
Cost of revenues 111,064 43,074
Sales and marketing 1,296,774 143,195
General and administrative 721,023 195,853
Depreciation and amortization 30,649 11,958
Interest expense 29,924 --
Other expenses--settlement 455,000 --
------------ ------------
Total costs and expenses 2,644,434 394,080
------------ ------------
Net loss $ (2,440,328) $ (225,332)
============ ============
Net loss per share $ (.13) $ (.01)
============ ============
Weighted average shares outstanding 18,223,249 15,750,000
============ ============
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
<TABLE>
<CAPTION>
MerchantOnline.com, Inc.
Statements of Shareholders' Equity
COMMON STOCK ADDITIONAL TOTAL
------------------------ PAID-IN SUBSCRIPTIONS ACCUMULATED SHAREHOLDER'S
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT EQUITY
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at November 20, 1997 (inception) 15,750,000 $ 15,750 $ 34,250 $ -- $ -- $ 50,000
Net loss -- -- -- -- (225,332) (225,332)
---------------------------------------------------------------------------
Balance at October 31, 1998 15,750,000 15,750 34,250 -- (225,332) (175,332)
Issuance of stock in reverse merger 1,750,000 1,750 (1,750) -- -- --
Issuance of stock in a private placement 25,000 25 24,975 -- -- 25,000
Issuance of stock in settlement of advertising
obligation 500,000 500 434,500 -- -- 435,000
Issuance of stock in exchange for consulting
services 1,500,000 1,500 1,318,500 -- -- 1,320,000
Issuance of stock for web site development 1,000,000 1,000 849,000 -- -- 850,000
Issuance of stock in private placement 500,000 500 999,500 (675,000) -- 325,000
Stock options granted to employees -- -- 53,300 -- -- 53,300
Stock options granted to nonemployees -- -- 425,000 -- -- 425,000
Net loss -- -- -- -- (2,440,328) (2,440,328)
---------------------------------------------------------------------------
Balance at October 31, 1999 21,025,000 $ 21,025 $ 4,137,275 $ (675,000) $(2,665,660) $ 817,640
===========================================================================
SEE ACCOMPANYING NOTES
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MerchantOnline.com, Inc.
Statements of Cash Flows
PERIOD FROM
NOVEMBER 20, 1997
YEAR ENDED (INCEPTION)
OCTOBER 31, TO OCTOBER 31,
1999 1998
------------ -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,440,328) $ (225,332)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 30,649 11,958
Issuance of stock and stock options for services 325,800 --
Issuance of stock
for settlement of advertising obligation 435,000 --
Changes in operating assets and liabilities:
Accounts receivable 12,362 (12,362)
Prepaid advertising (63,750) --
Deferred advertising (701,250) --
Other assets (2,704) (6,565)
Accounts payable 135,764 128,044
Accrued advertising liability 1,402,500 --
Other accrued liabilities 96,029 --
Other liabilities 211,041 15,523
----------- -----------
Net cash used in operating activities (558,887) (88,734)
INVESTING ACTIVITY
Purchases of property and equipment (23,998) (82,793)
----------- -----------
Net cash used in investing activity (23,998) (82,793)
FINANCING ACTIVITIES
Proceeds from note payable 295,000 --
Proceeds from Convertible Note Payable -- 90,000
Proceeds from capital contributions -- 50,000
Proceeds from stock issued in private placements 350,000 --
Borrowings from shareholder -- 34,026
Payments on note payable to shareholder (29,466) --
Payments on convertible notes payable (30,000) --
----------- -----------
Net cash provided by financing activities 585,534 174,026
F-7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MerchantOnline.com, Inc.
Statements of Cash Flows (continued)
PERIOD FROM
NOVEMBER 20, 1997
YEAR ENDED (INCEPTION)
OCTOBER 31, TO OCTOBER 31,
1999 1998
----------- -----------------
<S> <C> <C>
Net increase in cash 2,649 2,499
Cash at beginning of the year 2,499 --
---------- ----------
Cash at end of the year $ 5,148 $ 2,499
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 3,503 $ 3,106
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Issuance of common stock for development of web site $ 850,000 $ --
========== ==========
Issuance of common stock for prepaid consulting services $1,515,000 $ --
========== ==========
SEE ACCOMPANYING NOTES.
F-8
</TABLE>
<PAGE>
MerchantOnline.com, Inc.
Notes to Financial Statements
Year Ended October 31, 1999 and the Period from November 20, 1997
(inception) to October 31, 1998
1. NATURE OF BUSINESS
MerchantOnline.com, Inc. (f/k/a Creditco) (the Company) is a successor to Tarcyn
Corporation. Tarcyn Corporation was incorporated on March 13, 1993 under the
laws of the State of Colorado to engage in lawful corporate undertaking,
including, but not limited to, selected mergers and acquisitions. Tarcyn had
been in the development stage since inception and had no operations prior to the
merger with MerchantOnline.com. As such, Tarcyn was defined as a "shell"
company, whose sole purpose at the time was to locate and consummate a merger or
acquisition with a private entity.
Effective February 16, 1999, Tarcyn acquired all of the issued and outstanding
securities of Creditco Inc. d/b/a MerchantOnline.com, for 15,750,000 shares of
"restricted" common stock of Tarcyn. Subsequent to the acquisition, Tarcyn
changed its name to MerchantOnline.com, Inc., changed its jurisdiction of
incorporation from Colorado to Florida and changed its fiscal year end from
March 31, to October 31 in order to coincide with the fiscal year end of
Creditco. (See Note 11)
The primary business of the Company is to provide real time processing of
eCommerce transactions by hosting a server that allows eBusinesses to execute
transactions such as online processing of credit cards, debit cards and online
checks over the Internet. The Company charges initial set-up fees and monthly
fees for these services. During the period from March 1998 through March 1999,
the Company also allowed merchants to use its merchant account for a percentage
of gross receipts plus transaction fees.
F-9
<PAGE>
MerchantOnline.com, Inc.
Notes to Financial Statements (continued)
2. MANAGEMENT'S PLANS AND ISSUES AFFECTING LIQUIDITY
The Company's financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has a limited operating history
and had sustained losses since inception. In addition the Company had negative
cash flow from operations of approximately $558,900 during the year ended
October 31, 1999 and had negative working capital of approximately $307,063 at
October 31, 1999. As a result, the Company had to rely principally on private
equity funding to continue its activities to date. The Company intends to
significantly increase its operational expenses in fiscal year 2000 to expand
its product offering and sales and marketing activities.
On January 5, 2000, the Company entered into an investment agreement for the
sale of up to $35 million of common stock upon the exercise of certain Put
Rights. The Put Rights become available upon the effectiveness of a registration
statement to be filed with the Securities and Exchange Commission to register
the stock that will be sold under the Agreement (See Note 12). Additionally, the
same investor has entered into a letter of intent to purchase up to $3 million
of common stock in a private placement upon the request by the Company, until
such time as the registration statement is effective. Also, subsequent to
October 31, 1999, and through February 7, 2000, the Company has received
approximately $1,475,000 in connection with private placements of its common
stock (see Note 11 and 12). Management intends to use these proceeds to fund its
operations and expansion.
Since the Company does not have a definitive alternative financing arrangement
in place in the event that the proceeds from private equity financings are not
sufficient to fund working capital needs through the effectiveness of the
registration statement described above, there is substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments to reflect the possible effects on the
recoverability and classification of liabilities that may result from the
outcome of this uncertainty.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets.
In March 1998, the AICPA issued Statement of Position (SOP) 98-1, ACCOUNTING FOR
THE COSTS OF COMPUTER SOFTWARE DEVELOPED FOR OR OBTAINED FOR INTERNAL USE. The
F-10
<PAGE>
MerchantOnline.com, Inc.
Notes to Financial Statements (continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SOP requires capitalization of certain costs incurred in connection with
developing or obtaining internal use software. The Company has capitalized
$850,000 of web site development costs pursuant to this SOP, which is included
in property and equipment on the accompanying balance sheet.
REVENUE RECOGNITION AND PRESENTATION
Revenues from set-up fees are deferred and recognized on a straight-line basis
over a twelve-month period. Revenues from monthly fees, transaction fees and
commissions are recorded when earned.
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS.
The SAB establishes certain criteria for net versus gross recording of sales
transactions and requires companies to comply with the SAB no later than the
first fiscal quarter of the fiscal year beginning after December 15, 1999 and to
retroactively reclassify for all periods presented. The Company has decided to
early adopt the SAB. Prior to implementation of the SAB, the Company recorded
gross revenues from customers that used its merchant accounts and recorded
corresponding expenses, net of its fees, for distribution to its customers. The
1998 audited financial statements have been reclassified to comply with this
SAB. Revenues, net includes approximately $21,000 and $25,700 for the year ended
October 31, 1999 and the period from November 20, 1997 (inception) through
October 31, 1998, respectively, related to fees earned under these arrangements.
ADVERTISING EXPENSE
The Company accounts for its advertising expense in accordance with SOP 93-7,
Reporting on Advertising Costs, which requires advertising costs to be expensed
as incurred or at the time of first showing. Advertising costs for the year
ended October 31, 1999 and the period from November 20, 1997(inception) through
October 31, 1998 were approximately $833,000 and $9,400, respectively.
Prepaid advertising relates to available Internet advertising blocks, which have
been prepaid by the Company. Deferred advertising relates to Internet
F-11
<PAGE>
MerchantOnline.com, Inc.
Notes to Financial Statements (continued)
advertising blocks, which will become available to the Company upon the payment
of the Company's liability under an advertising agreement. (See Note 5)
LOSS PER SHARE
The Company computes loss per share pursuant to SFAS No. 128, EARNINGS PER
SHARE. Weighted average shares outstanding do not include any contingently
issuable shares. The dilutive effect of convertible debt has not been
considered, as its effect would be antidilutive.
F-12
<PAGE>
MerchantOnline.com, Inc.
Notes to Financial Statements (continued)
STOCK-BASED COMPENSATION
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, defines a fair value
method of accounting for issuance of stock options and other equity investments.
Under the fair value method, compensation cost is measured at the grant date
based on the fair value of the award and is recognized over the service period,
which is usually the vesting period. Pursuant to SFAS No. 123, companies are
encouraged, but not required, to adopt the fair value method of accounting for
employee stock-based transactions. Companies are also permitted to continue to
account for such transactions under Accounting Principles Board (APB) Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, but are required to disclose
in a note to the financial statements pro forma net income amounts as if the
Company had applied the new method of accounting.
The Company accounts for employee stock-based compensation under APB No. 25 and
has complied with the disclosure requirements of SFAS No. 123.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, ACCOUNTING FOR INCOME
TAXES. Deferred income tax assets and liabilities are determined based upon
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. A valuation allowance is recorded
when it is more likely than not that some portion or all of a deferred tax asset
will not be realized.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Management believes that the estimates utilized in preparing its financial
statements are reasonable and prudent; however, actual results could differ from
these estimates.
F-13
<PAGE>
MerchantOnline.com, Inc.
Notes to Financial Statements (continued)
RECLASSIFICATION
Certain amounts in prior period's financial statements have been reclassified to
conform with the current year's presentation
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at October 31, 1999:
USEFUL LIVES
(YEARS)
------------
Furniture and fixtures 5-7 $ 12,636
Computer hardware and software 3 92,015
Web-site development 3 852,140
---------
956,791
Less accumulated depreciation
and amortization 42,607
---------
$ 914,184
=========
5. DEFERRED ADVERTISING AND ADVERTISING LIABILITY
In May 1999, the Company entered into an agreement with an unrelated party that
provided for the Company to receive advertising in the form of sponsorship of a
car-racing team and certain Internet advertising blocks for a $1,530,000 fee,
which was payable in bi-weekly installments beginning June 10, 1999. The Company
allocated $765,000 of the fee to the sponsorship and expensed this amount during
fiscal 1999 over the term of the sponsorship season. The Company has the right
to use the Internet advertising blocks through December 31, 2000. Accordingly,
the Company has recorded deferred advertising of $701,250 at October 31, 1999,
$500,000 of which is classified as a current asset and $201,250 is a long term
asset to be used in fiscal year 2001.
The Company did not make the payments as provided in the agreement and entered
into a workout agreement on September 8, 1999 in order to preserve its rights to
the Internet blocks and settle its remaining obligation under the agreement. The
settlement provided for the Company to:
F-14
<PAGE>
MerchantOnline.com, Inc.
Notes to Financial Statements (continued)
(1) pay $20,000 in cash, (2) issue 500,000 shares of the Company's common stock
to the car-racing team and, (3) make monthly payments of approximately $127,500
for twelve consecutive months beginning on the September 1, 1999. In addition,
the President of the Company was required to place 500,000 of his shares of the
Company's common stock in escrow as collateral for the monthly payments. As of
October 31, 1999 the Company made only one monthly payment related to this
obligation. Currently, the Company has a verbal agreement to restructure the
arrangement such that certain accelerated payments of $375,000 will be made in
February 2000 and full payment will be made by August 2000.
The fair value of the shares issued in settlement on September 8, 1999 was
determined by management to be $435,000 and is recorded in other expenses -
settlement in the October 31, 1999 statement of operations. The Company has the
right to repurchase these shares any time prior to September 8, 2000 for $3 per
share.
On May 21, 1999, the Company entered into an agreement to sell approximately
$306,000 of the aforementioned Internet advertising blocks to an unrelated
party. As of October 31, 1999, the Company has collected approximately $216,000
pursuant to this agreement and has recorded this amount in other liabilities in
the accompanying balance sheet. The unrelated party does not have the right to
use this advertising until the $306,000 is paid in full. In the event that the
remaining amount is not received by the expiration of the Internet advertising
blocks in December 2000, the unrelated party will forego the right to use such
advertising.
6. NOTE PAYABLE
The Company had notes payable of $270,000 payable to several individuals at
October 31, 1999, bearing interest at 8% per annum. All of the notes payable
were due and payable prior to October 31, 1999. Subsequent to October 31, 1999,
the Company entered into an agreement with a note holder and issued 100,000
common shares in settlement of the outstanding obligation. (See Note 9)
The Company had a note payable of $60,000 bearing interest at 1% per month on
the monthly average outstanding balance. The note was due and payable in
December 1998. The note is convertible into common stock at $1 per share at the
option of the note holder. Subsequent to October 31, 1999, the note holder
converted the note to common stock.
F-15
<PAGE>
MerchantOnline.com, Inc.
Notes to Financial Statements (continued)
Interest expense incurred on the aforementioned notes was approximately $26,400
for the year ended October 31, 1999. The Company did not incur any interest
charges during the period from November 20, 1997 (inception) through October 31,
1998.
7. NOTE PAYABLE AND CONVERTIBLE NOTE PAYABLE
At October 31, 1999, the Company had two notes payable to shareholders of
approximately $30,000 in the aggregate. The $25,000 note payable bears interest
at 8% per annum and was due and payable on December 31, 1999. The note and
related accrued interest were converted to 25,000 shares of common stock
subsequent to October 31, 1999. The other note of $4,560 bears interest at 1%
per month on the average monthly outstanding balance. The Company incurred
interest expense of $4,970 on these notes for the year ended October 31, 1999.
8. INCOME TAXES
The Company has not recorded a provision (benefit) for income taxes for the year
ending October 31, 1999 and the period from November 20, 1997(inception) through
October 31, 1998.
The significant components of the Company's net deferred income taxes as of
October 31, 1999 are as follows:
Deferred tax assets:
Nonqualified stock options $ 58,784
Accrued vacation 15,721
Net operating loss carryforwards 905,266
-----------
979,771
Less valuation allowance (976,376)
-----------
Total deferred tax assets 3,394
Deferred tax liabilities:
Fixed assets (3,394)
-----------
Net deferred income taxes $ --
===========
F-16
<PAGE>
MerchantOnline.com, Inc.
Notes to Financial Statements (continued)
The differences between the effect of applying the federal statutory income tax
rate and the effective income tax rate are summarized below:
October 31,
--------------------
1999 1998
--------- ---------
Tax at federal statutory rates (34.00)% (34.00)
State income taxes, net of federal benefit (3.52)% (3.63)
Nondeductible items 0.98% --
Change in valuation allowance 36.54% 37.63
--------- ---------
--% --%
SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence both positive and negative, management has
determined that a $975,376 valuation allowance at October 31, 1999 is necessary
to reduce the deferred tax assets to the amount that will more than likely be
realized.
The change in the valuation allowance for the year ended October 31, 1999 was an
increase of approximately $891,584 resulting primarily from net operating losses
generated during the period.
At October 31, 1999, the Company has approximately $2,405,702 in net operating
loss carryforwards for U.S. federal income tax purposes that expire in various
amounts through 2019.
9. COMMITMENTS AND CONTINGENCIES
The Company leases its office space under a month-to-month agreement. Rental
expense amounted to approximately $57,200 and $18, 600 for the year ended
October 31, 1999 and the period from November 20, 1997 (inception) to October
31, 1998, respectively.
The Company is involved in a litigation regarding an outstanding note payable
and is currently negotiating a settlement that is not expected to be materially
in excess of the amounts recorded as of October 31, 1999. This matter is not
expected to have a material adverse effect on the Company's financial position
or its results of operations.
F-17
<PAGE>
MerchantOnline.com, Inc.
Notes to Financial Statements (continued)
10. STOCK OPTIONS
The Company granted stock options to certain employees during 1999. The stock
options are immediately vested and are exercisable over a three-year period at a
price of $0.50 per share. The fair value of the underlying stock on the grant
date exceeded the exercise price of all options; therefore, the Company recorded
compensation expense of approximately $53,300.
Pro forma information regarding net loss is required by SFAS No. 123 and has
been determined as if the Company has accounted for its employee stock options
under the fair value method of that statement. The fair value of outstanding
options was estimated at the date of grant using the Black Scholes method with
the following assumptions: expected volatility of 254%, risk-free interest rate
of 4.99%, no expected dividends; and weighted average expected life of the
options was three years.
The effect of applying the fair value method prescribed by SFAS No. 123 to the
Company's options results in pro forma net loss of $2,502,728 for the year ended
October 31, 1999.
No options were exercised or expired during 1999. A summary of the Company's
stock option activity and related information is as follows:
Outstanding at beginning of year --
Granted 630,000
Forfeited --
-----------
Outstanding at end of year 630,000
===========
Exercisable at end of year 630,000
===========
Average fair value of options
granted during the year $ 0.91
===========
The average remaining contractual life of options outstanding at October 31,
1999 was 3 years.
11. COMMON STOCK
On February 16, 1999, pursuant to the terms of an agreement and plan of
reorganization, MerchantOnline.com undertook a 3.5 - 1 forward split of its
issued and outstanding common stock and thereafter, MerchantOnline.com acquired
all of the issued and outstanding securities of CreditCo, Inc. in exchange for
15,750,000 "restricted" common shares of MerchantOnline.com. As a result,
MerchantOnline.com was the surviving entity. This transaction has been accounted
for as a reverse merger with a nonoperating public "Shell".
On February 9, 1999, the shareholders of Tarcyn effectively received 1,750,000
shares of the combined company in exchange for the "shell" which had no net
monetary assets. Shareholders' equity has been retroactively restated to reflect
the effective recapitalization of the 15,750,000 shares of common stock.
During September 1999, the Company issued 1,500,000 of its common shares in
exchange for certain consulting services related to two contracts that extended
over twelve-month periods. The value of the services was determined based on the
fair value of the common shares, as determined by an independent appraisal, at
the date of the transactions. During 1999, the Company recorded approximately
$169,600 of expense and at October 31, 1999 $1,150,400 of prepaid consulting
services related to these transactions.
F-18
<PAGE>
MerchantOnline.com, Inc.
Notes to Financial Statements (continued)
On September 15, 1999, the Company issued 1,000,000 common shares to an
unrelated party in exchange for the development of a web site. The value of the
service was determined based on the fair value of the common stock, as
determined by an independent appraisal at the date of the transaction. The
Company recorded an asset of $850,000 in connection with this transaction.
The Company also issued 500,000 stock options to nonemployees during the year
for services. In accordance with SFAS No. 123, the Company estimated the value
of the stock options on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions; annual dividends of
$0.00, expected volatility of 254%, risk-free interest rate of 4.99%, and
expected life of three years for all grants. The weighted-average fair value of
the stock options granted during the year was $0.85.
In May 1999, MerchantOnline.com commenced a private offering of its common stock
at a price of $1.00 per share for aggregate gross proceeds of up to $2 million,
of which an aggregate of 25,000 shares were sold. A second offering for $2.00
per share commenced in September 1999 which raised an aggregate of $1,800,000
through January 31, 2000.
At October 31, 1999, the Company had a subscription receivable of approximately
$675,000 related to the September 1999 private placement.
At October 31, 1999, the Company had 630,000 shares of common stock reserved for
issuance for outstanding stock options.
F-19
<PAGE>
MerchantOnline.com, Inc.
Notes to Financial Statements (continued)
12. SUBSEQUENT EVENTS
On December 3, 1999, the Company entered into an employment agreement with the
President of the Company. The agreement provides for annual compensation of
$250,000 and the issuance of 1,500,000 of stock options at an exercise price of
$2 per share, which vest over five years.
On December 6, 1999, the Company entered into a one year consulting agreement
that is renewable for one-year terms upon the mutual agreement of both parties.
The agreement pays compensation of $125,000 per year payable monthly.
Additionally, in connection there with, the Company has granted 300,000 stock
options at a exercise price of $1.87 per share.
On December 7, 1999, the Company sold 250,000 common shares in a private
placement transaction at $2 per share.
On January 5, 2000, the Company entered into an investment agreement that
entitles the Company to issue and sell, at its option, its common stock, under
certain Put Rights, 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.
In order to invoke a Put Right, the Company must have an effective registration
statement on file with the SEC registering the resale of the common shares which
may be issued as a consequence of the invocation of that Put Right. In
connection with this Agreement, the Company issued warrants to purchase 490,000
shares of common stock at $1.93 per share, which may be exercised anytime over a
five-year period. The invocation of a Put Right is subject to a predefined
formula. The agreement provides for the imposition of a nonusage fee, as
defined, if the Company does not put $1,000,000 of its common stock to the
investor within each six-month period.
On January 11, the Company entered into a letter of intent with the investor to
purchase up to $3 million of common stock in a private placement until such time
as the registration statement is effective.
On January 12, 2000, the Company entered into of letter on intent with a company
to purchase approximately 90% of the outstanding capital stock of a company in
exchange for cash and a predetermined amount of the Company's common stock. In
connection with the letter of intent, the Company paid a $50,000 nonrefundable
deposit.
On January 15, 2000, the Company acquired 100% of the common stock of
Approve.Net, Inc. for 2,000,000 shares of the Company's common stock.
Approve.Net, Inc. is engaged in the business of on-line credit card processing.
F-20
EMPLOYMENT AGREEMENT
This Employment Agreement dated as of December 3, 1999 (hereinafter
referred to as "Agreement") is entered into by and between Merchantonline.com,
Inc. (hereinafter referred to as the "Company") and Tarek S. Kirschen
(hereinafter referred to as "Executive").
WHEREAS, the Company employs Executive in the capacity of President and
Chief Executive Officer and desires to modify the existing employment
arrangement; and
WHEREAS, the Company and Executive desire to set forth in this
Agreement all of the terms and conditions of said employment, and to establish a
mechanism to resolve disputes relating to said employment;
NOW, THEREFORE, in consideration of the mutual promises and obligations
contained in this Agreement, the Company and Executive agree as follows:
1. TERM OF EMPLOYMENT. This Agreement is effective January 1, 2000
(the "Effective Date"), and will automatically terminate without further notice
at 5:00 p.m. on December 31, 2004.
2. DUTIES AND RESPONSIBILITIES. The Company hereby employs Executive
as President and Chief Executive Officer with such powers and duties in that
capacity as may be established from time to time by the Company in its
discretion. Executive will devote his entire time, attention and energies to the
Company's business. During his employment, Executive will not engage in any
other business activities, regardless of whether such activity is pursued for
profits, gains, or other pecuniary advantage. However, nothing in this Agreement
shall prevent Executive from passively investing in business activities so long
as such investments require no active participation by Executive.
3. COMPENSATION.
(a) BASE SALARY. The Company promises to pay Executive an
annualized base salary of $250,000, less applicable deductions, payable
in installments according to the Company's normal payroll practices.
(b) SALARY INCREASES: Executive's base salary will be adjusted
upward on January 1 of each subsequent year by the twelve month average
of the Consumer Price Index ("CPI") for the preceding year. The minimum
CPI adjustment will be three percent (3%) per year and the maximum CPI
adjustment will be six percent (6%) per year.
(c) BONUSES: During the term of this Agreement, the Executive
shall receive an annual bonus from the Company of each year, in such
amount as shall, from time to time, be determined by the Board of
Directors of the Company, in its good faith discretion. Also, the
Executive shall receive a bonus, as determined by the Board of
Directors, for any and all acquisitions or mergers consummated by the
Company.
<PAGE>
(d) VACATION. Executive shall be entitled to reasonable vacations
during each year of the Term, the time and duration thereof to be
determined by mutual agreement between Executive and the Company.
(e) STOCK OPTIONS. On the date of this Agreement, the Company
shall grant to Executive stock options to purchase an aggregate of
1,500,000 shares of common stock at an exercise price equal to $2.00 ,
which is the fair market value on the date of this agreement as
reported by the OTC Bulletin Board on that date. The options shall vest
300,000 options on December 3 of each year commencing December 3, 2000,
assuming that Executive remains employed by Company on the dates that
the options are to be deemed vested. In the event that Executive is not
employed by Company on dates that the options are to be deemed vested,
regardless of the reason for his separation from the Company, the
options that are not vested shall immediately terminate and expire.
There will be no "pro-rated" vesting of any options for the period in
which Executive ceases to be employed by Company. The vesting schedule
will be as follows: 300,000 options shall vest on December 3 of each
year commencing December 3, 2000. Executive will have five (5) years to
exercise all vested options.
(f) EXPENSES. The Company shall pay or reimburse the Executive for
all reasonable expenses which are actually incurred or paid by him in
the performance of his service hereunder.
(g) AUTOMOBILE. The Company shall provide Executive with a luxury
or comparable automobile, including maintenance, which may be used by
Executive for both personal and business purposes during the term of
his employment. A new vehicle shall be provided by the Company for
Executive at three-year intervals.
(h) MEMBERSHIPS. Company shall pay for Executive all appropriate
professional and associate membership dues necessary or appropriate for
fulfillment of Executive's responsibilities under this Agreement and
agree to provide an annual allowance of not in excess of $3,500 for
payment of social club memberships.
(i) PROFESSIONAL SEMINARS. Company shall afford Executive with 12
compensated days annually for the purpose of attending professional
seminars necessary to enable Executive to obtain and maintain licenses
and certification related to his employment. Company will pay all
reasonable travel, food and lodging costs associated with attending
such seminars.
(j) INSURANCE. The Executive agrees to allow the Company to
provide "Key-Man" Life Insurance. The Insurance will be at least
$2,000,000, with at least $1,000,000 of Universal Life or equivalent
type, and will be paid by the Company. The Company will be the
beneficiary of said policy, but the cash surrender value accumulated,
if any, will belong to the Executive.
(k) OTHER BENEFITS. Executive will be entitled to participate in
any group health, life or disability plan and is entitled to any other
benefits that the Company may maintain from time to time for all
employees, provided that Executive meets the respective eligibility
requirements.
4. INABILITY TO PERFORM JOB DUTIES. In the event of Executive's
death, this Agreement and the Executive's salary and compensation shall
automatically end. If Executive becomes unable to perform his employment duties
<PAGE>
during the term of this Agreement for any reason, his compensation under this
Agreement shall automatically end until such time as Executive becomes able to
resume his job duties for the Company. In the event that Executive becomes
unable to perform his employment duties for a cumulative period of greater than
twelve (12) weeks within any span of twelve (12) months, this Agreement and
Executive's employment will be automatically terminated.
5. TERMINATION BY COMPANY FOR CAUSE. The Company may terminate this
Agreement, and Executive's employment "for cause" at any time. As used herein,
"for cause" shall mean any one of the following:
o The habitual neglect by Executive of his job duties and
responsibilities; or
o Conviction of any crime, excluding minor traffic offenses; or
o Commission of a serious violation of any of the Company's
personnel policies, including but not limited to violations of
the Company's policies against any form of harassment; or
o Any act or omission deemed as grounds for termination of
employees as set forth in the Company's personnel policies in
existence at the time; or
o A material breach of this Agreement.
In the event the Company terminates Executive's employment for cause,
Executive's salary and other compensation shall automatically terminate and be
forfeited.
6. TERMINATION OF AGREEMENT BY COMPANY WITHOUT CAUSE OR BY EXECUTIVE
WITH CAUSE. The Company may terminate this Agreement and Executive's employment
without cause at any time upon thirty (30) days prior written notice to
Executive. The Executive may terminate this Agreement and Executive's employment
without cause at any time upon thirty (30) days prior written notice to the
Company upon a material breach of this Agreement by the Company. In each such
event, the Company will pay to Executive a severance payment of an amount equal
to 299% of his then-current base salary, less taxes and other applicable
withholding amounts.
7. TERMINATION OF AGREEMENT BY EXECUTIVE. Executive may terminate
this Agreement and his employment with the Company without cause upon thirty
(30) days prior written notice to the Company. Executive may be required to
perform his job duties and will be paid his regular salary up to the date of the
termination. At the option of the Company, the Company may require Executive to
terminate employment upon receiving said thirty (30) days' notice from Executive
of the termination of this Agreement. In such event, the Company will pay to
Executive an amount equal to thirty (30) calendar days of his base salary.
Executive will not be entitled to receive any other compensation or severance
allowance under this Agreement.
8. CHANGE OF CONTROL. (a) For the purposes of this Agreement, a
"Change of Control" shall be deemed to have taken place if: (i) any person,
<PAGE>
including a "group" as defined in Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended (but excluding Executive and members of his family),
becomes the owner or beneficial owner of Company securities, after the date of
this Agreement, having 50% or more of the combined voting power of the then
outstanding securities of the Company that may be cast for the election of
directors of the Company (other than as a result of an issuance of securities
initiated by the Company, or open market purchases approved by the Board, as
long as the majority of the Board approving the purchases is the majority at the
time the purchases are made), or (ii) the persons who were directors of the
Company before such transactions shall cease to constitute a majority of the
Board, or any successor to the Company, as the direct or indirect result of or
in connection with, any cash tender or exchange offer, merger or other business
combination, sale of assets or contested election, or any combination of the
foregoing transactions.
(b) During the remaining term hereof after the Change of
Control Date, the Company (or subsidiary) will (i) continue to pay Executive at
not less than the Base Salary on the Change of Control Date, (ii) pay Executive
bonuses in amounts not less in amount than those paid during the 12 month period
preceding the Change of Control Date, and (iii) continue employee benefit
programs as to Executive at levels in effect on the Change of Control Date (but
subject to such reductions as may be required to maintain such plans in
compliance with applicable federal law regulating employee benefit programs).
(c) If during the remaining term hereof after the Change of
Control Date (i) Executive's employment is terminated by the Company (or
subsidiary), or (ii) there shall have occurred a material reduction in
Executive's compensation or employment related benefits, or a material change in
Executive's status, working conditions, management responsibilities or titles,
and Executive voluntarily terminates his relationship with the Company within 60
days of any such occurrence, or the last in a series of occurrences, then
Executive shall be entitled to receive, a lump sum payment equal to 299% of
Executive's Base Salary. Such amount will be paid to Executive within 15
business days after his termination of affiliation with the Company.
9. COOPERATION. Upon the termination of this Agreement for any
reason, Executive agrees to cooperate with the Company in effecting a smooth
transition of the management of the Company with respect to the duties and
responsibilities which Executive performed for the Company. Further, after
termination of this Agreement, Executive will furnish such information and
proper assistance to the Company as it may reasonably require in connection with
any prior business arrangements in which Executive was involved, and any
litigation to which the Company is or may become party.
10. COVENANT NOT TO COMPETE. During the term of this Agreement, and
for two (2) years after its termination, Executive promises and agrees that
she/he will not enter into any employment or business relationship (whether as a
principal, agent, partner, employee, investor, owner, consultant, board member
or otherwise) with any company, business organization or individual that is
engaged in the same or similar business as that conducted by the Company or with
any other business that competes with the Company. This Section 10 is effective
regardless of the reason for the termination of the Agreement and regardless of
whether the Agreement is terminated by the Executive or the Company. This
restrictive covenant may be assigned to and enforced by any of the Company's
assignees or successors.
<PAGE>
11. AGREEMENT NOT TO USE OR DISCLOSE TRADE SECRETS. During the term of
this Agreement and a period of five (5) years thereafter, Executive promises and
agrees that he/she will not disclose or utilize any trade secrets acquired
during the course of service with the Company and/or its related business
entities. As used herein, "trade secret" refers to the whole or any portion or
phase of any formula, pattern, device, combination of devices, or compilation of
information which is for use, or is used, in the operation of the Company's
business and which provides the Company an advantage, or an opportunity to
obtain an advantage, over those who do not know or use it. "Trade secret" also
includes any scientific, technical, or commercial information, including any
design, list of suppliers, list of customers, as well as pricing information or
methodology, contractual arrangements with vendors or suppliers, business
development plans or activities, or Company financial information. This Section
11 is effective regardless of the reason for the termination of the Agreement
and regardless of whether the Agreement is terminated by the Executive, the
Company or by its own terms. This restrictive covenant may be assigned to and
enforced by any of the Company's assignees or successors.
12. AGREEMENT NOT TO USE OR DISCLOSE CONFIDENTIAL OR PROPRIETARY
INFORMATION. During the term of this Agreement and a period of two (2) years
thereafter, Executive promises and agrees that he/she will not disclose or
utilize any confidential or proprietary information acquired during the course
of service with the Company and/or its related business entities, Executive
shall not divulge, communicate, use to the detriment of the Company or for the
benefit of any other person or persons, or misuse in any way, any confidential
or proprietary information pertaining to the business of the Company. Any
confidential or proprietary information or data now or hereafter acquired by
Executive with respect to the business of the Company (which shall include, but
not be limited to, information concerning the Company's financial condition,
prospects, technology, customers, suppliers, methods of doing business and
promotion of the Company's products and services) shall be deemed a valuable,
special and unique asset of the Company that is received by Executive in
confidence and as a fiduciary. For purposes of this Agreement "confidential and
proprietary information" means information disclosed to Executive as a
consequence of or through his employment by the Company (including information
conceived, originated, discovered or developed by Executive) prior to or after
the date hereof and not generally known or in the public domain, about the
Company or its business. This Section 12 is effective regardless of the reason
for the termination of the Agreement and regardless of whether the Agreement is
terminated by the Executive, the Company or by its own terms. This restrictive
covenant may be assigned to and enforced by any of the Company's assignees or
successors.
13. AGREEMENT NOT TO HIRE COMPANY EXECUTIVES. If Executive leaves the
employ of the Company or terminates this Agreement, Executive promises and
agrees that, during the two (2) years following his departure from the Company,
Executive will not, without the express written permission of the Company,
directly or indirectly employ as a consultant or employee any person who is
employed as a consultant or employee of the Company at the time of Executive's
termination, or any person who was an employee or consultant of the Company
during the six months preceding Executive's termination. This Section 13 is
effective regardless of the reason for the termination of the Agreement and
regardless of whether the Agreement is terminated by the Executive, the Company
<PAGE>
or by its own terms. This restrictive covenant may be assigned to and enforced
by any of the Company's assignees or successors.
14. INJUNCTIVE RELIEF. In recognition of the unique services to be
performed by Executive and the possibility that any violation by Executive of
Section 10, Section 11, Section 12 or Section 13 of this Agreement may cause
irreparable or indeterminate damage or injury to Company, Executive expressly
stipulates and agrees that the Company shall be entitled, upon ten (10) days
written notice to Executive, to obtain an injunction from any court of competent
jurisdiction restraining any violation or threatened violation of this
Agreement. Such right to an injunction shall be in addition to, and not in
limitation of, any other rights or remedies the Company may have for damages.
15. JUDICIAL MODIFICATION OF AGREEMENT. The Company and Executive
specifically agree that a court of competent jurisdiction (or an arbitrator, as
appropriate) may modify or amend Section 10, Section 11, Section 12 or Section
13 of this Agreement if absolutely necessary to conform with relevant law or
binding judicial decisions in effect at the time the Company seeks to enforce
any or all of said provisions.
16. RESOLUTION OF DISPUTES BY ARBITRATION. Any claim or controversy
that arises out of or relates to Executive's employment, this Agreement, or the
breach of this Agreement, will be resolved by arbitration in Palm Beach County
in accordance with the rules of the American Arbitration Association. Judgment
upon the award rendered by the arbitrator may be entered in any court possessing
jurisdiction over arbitration awards. This Section shall not limit or restrict
the Company's right to obtain injunctive relief for violations of Section 10,
Section 11, Section 12 or Section 13 of this Agreement directly from a court
under Section 14 of this Agreement. Each party shall be required to bear its own
costs and attorney's fees incurred in any arbitration arising out of Executive's
employment, this Agreement, or the breach of this Agreement.
17. ADEQUATE CONSIDERATION. Executive expressly agrees that the
Company has provided adequate, reasonable consideration for the obligations
imposed upon him in this Agreement.
18. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement
between the parties, and supersedes any prior agreements or understanding
between the Company and Executive. This Agreement may be amended only in
writing, signed by both parties.
19. LIMITED EFFECT OF WAIVER BY COMPANY. If the Company waives a
breach of any provision of this Agreement by Executive, that waiver will not
operate or be construed as a waiver of later breaches by Executive.
20. SEVERABILITY. If any provision of this Agreement is held invalid
for any reason, such invalidity shall not affect the enforceability of the
remainder of this Agreement.
21. ASSUMPTION OF AGREEMENT BY COMPANY'S SUCCESSORS AND ASSIGNS. At
the Company's sole option, the Company's rights and obligations under this
<PAGE>
Agreement will inure to the benefit and be binding upon the Company's successors
and assigns. Executive may not assign his rights and obligations under this
Agreement.
22. APPLICABLE LAW. Executive and the Company agree that this
Agreement shall be subject to, and enforceable under, the laws of the State of
Florida.
IN WITNESS WHEREOF, the parties have executed this Employment Agreement
on December 3, 1999.
COMPANY EXECUTIVE
By: /s/ ANGEL RODRIQUEZ By: /s/ TAREK KIRSCHEN
------------------------------- ------------------------------
/s/ BARBARA MENDELSON /s/ JANICE STITT
- - ------------------------------------ -----------------------------------
Witness Witness
MERCHANTONLINE.COM, INC.
INVESTMENT AGREEMENT
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED WITH
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE OR OTHER
SECURITIES AUTHORITIES. THEY MAY NOT BE SOLD OR TRANSFERRED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE FEDERAL
AND STATE SECURITIES LAWS.
THIS INVESTMENT AGREEMENT DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE
SECURITIES DESCRIBED HEREIN BY OR TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY
FEDERAL OR STATE SECURITIES AUTHORITIES, NOR HAVE SUCH
AUTHORITIES CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY
OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF
RISK. THE INVESTOR MUST RELY ON ITS OWN ANALYSIS OF THE
INVESTMENT AND ASSESSMENT OF THE RISKS INVOLVED. SEE THE RISK
FACTORS SET FORTH IN THE ATTACHED DISCLOSURE DOCUMENTS AS
EXHIBIT J.
SEE ADDITIONAL LEGENDS AT SECTIONS 4.7.
THIS INVESTMENT AGREEMENT (this "Agreement" or "Investment
Agreement") is made as of the ____ day of January 2000, by and between
MerchantOnline.com, Inc., a corporation duly organized and existing under the
laws of the State of Florida (the "Company"), and the undersigned Investor
executing this Agreement ("Investor").
RECITALS:
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue to the Investor, and the
Investor shall purchase from the Company, from time to time as provided herein,
shares of the Company's Common Stock, as part of an offering of Common Stock by
the Company to Investor, for a maximum aggregate offering amount of Thirty Five
Million Dollars ($35,000,000) (the "Maximum Offering Amount"); and
WHEREAS, the solicitation of this Investment Agreement and, if accepted
by the Company, the offer and sale of the Common Stock are being made in
reliance upon the provisions of Regulation D ("Regulation D") promulgated under
the Act, Section 4(2) of the Act, and/or upon such other exemption from the
registration requirements of the Act as may be available with respect to any or
all of the purchases of Common Stock to be made hereunder.
<PAGE>
TERMS:
NOW, THEREFORE, the parties hereto agree as follows:
1. CERTAIN DEFINITIONS. As used in this Agreement (including the
recitals above), the following terms shall have the following meanings (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined):
"20% Approval" shall have the meaning set forth in Section 5.25.
"9.9% Limitation" shall have the meaning set forth in Section 2.3.1(f).
"Accredited Investor" shall have the meaning set forth in Section 3.1.
"Act" shall mean the Securities Act of 1933, as amended.
"Advance Put Notice" shall have the meaning set forth in Section
2.3.1(a), the form of which is attached hereto as EXHIBIT E.
"Advance Put Notice Confirmation" shall have the meaning set forth in
Section 2.3.1(a), the form of which is attached hereto as EXHIBIT F.
"Advance Put Notice Date" shall have the meaning set forth in Section
2.3.1(a).
"Affiliate" shall have the meaning as set forth Section 6.4.
"Aggregate Issued Shares" equals the aggregate number of shares of
Common Stock issued to Investor pursuant to the terms of this Agreement or the
Registration Rights Agreement as of a given date, including Put Shares and
Warrant Shares.
"Agreed Upon Procedures Report" shall have the meaning set forth in
Section 2.5.3(b).
"Agreement" shall mean this Investment Agreement.
"Automatic Termination" shall have the meaning set forth in Section
2.3.2.
"Bring Down Cold Comfort Letters" shall have the meaning set forth in
Section 2.3.6(b).
"Business Day" shall mean any day during which the Principal Market is
open for trading.
"Calendar Month" shall mean the period of time beginning on the numeric
day in question in a calendar month and for Calendar Months thereafter,
beginning on the earlier of (i) the same numeric day of the next calendar month
or (ii) the last day of the next calendar month. Each Calendar Month shall end
on the day immediately preceding the beginning of the next succeeding Calendar
Month.
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<PAGE>
"Cap Amount" shall have the meaning set forth in Section 2.3.10.
"Capital Raising Limitations" shall have the meaning set forth in
Section 6.5.1.
"Capitalization Schedule" shall have the meaning set forth in Section
3.2.4, attached hereto as EXHIBIT K.
"Closing" shall mean one of (i) the Investment Commitment Closing and
(ii) each closing of a purchase and sale of Common Stock pursuant to Section 2.
"Closing Bid Price" means, for any security as of any date, the last
closing bid price for such security on the O.T.C. Bulletin Board, or, if the
O.T.C. Bulletin Board is not the principal securities exchange or trading market
for such security, the last closing bid price of such security on the principal
securities exchange or trading market where such security is listed or traded as
reported by such principal securities exchange or trading market, or if the
foregoing do not apply, the last closing bid price of such security in the
over-the-counter market on the electronic bulletin board for such security, or,
if no closing bid price is reported for such security, the average of the bid
prices of any market makers for such security as reported in the "pink sheets"
by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be
calculated for such security on such date on any of the foregoing bases, the
Closing Bid Price of such security on such date shall be the fair market value
as mutually determined by the Company and the Investor in this Offering. If the
Company and the Investor in this Offering are unable to agree upon the fair
market value of the Common Stock, then such dispute shall be resolved by an
investment banking firm mutually acceptable to the Company and the Investor in
this offering and any fees and costs associated therewith shall be paid by the
Company.
"Commitment Evaluation Period" shall have the meaning set forth in
Section 2.6.
"Commitment Warrants" shall have the meaning set forth in Section
2.4.1, the form of which is attached hereto as EXHIBIT U.
"Commitment Warrant Exercise Price" shall have the meaning set forth in
Section 2.4.1.
"Common Shares" shall mean the shares of Common Stock of the Company.
"Common Stock" shall mean the common stock of the Company.
"Company" shall mean MerchantOnline.com, Inc., a corporation duly
organized and existing under the laws of the State of Florida.
"Company Designated Maximum Put Dollar Amount" shall have the meaning
set forth in Section 2.3.1(a).
"Company Designated Minimum Put Share Price" shall have the meaning set
forth in Section 2.3.1(a).
"Company Termination" shall have the meaning set forth in Section
2.3.12.
3
<PAGE>
"Conditions to Investor's Obligations" shall have the meaning as set
forth in Section 2.2.2.
"Delisting Event" shall mean any time during the term of this
Investment Agreement, that the Company's Common Stock is not listed for and
actively trading on the O.T.C. Bulletin Board, the Nasdaq Small Cap Market, the
Nasdaq National Market, the American Stock Exchange, or the New York Stock
Exchange or is suspended or delisted with respect to the trading of the shares
of Common Stock on such market or exchange.
"Disclosure Documents" shall have the meaning as set forth in Section
3.2.4.
"Due Diligence Review" shall have the meaning as set forth in Section
2.5.
"Effective Date" shall have the meaning set forth in Section 2.3.1.
"Equity Securities" shall have the meaning set forth in Section 6.5.1.
"Evaluation Day" shall have the meaning set forth in Section 2.3.1(b).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Excluded Day" shall have the meaning set forth in Section 2.3.1(b).
"Extended Put Period" shall mean the period of time between the Advance
Put Notice Date until the Pricing Period End Date.
"Impermissible Put Cancellation" shall have the meaning set forth in
Section 2.3.1(e).
"Indemnified Liabilities" shall have the meaning set forth in Section
9.
"Indemnities" shall have the meaning set forth in Section 9.
"Indemnitor" shall have the meaning set forth in Section 9.
"Individual Put Limit" shall have the meaning set forth in Section
2.3.1 (b).
"Ineffective Period" shall mean any period of time that the
Registration Statement or any Supplemental Registration Statement (each as
defined in the Registration Rights Agreement) becomes ineffective or unavailable
for use for the sale or resale, as applicable, of any or all of the Registrable
Securities (as defined in the Registration Rights Agreement) for any reason (or
in the event the prospectus under either of the above is not current and
deliverable) during any time period required under the Registration Rights
Agreement.
"Initial Exercise Price" shall have the meaning set forth in Section
2.4.1.
"Intended Put Share Amount" shall have the meaning set forth in Section
2.3.1(a).
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<PAGE>
"Investment Commitment Closing" shall have the meaning set forth in
Section 2.2.1.
"Investment Agreement" shall mean this Investment Agreement.
"Investment Commitment Opinion of Counsel" shall mean an opinion from
Company's independent counsel, substantially in the form attached as EXHIBIT B,
or such other form as agreed upon by the parties, as to the Investment
Commitment Closing.
"Investment Date" shall mean the date of the Investment Commitment
Closing.
"Investor" shall have the meaning set forth in the preamble hereto.
"Key Employee" shall have the meaning set forth in Section 5.17, as set
forth in EXHIBIT N.
"Late Payment Amount" shall have the meaning set forth in Section
2.3.8.
"Legend" shall have the meaning set forth in Section 4.7.
"Major Transaction" shall mean and shall be deemed to have occurred at
such time upon any of the following events:
(i) a consolidation, merger or other business combination or
event or transaction following which the holders of Common Stock of the Company
immediately preceding such consolidation, merger, combination or event either
(i) no longer hold a majority of the shares of Common Stock of the Company or
(ii) no longer have the ability to elect the board of directors of the Company
(a "Change of Control"); provided, however, that if the other entity involved in
such consolidation, merger, combination or event is a publicly traded company
with "Substantially Similar Trading Characteristics" (as defined below) as the
Company and the holders of Common Stock are to receive solely Common Stock or no
consideration (if the Company is the surviving entity) or solely common stock of
such other entity (if such other entity is the surviving entity), such
transaction shall not be deemed to be a Major Transaction (provided the
surviving entity, if other than the Company, shall have agreed to assume all
obligations of the Company under this Agreement and the Registration Rights
Agreement). For purposes hereof, an entity shall have Substantially Similar
Trading Characteristics as the Company if the average daily dollar trading
volume of the common stock of such entity is equal to or in excess of $500,000
for the 90th through the 31st day prior to the public announcement of such
transaction;
(ii) the sale or transfer of all or substantially all of the
Company's assets; or
(iii) a purchase, tender or exchange offer made to the holders
of outstanding shares of Common Stock, such that following such purchase, tender
or exchange offer a Change of Control shall have occurred.
"Market Price" shall equal the lowest Closing Bid Price for the Common
Stock on the Principal Market during the Pricing Period for the applicable Put.
5
<PAGE>
"Material Facts" shall have the meaning set forth in Section 2.3.6(a).
"Maximum Put Dollar Amount" shall mean the lesser of (i) the Company
Designated Maximum Put Dollar Amount, if any, specified by the Company in a Put
Notice, and (ii) $2 million.
"Maximum Offering Amount" shall mean Thirty Five Million Dollars
($35,000,000).
"Nasdaq 20% Rule" shall have the meaning set forth in Section 2.3.10.
"NASD" shall have the meaning set forth in Section 6.9.
"NYSE" shall have the meaning set forth in Section 6.9.
"Numeric Day" shall mean the numerical day of the month of the
Investment Date or the last day of the calendar month in question, whichever is
less.
"Offering" shall mean the Company's offering of Common Stock and
Warrants issued under this Investment Agreement.
"Officer's Certificate" shall mean a certificate, signed by an officer
of the Company, to the effect that the representations and warranties of the
Company in this Agreement required to be true for the applicable Closing are
true and correct in all material respects and all of the conditions and
limitations set forth in this Agreement for the applicable Closing are
satisfied.
"Opinion of Counsel" shall mean, as applicable, the Investment
Commitment Opinion of Counsel, the Put Opinion of Counsel, and the Registration
Opinion.
"Payment Due Date" shall have the meaning set forth in Section 2.3.8.
"Pricing Period" shall mean, unless otherwise shortened under the terms
of this Agreement, the period beginning on the Business Day immediately
following the Put Date and ending on and including the date which is 20 Business
Days after such Put Date.
"Pricing Period End Date" shall mean the last Business Day of any
Pricing Period.
"Principal Market" shall mean the O.T.C. Bulletin Board, the Nasdaq
Small Cap Market, the Nasdaq National Market, the American Stock Exchange or the
New York Stock Exchange, whichever is at the time the principal trading exchange
or market for the Common Stock.
"Proceeding" shall have the meaning as set forth Section 5.1.
"Purchase" shall have the meaning set forth in Section 2.3.7.
"Purchase Warrants" shall have the meaning set forth in Section 2.4.2,
the form of which is attached hereto as EXHIBIT D.
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<PAGE>
"Purchase Warrant Exercise Price" shall have the meaning set forth in
Section 2.4.2.
"Put" shall have the meaning set forth in Section 2.3.1(d).
"Put Cancellation" shall have the meaning set forth in Section
2.3.11(a).
"Put Cancellation Notice Confirmation" shall have the meaning set forth
in Section 2.3.11(c), the form of which is attached hereto as EXHIBIT S.
"Put Cancellation Date" shall have the meaning set forth in Section
2.3.11(a).
"Put Cancellation Notice" shall have the meaning set forth in Section
2.3.11(a), the form of which is attached hereto as EXHIBIT Q.
"Put Closing" shall have the meaning set forth in Section 2.3.8.
"Put Closing Date" shall have the meaning set forth in Section 2.3.8.
"Put Date" shall mean the date that is specified by the Company in any
Put Notice for which the Company intends to exercise a Put under Section 2.3.1,
unless the Put Date is postponed pursuant to the terms hereof, in which case the
"Put Date" is such postponed date.
"Put Dollar Amount" shall be determined by multiplying the Put Share
Amount by the respective Put Share Prices with respect to such Put Shares,
subject to the limitations herein.
"Put Notice" shall have the meaning set forth in Section 2.3.1(d), the
form of which is attached hereto as EXHIBIT G.
"Put Notice Confirmation" shall have the meaning set forth in Section
2.3.1(d), the form of which is attached hereto as EXHIBIT H.
"Put Opinion of Counsel" shall mean an opinion from Company's
independent counsel, in the form attached as EXHIBIT I, or such other form as
agreed upon by the parties, as to any Put Closing.
"Put Share Amount" shall have the meaning as set forth Section
2.3.1(b).
"Put Share Price" shall have the meaning set forth in Section 2.3.1(c).
"Put Shares" shall mean shares of Common Stock that are purchased by
the Investor pursuant to a Put.
"Registrable Securities" shall have the meaning as set forth in the
Registration Rights Agreement.
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"Registration Opinion" shall have the meaning set forth in Section
2.3.6(a), the form of which is attached hereto as EXHIBIT R.
"Registration Opinion Deadline" shall have the meaning set forth in
Section 2.3.6(a).
"Registration Rights Agreement" shall mean that certain registration
rights agreement entered into by the Company and Investor on even date herewith,
in the form attached hereto as EXHIBIT A, or such other form as agreed upon by
the parties.
"Registration Statement" shall have the meaning as set forth in the
Registration Rights Agreement.
"Regulation D" shall mean Regulation D promulgated under the Act.
"Reporting Issuer" shall have the meaning set forth in Section 6.2.
"Required Put Documents" shall have the meaning set forth in Section
2.3.5.
"Risk Factors" shall have the meaning set forth in Section 3.2.4,
attached hereto as EXHIBIT J.
"Schedule of Exceptions" shall have the meaning set forth in Section 5,
and is attached hereto as Exhibit C.
"SEC" shall mean the Securities and Exchange Commission.
"Securities" shall mean this Investment Agreement, together with the
Common Stock of the Company, the Warrants and the Warrant Shares issuable
pursuant to this Investment Agreement.
"Semi-Annual Non-Usage Fee" shall have the meaning set forth in Section
2.6.
"Share Authorization Increase Approval" shall have the meaning set
forth in Section 5.25.
"Six Month Anniversary" shall mean the date that is the same Numeric
Day of the sixth (6th) calendar month after the Investment Date, and the date
that is the same Numeric Day of each sixth (6th) calendar month thereafter,
provided that if such date is not a Business Day, the next Business Day
thereafter.
"Stockholder 20% Approval" shall have the meaning set forth in Section
6.11.
"Supplemental Registration Statement" shall have the meaning set forth
in the Registration Rights Agreement.
"Term" shall mean the term of this Agreement, which shall be a period
of time beginning on the date of this Agreement and ending on the Termination
Date.
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"Termination Date" shall mean the earlier of (i) the date that is three
(3) years after the Effective Date, or (ii) the date that is thirty (30)
Business Days after the later of (a) the Put Closing Date on which the sum of
the aggregate Put Share Price for all Put Shares equal the Maximum Offering
Amount, (b) the date that the Company has delivered a Termination Notice to the
Investor, (c) the date of an Automatic Termination, and (d) the date that all of
the Warrants have been exercised. Notwithstanding the above, if no Registration
Statement has been declared effective by the date that is one (1) year after the
date of this Agreement, the Termination Date shall be the date that is one (1)
year after the date of this Agreement.
"Termination Fee" shall have the meaning as set forth in Section 2.6.
"Termination Notice" shall have the meaning as set forth in Section
2.3.12.
"Third Party Report" shall have the meaning set forth in Section 3.2.4.
"Transaction Documents" shall have the meaning set forth in Section 9.
"Transfer Agent Instructions" shall mean the Company's instructions to
its transfer agent, substantially in the form attached as EXHIBIT T, or such
other form as agreed upon by the parties.
"Trigger Price" shall have the meaning set forth in Section 2.3.1(b).
"Truncated Pricing Period" shall have the meaning set forth in Section
2.3.11(d).
"Truncated Put Share Amount" shall have the meaning set forth in
Section 2.3.11(b).
"Unlegended Share Certificates" shall mean a certificate or
certificates (or electronically delivered shares, as appropriate) (in
denominations as instructed by Investor) representing the shares of Common Stock
to which the Investor is then entitled to receive, registered in the name of
Investor or its nominee (as instructed by Investor) and not containing a
restrictive legend or stop transfer order, including but not limited to the Put
Shares for the applicable Put and Warrant Shares.
"Use of Proceeds Schedule" shall have the meaning as set forth in
Section 3.2.4, attached hereto as EXHIBIT L.
"Volume Limitations" shall have the meaning set forth in Section
2.3.1(b).
"Warrant Shares" shall mean the Common Stock issued or issuable upon
exercise of the Warrants.
"Warrants" shall mean Purchase Warrants and Commitment Warrants.
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2. PURCHASE AND SALE OF COMMON STOCK.
2.1 OFFER TO SUBSCRIBE.
Subject to the terms and conditions herein and the
satisfaction of the conditions to closing set forth in Sections 2.2 and 2.3
below, Investor hereby agrees to purchase such amounts of Common Stock and
accompanying Warrants as the Company may, in its sole and absolute discretion,
from time to time elect to issue and sell to Investor according to one or more
Puts pursuant to Section 2.3 below.
2.2 INVESTMENT COMMITMENT.
2.2.1 INVESTMENT COMMITMENT CLOSING. The closing of
this Agreement (the "Investment Commitment Closing") shall be deemed to occur
when this Agreement and the Registration Rights Agreement have been executed by
both Investor and the Company, the Transfer Agent Instructions have been
executed by both the Company and the Transfer Agent, and the other Conditions to
Investor's Obligations set forth in Section 2.2.2 below have been met.
2.2.2 CONDITIONS TO INVESTOR'S OBLIGATIONS. As a
prerequisite to the Investment Commitment Closing and the Investor's obligations
hereunder, all of the following (the "Conditions to Investor's Obligations")
shall have been satisfied prior to or concurrently with the Company's execution
and delivery of this Agreement:
(a) the following documents shall have been delivered to
the Investor: (i) the Registration Rights Agreement
(executed by the Company and Investor), (ii) the
Investment Commitment Opinion of Counsel (signed by
the Company's counsel), (iii) the Transfer Agent
Instructions (executed by the Company and the
Transfer Agent), and (iv) a Secretary's Certificate
as to (A) the resolutions of the Company's board of
directors authorizing this transaction, (B) the
Company's Certificate of Incorporation, and (C) the
Company's Bylaws;
(b) this Investment Agreement, accepted by the Company,
shall have been received by the Investor;
(c) the Company's Common Stock shall be listed for
trading and actually trading on the O.T.C. Bulletin
Board, the Nasdaq Small Cap Market, the Nasdaq
National Market, the American Stock Exchange or the
New York Stock Exchange;
(d) other than continuing losses described in the Risk
Factors set forth in the Disclosure Documents
(provided for in Section 3.2.4), as of the Closing
there have been no material adverse changes in the
Company's business prospects or financial condition
since the date of the last balance sheet included in
the Disclosure Documents, including but not limited
to incurring material liabilities; and
(e) the representations and warranties of the Company in
this Agreement shall be true and correct in all
material respects and the conditions to Investor's
obligations set forth in this Section 2.2.2 shall
have been satisfied as of such Closing; and the
Company shall deliver an Officer's Certificate,
signed by an officer of the Company, to such effect
to the Investor.
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2.3 PUTS OF COMMON SHARES TO THE INVESTOR.
2.3.1 PROCEDURE TO EXERCISE A PUT. Subject to the
Individual Put Limit, the Maximum Offering Amount and the Cap Amount (if
applicable), and the other conditions and limitations set forth in this
Agreement, at any time beginning on the date on which the Registration Statement
is declared effective by the SEC (the "Effective Date"), the Company may, in its
sole and absolute discretion, elect to exercise one or more Puts according to
the following procedure, provided that each subsequent Put Date after the first
Put Date shall be no sooner than five (5) Business Days following the preceding
Pricing Period End Date:
(a) DELIVERY OF ADVANCE PUT NOTICE.At least
ten (10) Business Days but not more than twenty (20) Business Days prior to any
intended Put Date (unless otherwise agreed in writing by the Investor), the
Company shall deliver advance written notice (the "Advance Put Notice," the form
of which is attached hereto as EXHIBIT E, the date of such Advance Put Notice
being the "Advance Put Notice Date") to Investor stating the Put Date for which
the Company shall, subject to the limitations and restrictions contained herein,
exercise a Put and stating the number of shares of Common Stock (subject to the
Individual Put Limit and the Maximum Put Dollar Amount) which the Company
intends to sell to the Investor for the Put (the "Intended Put Share Amount").
The Company may, at its option, also designate in any Advance Put
Notice (i) a maximum dollar amount of Common Stock, not to exceed $2,000,000,
which it shall sell to Investor during the Put (the "Company Designated Maximum
Put Dollar Amount") and/or (ii) a minimum purchase price per Put Share at which
the Investor may purchase Shares pursuant to such Put Notice (a "Company
Designated Minimum Put Share Price"). The Company Designated Minimum Put Share
Price, if applicable, shall be no greater than 80% of the Closing Bid Price of
the Company's common stock on the Advance Put Notice Date. The Company may
decrease (but not increase) the Company Designated Minimum Put Share Price for a
Put at any time by giving the Investor written notice of such decrease not later
than 12:00 Noon, New York City time, on the Business Day immediately preceding
the Business Day that such decrease is to take effect. A decrease in the Company
Designated Minimum Put Share Price shall have no retroactive effect on the
determination of Trigger Prices and Excluded Days for days preceding the
Business Day that such decrease takes effect.
Notwithstanding the above, if, at the time of delivery of an Advance
Put Notice, more than two (2) Calendar Months have passed since the date of the
previous Put Closing, such Advance Put Notice shall provide at least twenty (20)
Business Days notice of the intended Put Date, unless waived in writing by the
Investor. In order to effect delivery of the Advance Put Notice, the Company
shall (i) send the Advance Put Notice by facsimile on such date so that such
notice is received by the Investor by 6:00 p.m., New York, NY time, and (ii)
surrender such notice on such date to a courier for overnight delivery to the
Investor (or two (2) day delivery in the case of an Investor residing outside of
the U.S.). Upon receipt by the Investor of a facsimile copy of the Advance Put
Notice, the Investor shall, within two (2) Business Days, send, via facsimile, a
confirmation of receipt (the "Advance Put Notice Confirmation," the form of
which is attached hereto as EXHIBIT F) of the Advance Put Notice to the Company
specifying that the Advance Put Notice has been received and affirming the
intended Put Date and the Intended Put Share Amount.
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(b) PUT SHARE AMOUNT. The "Put Share Amount"
is the number of shares of Common Stock that the Investor shall be obligated to
purchase in a given Put, and shall equal the lesser of (i) the Intended Put
Share Amount, and (ii) the Individual Put Limit. The "Individual Put Limit"
shall equal the lesser of (i) 15% of the sum of the aggregate daily reported
trading volumes in the outstanding Common Stock on the Company's Principal
Market, excluding any block trades of 20,000 or more shares of Common Stock, for
all Evaluation Days (as defined below) in the Pricing Period, (ii) the number of
Put Shares which, when multiplied by their respective Put Share Prices, equals
the Maximum Put Dollar Amount, and (iii) the 9.9% Limitation, but in no event
shall the Individual Put Limit exceed 15% of the sum of the aggregate daily
reported trading volumes in the outstanding Common Stock on the Company's
Principal Market, excluding any block trades of 20,000 or more shares of Common
Stock, for the twenty (20) Business Days immediately preceding the Put Date
(this limitation, together with the limitation in (i) immediately above, are
collectively referred to herein as the "Volume Limitations"). Company agrees not
to trade Common Stock or arrange for Common Stock to be traded for the purpose
of artificially increasing the Volume Limitations.
For purposes of this Agreement:
"Trigger Price" for any Pricing Period shall mean the greater
of (i) the Company Designated Minimum Put Share Price, plus $.10, or (ii) the
Company Designated Minimum Put Share Price divided by .91.
An "Excluded Day" shall mean each Business Day during a
Pricing Period where the lowest intra-day trading price of the Common Stock is
less than the Trigger Price.
An "Evaluation Day" shall mean each Business Day during a
Pricing Period that is not an Excluded Day.
(c) PUT SHARE PRICE. The purchase price for
the Put Shares (the "Put Share Price") shall equal the lesser of (i) the Market
Price for such Put, minus $.10, or (ii) 91% of the Market Price for such Put,
but shall in no event be less than the Company Designated Minimum Put Share
Price for such Put, if applicable. .
(d) DELIVERY OF PUT NOTICE. After delivery
of an Advance Put Notice, on the Put Date specified in the Advance Put Notice
the Company shall deliver written notice (the "Put Notice," the form of which is
attached hereto as EXHIBIT G) to Investor stating (i) the Put Date, (ii) the
Intended Put Share Amount as specified in the Advance Put Notice (such exercise
a "Put"), (iii) the Company Designated Maximum Put Dollar Amount (if
applicable), and (iv) the Company Designated Minimum Put Share Price (if
applicable). In order to effect delivery of the Put Notice, the Company shall
(i) send the Put Notice by facsimile on the Put Date so that such notice is
received by the Investor by 6:00 p.m., New York, NY time, and (ii) surrender
such notice on the Put Date to a courier for overnight delivery to the Investor
(or two (2) day delivery in the case of an Investor residing outside of the
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U.S.). Upon receipt by the Investor of a facsimile copy of the Put Notice, the
Investor shall, within two (2) Business Days, send, via facsimile, a
confirmation of receipt (the "Put Notice Confirmation," the form of which is
attached hereto as EXHIBIT H) of the Put Notice to Company specifying that the
Put Notice has been received and affirming the Put Date and the Intended Put
Share Amount.
(e) DELIVERY OF REQUIRED PUT DOCUMENTS. On
or before the Put Date for such Put, the Company shall deliver the Required Put
Documents (as defined in Section 2.3.5 below) to the Investor (or to an agent of
Investor, if Investor so directs). Unless otherwise specified by the Investor,
the Put Shares of Common Stock shall be transmitted electronically pursuant to
such electronic delivery system, as the Investor shall request; otherwise
delivery shall be by physical certificates. If the Company has not delivered all
of the Required Put Documents to the Investor on or before the Put Date, the Put
shall be automatically cancelled, unless the Investor agrees to delay the Put
Date by up to three (3) Business Days, in which case the Pricing Period begins
on the Business Day following such new Put Date. If the Company has not
delivered all of the Required Put Documents to the Investor on or before the Put
Date (or new Put Date, if applicable), and the Investor has not agreed in
writing to delay the Put Date, the Put is automatically canceled (an
"Impermissible Put Cancellation") and, unless the Put was otherwise canceled in
accordance with the terms of Section 2.3.11, the Company shall pay the Investor
$5,000 for its reasonable due diligence expenses incurred in preparation for the
canceled Put and the Company may deliver an Advance Put Notice for the
subsequent Put no sooner than ten (10) Business Days after the date that such
Put was canceled, unless otherwise agreed by the Investor.
(f) LIMITATION ON INVESTOR'S OBLIGATION TO
PURCHASE SHARES. Notwithstanding anything to the contrary in this Agreement, in
no event shall the Investor be required to purchase, and an Intended Put Share
Amount may not include, an amount of Put Shares, which when added to the number
of Put Shares acquired by the Investor pursuant to this Agreement during the 31
days preceding the Put Date with respect to which this determination of the
permitted Intended Put Share Amount is being made, would exceed 9.99% of the
number of shares of Common Stock outstanding (on a fully diluted basis, to the
extent that inclusion of unissued shares is mandated by Section 13(d) of the
Exchange Act) on the Put Date for such Pricing Period, as determined in
accordance with Section 13(d) of the Exchange Act (the "Section 13(d)
Outstanding Share Amount"). Each Put Notice shall include a representation of
the Company as to the Section 13(d) Outstanding Share Amount on the related Put
Date. In the event that the Section 13(d) Outstanding Share Amount is different
on any date during a Pricing Period than on the Put Date associated with such
Pricing Period, then the number of shares of Common Stock outstanding on such
date during such Pricing Period shall govern for purposes of determining whether
the Investor, when aggregating all purchases of Shares made pursuant to this
Agreement in the 31 calendar days preceding such date, would have acquired more
than 9.99% of the Section 13(d) Outstanding Share Amount. The limitation set
forth in this Section 2.3.1(f) is referred to as the "9.9% Limitation."
2.3.2 TERMINATION OF RIGHT TO PUT. The Company's
right to require the Investor to purchase any subsequent Put Shares shall
terminate permanently (each, an "Automatic Termination") upon the occurrence of
any of the following:
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(a) the Company shall not exercise a Put or
any Put thereafter if, at any time, either the Company or any director or
executive officer of the Company has engaged in a transaction or conduct related
to the Company that has resulted in (i) a Securities and Exchange Commission
enforcement action, or (ii) a civil judgment or criminal conviction for fraud or
misrepresentation, or for any other offense that, if prosecuted criminally,
would constitute a felony under applicable law;
(b) the Company shall not exercise a Put or
any Put thereafter, on any date after a cumulative time period or series of time
periods, including both Ineffective Periods and Delisting Events, that lasts for
an aggregate of four (4) months;
(c) the Company shall not exercise a Put or
any Put thereafter if at any time the Company has filed for and/or is subject to
any bankruptcy, insolvency, reorganization or liquidation proceedings or other
proceedings for relief under any bankruptcy law or any law for the relief of
debtors instituted by or against the Company or any subsidiary of the Company;
(d) the Company shall not exercise a Put
after the sooner of (i) the date that is three (3) years after the Effective
Date, or (ii) the Put Closing Date on which the aggregate of the Put Dollar
Amounts for all Puts equal the Maximum Offering Amount; and
(e) the Company shall not exercise a Put
after the Company has breached any covenant in Section 2.6, Section 6, or
Section 9 hereof.
2.3.3 PUT LIMITATIONS. The Company's right to
exercise a Put shall be limited as follows:
(a) notwithstanding the amount of any Put,
the Investor shall not be obligated to purchase any additional Put Shares once
the aggregate Put Dollar Amount paid by Investor equals the Maximum Offering
Amount;
(b) the Investor shall not be obligated to
acquire and pay for the Put Shares with respect to any Put for which the Company
has announced a subdivision or combination, including a reverse split, of its
Common Stock or has subdivided or combined its Common Stock during the Extended
Put Period;
(c) the Investor shall not be obligated to
acquire and pay for the Put Shares with respect to any Put for which the Company
has paid a dividend of its Common Stock or has made any other distribution of
its Common Stock during the Extended Put Period;
(d) the Investor shall not be obligated to
acquire and pay for the Put Shares with respect to any Put for which the Company
has made, during the Extended Put Period, a distribution of all or any portion
of its assets or evidences of indebtedness to the holders of its Common Stock;
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(e) the Investor shall not be obligated to
acquire and pay for the Put Shares with respect to any Put for which a Major
Transaction has occurred during the Extended Put Period.
2.3.4 CONDITIONS PRECEDENT TO THE RIGHT OF THE
COMPANY TO DELIVER AN ADVANCE PUT NOTICE OR A PUT NOTICE AND THE OBLIGATION OF
THE INVESTOR TO PURCHASE PUT SHARES. The right of the Company to deliver an
Advance Put Notice or a Put Notice and the obligation of the Investor hereunder
to acquire and pay for the Put Shares incident to a Closing is subject to the
satisfaction, on (i) the date of delivery of such Advance Put Notice or Put
Notice and (ii) the applicable Put Closing Date, of each of the following
conditions:
(a) the Company's Common Stock shall be listed for and
actively trading on the O.T.C. Bulletin Board, the
Nasdaq Small Cap Market, the Nasdaq National Market
or the New York Stock Exchange and the Put Shares
shall be so listed, and to the Company's knowledge
there is no notice of any suspension or delisting
with respect to the trading of the shares of Common
Stock on such market or exchange;
(b) the Company shall have satisfied any and all
obligations pursuant to the Registration Rights
Agreement, including, but not limited to, the filing
of the Registration Statement with the SEC with
respect to the resale of all Registrable Securities
and the requirement that the Registration Statement
shall have been declared effective by the SEC for the
resale of all Registrable Securities and the Company
shall have satisfied and shall be in compliance with
any and all obligations pursuant to this Agreement
and the Warrants;
(c) the representations and warranties of the Company are
true and correct in all material respects as if made
on such date and the conditions to Investor's
obligations set forth in this Section 2.3.4 are
satisfied as of such Closing, and the Company shall
deliver a certificate, signed by an officer of the
Company, to such effect to the Investor;
(d) the Company shall have reserved for issuance a
sufficient number of Common Shares for the purpose of
enabling the Company to satisfy any obligation to
issue Common Shares pursuant to any Put and to effect
exercise of the Warrants;
(e) the Registration Statement is not subject to an
Ineffective Period as defined in the Registration
Rights Agreement, the prospectus included therein is
current and deliverable, and to the Company's
knowledge there is no notice of any investigation or
inquiry concerning any stop order with respect to the
Registration Statement; and
(f) if the Aggregate Issued Shares after the Closing of
the Put would exceed the Cap Amount, the Company
shall have obtained the Stockholder 20% Approval as
specified in Section 6.11, if the Company's Common
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Stock is listed on the NASDAQ Small Cap Market or
NMS, and such approval is required by the rules of
the NASDAQ.
2.3.5 DOCUMENTS REQUIRED TO BE DELIVERED ON THE PUT
DATE AS CONDITIONS TO CLOSING OF ANY PUT. The Closing of any Put and Investor's
obligations hereunder shall additionally be conditioned upon the delivery to the
Investor of each of the following (the "Required Put Documents") on or before
the applicable Put Date:
(a) a number of Unlegended Share
Certificates (or freely tradeable electronically delivered shares, as
appropriate) equal to the Intended Put Share Amount, in denominations of not
more than 50,000 shares per certificate;
(b) the following documents: Put Opinion of
Counsel, Officer's Certificate, Put Notice, Registration Opinion, and any report
or disclosure required under Section 2.3.6 or Section 2.5;
(c) all documents, instruments and other
writings required to be delivered on or before the Put Date pursuant to any
provision of this Agreement in order to implement and effect the transactions
contemplated herein.
2.3.6 ACCOUNTANT'S LETTER AND REGISTRATION OPINION.
(a) The Company shall have caused to be
delivered to the Investor, (i) whenever required by Section 2.3.6(b) or by
Section 2.5.3, and (ii) on the date that is three (3) Business Days prior to
each Put Date (the "Registration Opinion Deadline"), an opinion of the Company's
independent counsel, in substantially the form of EXHIBIT R (the "Registration
Opinion"), addressed to the Investor stating, inter alia, that no facts
("Material Facts") have come to such counsel's attention that have caused it to
believe that the Registration Statement is subject to an Ineffective Period or
to believe that the Registration Statement, any Supplemental Registration
Statement (as each may be amended, if applicable), and any related prospectuses,
contain an untrue statement of material fact or omits a material fact required
to make the statements contained therein, in light of the circumstances under
which they were made, not misleading. If a Registration Opinion cannot be
delivered by the Company's independent counsel to the Investor on the
Registration Opinion Deadline due to the existence of Material Facts or an
Ineffective Period, the Company shall promptly notify the Investor and as
promptly as possible amend each of the Registration Statement and any
Supplemental Registration Statements, as applicable, and any related prospectus
or cause such Ineffective Period to terminate, as the case may be, and deliver
such Registration Opinion and updated prospectus as soon as possible thereafter.
If at any time after a Put Notice shall have been delivered to Investor but
before the related Pricing Period End Date, the Company acquires knowledge of
such Material Facts or any Ineffective Period occurs, the Company shall promptly
notify the Investor and shall deliver a Put Cancellation Notice to the Investor
pursuant to Section 2.3.11 by facsimile and overnight courier by the end of that
Business Day.
(b) (i) the Company shall engage its
independent auditors to perform the procedures in accordance with the provisions
of Statement on Auditing Standards No. 71, as amended, as agreed to by the
parties hereto, and reports thereon (the "Bring Down Cold Comfort Letters") as
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shall have been reasonably requested by the Investor with respect to certain
financial information contained in the Registration Statement and shall have
delivered to the Investor such a report addressed to the Investor, on the date
that is three (3) Business Days prior to each Put Date.
(ii) in the event that the Investor
shall have requested delivery of an Agreed Upon Procedures Report pursuant to
Section 2.5.3, the Company shall engage its independent auditors to perform
certain agreed upon procedures and report thereon as shall have been reasonably
requested by the Investor with respect to certain financial information of the
Company and the Company shall deliver to the Investor a copy of such report
addressed to the Investor. In the event that the report required by this Section
2.3.6(b) cannot be delivered by the Company's independent auditors, the Company
shall, if necessary, promptly revise the Registration Statement and the Company
shall not deliver a Put Notice until such report is delivered.
2.3.7 INVESTOR'S OBLIGATION AND RIGHT TO PURCHASE
SHARES. Subject to the conditions set forth in this Agreement, following the
Investor's receipt of a validly delivered Put Notice, the Investor shall be
required to purchase (each a "Purchase") from the Company a number of Put Shares
equal to the Put Share Amount, in the manner described below.
2.3.8 MECHANICS OF PUT CLOSING. Each of the Company
and the Investor shall deliver all documents, instruments and writings required
to be delivered by either of them pursuant to this Agreement at or prior to each
Closing. Subject to such delivery and the satisfaction of the conditions set
forth in Sections 2.3.4 and 2.3.5, the closing of the purchase by the Investor
of Shares shall occur by 5:00 PM, New York City Time, on the date which is five
(5) Business Days following the applicable Pricing Period End Date (or such
other time or later date as is mutually agreed to by the Company and the
Investor) (the "Payment Due Date") at the offices of Investor. On each or before
each Payment Due Date, the Investor shall deliver to the Company, in the manner
specified in Section 8 below, the Put Dollar Amount to be paid for such Put
Shares, determined as aforesaid. The closing (each a "Put Closing") for each Put
shall occur on the date that both (i) the Company has delivered to the Investor
all Required Put Documents, and (ii) the Investor has delivered to the Company
such Put Dollar Amount and any Late Payment Amount, if applicable (each a "Put
Closing Date").
If the Investor does not deliver to the Company the Put Dollar Amount
for such Put Closing on or before the Payment Due Date, then the Investor shall
pay to the Company, in addition to the Put Dollar Amount, an amount (the "Late
Payment Amount") at a rate of X% per month, accruing daily, multiplied by such
Put Dollar Amount, where "X" equals one percent (1%) for the first month
following the date in question, and increases by an additional one percent (1%)
for each month that passes after the date in question, up to a maximum of five
percent (5%) per month; provided, however, that in no event shall the amount of
interest that shall become due and payable hereunder exceed the maximum amount
permissible under applicable law.
2.3.9 LIMITATION ON SHORT SALES. The Investor and its
Affiliates shall not engage in short sales of the Company's Common Stock;
provided, however, that the Investor may enter into any short exempt sale or any
short sale or other hedging or similar arrangement it deems appropriate with
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respect to Put Shares after it receives a Put Notice with respect to such Put
Shares so long as such sales or arrangements do not involve more than the number
of such Put Shares specified in the Put Notice.
2.3.10 CAP AMOUNT. If the Company becomes listed on
the Nasdaq Small Cap Market or the Nasdaq National Market, then, unless the
Company has obtained Stockholder 20% Approval as set forth in Section 6.11 or
unless otherwise permitted by Nasdaq, in no event shall the Aggregate Issued
Shares exceed the maximum number of shares of Common Stock (the "Cap Amount")
that the Company can, without stockholder approval, so issue pursuant to Nasdaq
Rule 4460(i)(1)(d)(ii) (or any other applicable Nasdaq Rules or any successor
rule) (the "Nasdaq 20% Rule").
2.3.11 PUT CANCELLATION.
(a) MECHANICS OF PUT CANCELLATION. If at any
time during a Pricing Period the Company discovers the existence of Material
Facts or any Ineffective Period or Delisting Event occurs, the Company shall
cancel the Put (a "Put Cancellation"), by delivering written notice to the
Investor (the "Put Cancellation Notice"), attached as EXHIBIT Q, by facsimile
and overnight courier. The "Put Cancellation Date" shall be the date that the
Put Cancellation Notice is first received by the Investor, if such notice is
received by the Investor by 6:00 p.m., New York, NY time, and shall be the
following date, if such notice is received by the Investor after 6:00 p.m., New
York, NY time.
(b) EFFECT OF PUT CANCELLATION. Anytime a
Put Cancellation Notice is delivered to Investor after the Put Date, the Put,
shall remain effective with respect to a number of Put Shares (the "Truncated
Put Share Amount") equal to the Individual Put Limit for the Truncated Pricing
Period.
(c) PUT CANCELLATION NOTICE CONFIRMATION.
Upon receipt by the Investor of a facsimile copy of the Put Cancellation Notice,
the Investor shall promptly send, via facsimile, a confirmation of receipt (the
"Put Cancellation Notice Confirmation," a form of which is attached as EXHIBIT
S) of the Put Cancellation Notice to the Company specifying that the Put
Cancellation Notice has been received and affirming the Put Cancellation Date.
(d) TRUNCATED PRICING PERIOD. If a Put
Cancellation Notice has been delivered to the Investor after the Put Date, the
Pricing Period for such Put shall end at on the close of trading on the last
full trading day on the Principal Market that ends prior to the moment of
initial delivery of the Put Cancellation Notice (a "Truncated Pricing Period")
to the Investor.
2.3.12 INVESTMENT AGREEMENT CANCELLATION. The Company
may terminate (a "Company Termination") its right to initiate future Puts by
providing written notice ("Termination Notice") to the Investor, by facsimile
and overnight courier, at any time other than during an Extended Put Period,
provided that such termination shall have no effect on the parties' other rights
and obligations under this Agreement, the Registration Rights Agreement or the
Warrants. Notwithstanding the above, any cancellation occurring during an
Extended Put Period is governed by Section 2.3.11.
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2.3.13 RETURN OF EXCESS COMMON SHARES. In the event
that the number of Shares purchased by the Investor pursuant to its obligations
hereunder is less than the Intended Put Share Amount, the Investor shall
promptly return to the Company any shares of Common Stock in the Investor's
possession that are not being purchased by the Investor.
2.4 WARRANTS.
2.4.1 COMMITMENT WARRANTS. In partial consideration
hereof, following the execution of the Letter of Agreement dated on or about
December 13, 1999 between the Company and the Investor, the Company issued and
delivered to Investor or its designated assignees, warrants (the "Commitment
Warrants") in the form attached hereto as EXHIBIT U, or such other form as
agreed upon by the parties, to purchase 490,000 shares of Common Stock. The
Commitment Warrants shall be exerciseable at a price (the "Commitment Warrant
Exercise Price") which shall initially equal the lowest Closing Bid Price for
the five (5) Business Days immediately preceding December 13, 1999 ("Initial
Exercise Price"), and shall have reset provisions. Each Commitment Warrant shall
be immediately exercisable at the Commitment Warrant Exercise Price, and shall
have a term beginning on the date of issuance and ending on date that is five
(5) years thereafter. The Warrant Shares shall be registered for resale pursuant
to the Registration Rights Agreement.
2.4.2 PURCHASE WARRANTS. Within five (5) Business
Days of the end of each Pricing Period, the Company shall issue and deliver to
the Investor a warrant ("Purchase Warrant"), in the form attached hereto as
EXHIBIT D, or such other form as agreed upon by the parties, to purchase a
number of shares of Common Stock equal to 10% of the number of Put Shares issued
to Investor in that Put. Each Purchase Warrant shall be exerciseable at a price
(the "Purchase Warrant Exercise Price") which shall initially equal 110% of the
Market Price for the applicable Put, and shall have semi-annual reset
provisions. Each Purchase Warrant shall be immediately exercisable at the
Purchase Warrant Exercise Price, and shall have a term beginning on the date of
issuance and ending on the date that is five (5) years thereafter. The Warrant
Shares shall be registered for resale pursuant to the Registration Rights
Agreement.
2.5 DUE DILIGENCE REVIEW. The Company shall make available for
inspection and review by the Investor (the "Due Diligence Review"), advisors to
and representatives of the Investor (who may or may not be affiliated with the
Investor and who are reasonably acceptable to the Company), any underwriter
participating in any disposition of Common Stock on behalf of the Investor
pursuant to the Registration Statement, any Supplemental Registration Statement,
or amendments or supplements thereto or any blue sky, NASD or other filing, all
financial and other records, all SEC Documents and other filings with the SEC,
and all other corporate documents and properties of the Company as may be
reasonably necessary for the purpose of such review, and cause the Company's
officers, directors and employees to supply all such information reasonably
requested by the Investor or any such representative, advisor or underwriter in
connection with such Registration Statement (including, without limitation, in
response to all questions and other inquiries reasonably made or submitted by
any of them), prior to and from time to time after the filing and effectiveness
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of the Registration Statement for the sole purpose of enabling the Investor and
such representatives, advisors and underwriters and their respective accountants
and attorneys to conduct initial and ongoing due diligence with respect to the
Company and the accuracy of the Registration Statement.
2.5.1 TREATMENT OF NONPUBLIC INFORMATION. The Company
shall not disclose nonpublic information to the Investor or to its advisors or
representatives unless prior to disclosure of such information the Company
identifies such information as being nonpublic information and provides the
Investor and such advisors and representatives with the opportunity to accept or
refuse to accept such nonpublic information for review. The Company may, as a
condition to disclosing any nonpublic information hereunder, require the
Investor and its advisors and representatives to enter into a confidentiality
agreement (including an agreement with such advisors and representatives
prohibiting them from trading in Common Stock during such period of time as they
are in possession of nonpublic information) in form reasonably satisfactory to
the Company and the Investor.
Nothing herein shall require the Company to disclose nonpublic
information to the Investor or its advisors or representatives, and the Company
represents that it does not disseminate nonpublic information to any investors
who purchase stock in the Company in a public offering, to money managers or to
securities analysts, provided, however, that notwithstanding anything herein to
the contrary, the Company will, as hereinabove provided, immediately notify the
advisors and representatives of the Investor and, if any, underwriters, of any
event or the existence of any circumstance (without any obligation to disclose
the specific event or circumstance) of which it becomes aware, constituting
nonpublic information (whether or not requested of the Company specifically or
generally during the course of due diligence by and such persons or entities),
which, if not disclosed in the Prospectus included in the Registration
Statement, would cause such Prospectus to include a material misstatement or to
omit a material fact required to be stated therein in order to make the
statements therein, in light of the circumstances in which they were made, not
misleading. Nothing contained in this Section 2.5 shall be construed to mean
that such persons or entities other than the Investor (without the written
consent of the Investor prior to disclosure of such information) may not obtain
nonpublic information in the course of conducting due diligence in accordance
with the terms of this Agreement; provided, however, that in no event shall the
Investor's advisors or representatives disclose to the Investor the nature of
the specific event or circumstances constituting any nonpublic information
discovered by such advisors or representatives in the course of their due
diligence without the written consent of the Investor prior to disclosure of
such information.
2.5.2 DISCLOSURE OF MISSTATEMENTS AND OMISSIONS. The
Investor's advisors or representatives shall make complete disclosure to the
Investor's counsel of all events or circumstances constituting nonpublic
information discovered by such advisors or representatives in the course of
their due diligence upon which such advisors or representatives form the opinion
that the Registration Statement contains an untrue statement of a material fact
or omits a material fact required to be stated in the Registration Statement or
necessary to make the statements contained therein, in the light of the
circumstances in which they were made, not misleading. Upon receipt of such
disclosure, the Investor's counsel shall consult with the Company's independent
counsel in order to address the concern raised as to the existence of a material
misstatement or omission and to discuss appropriate disclosure with respect
thereto; provided, however, that such consultation shall not constitute the
advice of the Company's independent counsel to the Investor as to the accuracy
of the Registration Statement and related Prospectus.
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2.5.3 PROCEDURE IF MATERIAL FACTS ARE REASONABLY
BELIEVED TO BE UNTRUE OR ARE Omitted. In the event after such consultation the
Investor or the Investor's counsel reasonably believes that the Registration
Statement contains an untrue statement or a material fact or omits a material
fact required to be stated in the Registration Statement or necessary to make
the statements contained therein, in light of the circumstances in which they
were made, not misleading,
(a) the Company shall file with the
SEC an amendment to the Registration Statement responsive to such alleged untrue
statement or omission and provide the Investor, as promptly as practicable, with
copies of the Registration Statement and related Prospectus, as so amended, or
(b) if the Company disputes the
existence of any such material misstatement or omission, (i) the Company's
independent counsel shall provide the Investor's counsel with a Registration
Opinion and (ii) in the event the dispute relates to the adequacy of financial
disclosure and the Investor shall reasonably request, the Company's independent
auditors shall provide to the Company a letter ("Agreed Upon Procedures Report")
outlining the performance of such "agreed upon procedures" as shall be
reasonably requested by the Investor and the Company shall provide the Investor
with a copy of such letter.
2.6 COMMITMENT PAYMENTS.
On the last Business Day of each six (6) Calendar Month period
following the date of this Agreement (each such period a "Commitment Evaluation
Period"), if the Company has not Put at least $1,000,000 in aggregate Put Dollar
Amount during that Commitment Evaluation Period, the Company, in consideration
of Investor's commitment costs, including, but not limited to, due diligence
expenses, shall pay to the Investor an amount (the "Semi-Annual Non-Usage Fee ")
equal to the difference of (i) $100,000, minus (ii) 10% of the aggregate Put
Dollar Amount of the Put Shares put to Investor during that Commitment
Evaluation Period. In the event that the Company delivers a Termination Notice
to the Investor or an Automatic Termination occurs, the Company shall pay to the
Investor (the "Termination Fee") the greater of (i) the Semi-Annual Non-Usage
Fee for the applicable Commitment Evaluation Period, or (ii) the difference of
(x) $200,000, minus (y) 10% of the aggregate Put Dollar Amount of the Put Shares
put to Investor during all Puts to date, and the Company shall not be required
to pay the Semi-Annual Non-Usage Fee thereafter.
Each Semi Annual Non-Usage Fee or Termination Fee is payable, in cash,
within five (5) business days of the date it accrued. The Company shall not be
required to deliver any payments to Investor under this subsection until
Investor has paid all Put Dollar Amounts that are then due.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF INVESTOR.
Investor hereby represents and warrants to and agrees with the Company as
follows:
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3.1 ACCREDITED INVESTOR. Investor is an accredited investor
("Accredited Investor"), as defined in Rule 501 of Regulation D, and has checked
the applicable box set forth in Section 10 of this Agreement.
3.2 INVESTMENT EXPERIENCE; ACCESS TO INFORMATION; INDEPENDENT
INVESTIGATION.
3.2.1 ACCESS TO INFORMATION. Investor or Investor's
professional advisor has been granted the opportunity to ask questions of and
receive answers from representatives of the Company, its officers, directors,
employees and agents concerning the terms and conditions of this Offering, the
Company and its business and prospects, and to obtain any additional information
which Investor or Investor's professional advisor deems necessary to verify the
accuracy and completeness of the information received.
3.2.2 RELIANCE ON OWN ADVISORS. Investor has relied
completely on the advice of, or has consulted with, Investor's own personal tax,
investment, legal or other advisors and has not relied on the Company or any of
its affiliates, officers, directors, attorneys, accountants or any affiliates of
any thereof and each other person, if any, who controls any of the foregoing,
within the meaning of Section 15 of the Act for any tax or legal advice (other
than reliance on information in the Disclosure Documents as defined in Section
3.2.4 below and on the Opinion of Counsel). The foregoing, however, does not
limit or modify Investor's right to rely upon covenants, representations and
warranties of the Company in this Agreement.
3.2.3 CAPABILITY TO EVALUATE. Investor has such
knowledge and experience in financial and business matters so as to enable such
Investor to utilize the information made available to it in connection with the
Offering in order to evaluate the merits and risks of the prospective
investment, which are substantial, including without limitation those set forth
in the Disclosure Documents (as defined in Section 3.2.4 below).
3.2.4 DISCLOSURE DOCUMENTS. Investor, in making
Investor's investment decision to subscribe for the Investment Agreement
hereunder, represents that (a) Investor has received and had an opportunity to
review (i) the Company's Annual Report on Form 10-KSB for the year ended October
31, 1998, (ii) the Company's quarterly report on Form 10-QSB for the quarters
ended April 30,1999 and July 31,1999, (iii) the Risk Factors, attached as
EXHIBIT J, (the "Risk Factors") (iv) the Capitalization Schedule, attached as
EXHIBIT K, (the "Capitalization Schedule") and (v) the Use of Proceeds Schedule,
attached as EXHIBIT L, (the "Use of Proceeds Schedule"); (b) Investor has read,
reviewed, and relied solely on the documents described in (a) above, the
Company's representations and warranties and other information in this
Agreement, including the exhibits, documents prepared by the Company which have
been specifically provided to Investor in connection with this Offering (the
documents described in this Section 3.2.4 (a) and (b) are collectively referred
to as the "Disclosure Documents"), and an independent investigation made by
Investor and Investor's representatives, if any; (c) Investor has, prior to the
date of this Agreement, been given an opportunity to review material contracts
and documents of the Company which have been filed as exhibits to the Company's
filings under the Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and has had an opportunity to ask questions of and receive
answers from the Company's officers and directors; and (d) is not relying on any
oral representation of the Company or any other person, nor any written
representation or assurance from the Company other than those contained in the
Disclosure Documents or incorporated herein or therein. The foregoing, however,
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does not limit or modify Investor's right to rely upon covenants,
representations and warranties of the Company in Sections 5 and 6 of this
Agreement. Investor acknowledges and agrees that the Company has no
responsibility for, does not ratify, and is under no responsibility whatsoever
to comment upon or correct any reports, analyses or other comments made about
the Company by any third parties, including, but not limited to, analysts'
research reports or comments (collectively, "Third Party Reports"), and Investor
has not relied upon any Third Party Reports in making the decision to invest.
3.2.5 INVESTMENT EXPERIENCE; FEND FOR SELF. Investor
has substantial experience in investing in securities and it has made
investments in securities other than those of the Company. Investor acknowledges
that Investor is able to fend for Investor's self in the transaction
contemplated by this Agreement, that Investor has the ability to bear the
economic risk of Investor's investment pursuant to this Agreement and that
Investor is an "Accredited Investor" by virtue of the fact that Investor meets
the investor qualification standards set forth in Section 3.1 above. Investor
has not been organized for the purpose of investing in securities of the
Company, although such investment is consistent with Investor's purposes.
3.3 EXEMPT OFFERING UNDER REGULATION D.
3.3.1 NO GENERAL SOLICITATION. The Investment
Agreement was not offered to Investor through, and Investor is not aware of, any
form of general solicitation or general advertising, including, without
limitation, (i) any advertisement, article, notice or other communication
published in any newspaper, magazine or similar media or broadcast over
television or radio, and (ii) any seminar or meeting whose attendees have been
invited by any general solicitation or general advertising.
3.3.2 RESTRICTED SECURITIES. Investor understands
that the Investment Agreement is, the Common Stock and Warrants issued at each
Put Closing will be, and the Warrant Shares will be, characterized as
"restricted securities" under the federal securities laws inasmuch as they are
being acquired from the Company in a transaction exempt from the registration
requirements of the federal securities laws and that under such laws and
applicable regulations such securities may not be transferred or resold without
registration under the Act or pursuant to an exemption therefrom. In this
connection, Investor represents that Investor is familiar with Rule 144 under
the Act, as presently in effect, and understands the resale limitations imposed
thereby and by the Act.
3.3.3 DISPOSITION. Without in any way limiting the
representations set forth above, Investor agrees that until the Securities are
sold pursuant to an effective Registration Statement or an exemption from
registration, they will remain in the name of Investor and will not be
transferred to or assigned to any broker, dealer or depositary. Investor further
agrees not to sell, transfer, assign, or pledge the Securities (except for any
bona fide pledge arrangement to the extent that such pledge does not require
registration under the Act or unless an exemption from such registration is
available and provided further that if such pledge is realized upon, any
transfer to the pledgee shall comply with the requirements set forth herein), or
to otherwise dispose of all or any portion of the Securities unless and until:
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(a) There is then in effect a registration
statement under the Act and any applicable state securities laws covering such
proposed disposition and such disposition is made in accordance with such
registration statement and in compliance with applicable prospectus delivery
requirements; or
(b) (i) Investor shall have notified the
Company of the proposed disposition and shall have furnished the Company with a
statement of the circumstances surrounding the proposed disposition to the
extent relevant for determination of the availability of an exemption from
registration, and (ii) if reasonably requested by the Company, Investor shall
have furnished the Company with an opinion of counsel, reasonably satisfactory
to the Company, that such disposition will not require registration of the
Securities under the Act or state securities laws. It is agreed that the Company
will not require the Investor to provide opinions of counsel for transactions
made pursuant to Rule 144 provided that Investor and Investor's broker, if
necessary, provide the Company with the necessary representations for counsel to
the Company to issue an opinion with respect to such transaction.
The Investor is entering into this Agreement for its own
account and the Investor has no present arrangement (whether or not legally
binding) at any time to sell the Common Stock to or through any person or
entity; provided, however, that by making the representations herein, the
Investor does not agree to hold the Common Stock for any minimum or other
specific term and reserves the right to dispose of the Common Stock at any time
in accordance with federal and state securities laws applicable to such
disposition.
3.4 DUE AUTHORIZATION.
3.4.1 AUTHORITY. The person executing this Investment
Agreement, if executing this Agreement in a representative or fiduciary
capacity, has full power and authority to execute and deliver this Agreement and
each other document included herein for which a signature is required in such
capacity and on behalf of the subscribing individual, partnership, trust,
estate, corporation or other entity for whom or which Investor is executing this
Agreement. Investor has reached the age of majority (if an individual) according
to the laws of the state in which he or she resides.
3.4.2 DUE AUTHORIZATION. Investor is duly and validly
organized, validly existing and in good standing as a limited liability company
under the laws of Georgia with full power and authority to purchase the
Securities to be purchased by Investor and to execute and deliver this
Agreement.
3.4.3 PARTNERSHIPS. If Investor is a partnership, the
representations, warranties, agreements and understandings set forth above are
true with respect to all partners of Investor (and if any such partner is itself
a partnership, all persons holding an interest in such partnership, directly or
indirectly, including through one or more partnerships), and the person
executing this Agreement has made due inquiry to determine the truthfulness of
the representations and warranties made hereby.
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3.4.4 REPRESENTATIVES. If Investor is purchasing in a
representative or fiduciary capacity, the representations and warranties shall
be deemed to have been made on behalf of the person or persons for whom Investor
is so purchasing.
4. ACKNOWLEDGMENTS Investor is aware that:
4.1 RISKS OF INVESTMENT. Investor recognizes that an
investment in the Company involves substantial risks, including the potential
loss of Investor's entire investment herein. Investor recognizes that the
Disclosure Documents, this Agreement and the exhibits hereto do not purport to
contain all the information, which would be contained in a registration
statement under the Act;
4.2 NO GOVERNMENT APPROVAL. No federal or state agency has
passed upon the Securities, recommended or endorsed the Offering, or made any
finding or determination as to the fairness of this transaction;
4.3 NO REGISTRATION, RESTRICTIONS ON TRANSFER. As of the date
of this Agreement, the Securities and any component thereof have not been
registered under the Act or any applicable state securities laws by reason of
exemptions from the registration requirements of the Act and such laws, and may
not be sold, pledged (except for any limited pledge in connection with a margin
account of Investor to the extent that such pledge does not require registration
under the Act or unless an exemption from such registration is available and
provided further that if such pledge is realized upon, any transfer to the
pledgee shall comply with the requirements set forth herein), assigned or
otherwise disposed of in the absence of an effective registration of the
Securities and any component thereof under the Act or unless an exemption from
such registration is available;
4.4 RESTRICTIONS ON TRANSFER. Investor may not attempt to
sell, transfer, assign, pledge or otherwise dispose of all or any portion of the
Securities or any component thereof in the absence of either an effective
registration statement or an exemption from the registration requirements of the
Act and applicable state securities laws;
4.5 NO ASSURANCES OF REGISTRATION. There can be no assurance
that any registration statement will become effective at the scheduled time, or
ever, or remain effective when required, and Investor acknowledges that it may
be required to bear the economic risk of Investor's investment for an indefinite
period of time;
4.6 EXEMPT TRANSACTION. Investor understands that the
Securities are being offered and sold in reliance on specific exemptions from
the registration requirements of federal and state law and that the
representations, warranties, agreements, acknowledgments and understandings set
forth herein are being relied upon by the Company in determining the
applicability of such exemptions and the suitability of Investor to acquire such
Securities.
4.7 LEGENDS. The certificates representing the Put Shares
shall not bear a Restrictive Legend. The certificates representing the Warrant
Shares shall not bear a Restrictive Legend unless they are issued at a time when
the Registration Statement is not effective for resale. It is understood that
the certificates evidencing any Warrant Shares issued at a time when the
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Registration Statement is not effective for resale, subject to legend removal
under the terms of Section 6.8 below, shall bear the following legend (the
"Legend"):
"The securities represented hereby have not been registered under the
Securities Act of 1933, as amended, or applicable state securities
laws, nor the securities laws of any other jurisdiction. They may not
be sold or transferred in the absence of an effective registration
statement under those securities laws or pursuant to an exemption
therefrom."
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
makes the following representations and warranties to Investor (which shall be
true at the signing of this Agreement, and as of any such later date as
contemplated hereunder) and agrees with Investor that, except as set forth in
the "Schedule of Exceptions" attached hereto as EXHIBIT C:
5.1 ORGANIZATION, GOOD STANDING, AND QUALIFICATION. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Florida, USA and has all requisite corporate
power and authority to carry on its business as now conducted and as proposed to
be conducted. The Company is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure to so qualify would have a
material adverse effect on the business or properties of the Company and its
subsidiaries taken as a whole. The Company is not the subject of any pending,
threatened or, to its knowledge, contemplated investigation or administrative or
legal proceeding (a "Proceeding") by the Internal Revenue Service, the taxing
authorities of any state or local jurisdiction, or the Securities and Exchange
Commission, The National Association of Securities Dealer, Inc., The Nasdaq
Stock Market, Inc. or any state securities commission, or any other governmental
entity, which have not been disclosed in the Disclosure Documents. None of the
disclosed Proceedings, if any, will have a material adverse effect upon the
Company or the market for the Common Stock. The Company does not have any
subsidiaries as of the date of this Agreement.
5.2 CORPORATE CONDITION. The Company's condition is, in all
material respects, as described in the Disclosure Documents (as further set
forth in any subsequently filed Disclosure Documents, if applicable), except for
changes in the ordinary course of business and normal year-end adjustments that
are not, in the aggregate, materially adverse to the Company. Except for
continuing losses, there have been no material adverse changes to the Company's
business, financial condition, or prospects since the dates of such Disclosure
Documents. The financial statements as contained in the 10-KSB and 10-QSB have
been prepared in accordance with generally accepted accounting principles,
consistently applied (except as otherwise permitted by Regulation S-X of the
Exchange Act), subject, in the case of unaudited interim financial statements,
to customary year end adjustments and the absence of certain footnotes, and
fairly present the financial condition of the Company as of the dates of the
balance sheets included therein and the consolidated results of its operations
and cash flows for the periods then ended,. Without limiting the foregoing,
there are no material liabilities, contingent or actual, that are not disclosed
in the Disclosure Documents (other than liabilities incurred by the Company in
the ordinary course of its business, consistent with its past practice, after
the period covered by the Disclosure Documents). The Company has paid all
material taxes that are due, except for taxes that it reasonably disputes. There
is no material claim, litigation, or administrative proceeding pending or, to
the best of the Company's knowledge, threatened against the Company, except as
disclosed in the Disclosure Documents. This Agreement and the Disclosure
Documents do not contain any untrue statement of a material fact and do not omit
to state any material fact required to be stated therein or herein necessary to
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make the statements contained therein or herein not misleading in the light of
the circumstances under which they were made. No event or circumstance exists
relating to the Company which, under applicable law, requires public disclosure
but which has not been so publicly announced or disclosed.
5.3 AUTHORIZATION. All corporate action on the part of the
Company by its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement, the performance of all
obligations of the Company hereunder and the authorization, issuance and
delivery of the Common Stock being sold hereunder and the issuance (and/or the
reservation for issuance) of the Warrants and the Warrant Shares have been
taken, and this Agreement and the Registration Rights Agreement constitute valid
and legally binding obligations of the Company, enforceable in accordance with
their terms, except insofar as the enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, or other similar laws affecting
creditors' rights generally or by principles governing the availability of
equitable remedies. The Company has obtained all consents and approvals required
for it to execute, deliver and perform each agreement referenced in the previous
sentence.
5.4 VALID ISSUANCE OF COMMON STOCK. The Common Stock and the
Warrants, when issued, sold and delivered in accordance with the terms hereof,
for the consideration expressed herein, will be validly issued, fully paid and
nonassessable and, based in part upon the representations of Investor in this
Agreement, will be issued in compliance with all applicable U.S. federal and
state securities laws. The Warrant Shares, when issued in accordance with the
terms of the Warrants, shall be duly and validly issued and outstanding, fully
paid and nonassessable, and based in part on the representations and warranties
of Investor, will be issued in compliance with all applicable U.S. federal and
state securities laws. The Put Shares, the Warrants and the Warrant Shares will
be issued free of any preemptive rights.
5.5 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
violation or default of any provisions of its Certificate of Incorporation or
Bylaws, each as amended and in effect on and as of the date of the Agreement, or
of any material provision of any material instrument or material contract to
which it is a party or by which it is bound or of any provision of any federal
or state judgment, writ, decree, order, statute, rule or governmental regulation
applicable to the Company, which would have a material adverse effect on the
Company's business or prospects, or on the performance of its obligations under
this Agreement or the Registration Rights Agreement. The execution, delivery and
performance of this Agreement and the other agreements entered into in
conjunction with the Offering and the consummation of the transactions
contemplated hereby and thereby will not (a) result in any such violation or be
in conflict with or constitute, with or without the passage of time and giving
of notice, either a default under any such provision, instrument or contract or
an event which results in the creation of any lien, charge or encumbrance upon
any assets of the Company, which would have a material adverse effect on the
Company's business or prospects, or on the performance of its obligations under
this Agreement, the Registration Rights Agreement, (b) violate the Company's
Certificate of Incorporation or By-Laws or (c) violate any statute, rule or
governmental regulation applicable to the Company which violation would have a
material adverse effect on the Company's business or prospects.
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5.6 REPORTING COMPANY. The Company is subject to the reporting
requirements of the Exchange Act, has a class of securities registered under
Section 12 of the Exchange Act, and has filed all reports required by the
Exchange Act since the date the Company first became subject to such reporting
obligations. The Company undertakes to furnish Investor with copies of such
reports as may be reasonably requested by Investor prior to consummation of this
Offering and thereafter, to make such reports available, for the full term of
this Agreement, including any extensions thereof, and for as long as Investor
holds the Securities. The Common Stock is duly listed on the O.T.C. Bulletin
Board. The Company is not in violation of the listing requirements of the O.T.C.
Bulletin Board and does not reasonably anticipate that the Common Stock will be
delisted by the O.T.C. Bulletin Board for the foreseeable future. The Company
has filed all reports required under the Exchange Act. The Company has not
furnished to the Investor any material nonpublic information concerning the
Company.
5.7 CAPITALIZATION. The capitalization of the Company as of
December __, 1999, is, and the capitalization as of the Closing, subject to
exercise of any outstanding warrants and/or exercise of any outstanding stock
options, after taking into account the offering of the Securities contemplated
by this Agreement and all other share issuances occurring prior to this
Offering, will be, as set forth in the Capitalization Schedule as set forth in
EXHIBIT K. There are no securities or instruments containing anti-dilution or
similar provisions that will be triggered by the issuance of the Securities.
Except as disclosed in the Capitalization Schedule, as of the date of this
Agreement, (i) there are no outstanding options, warrants, scrip, rights to
subscribe for, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into or exercisable or exchangeable for, any
shares of capital stock of the Company or any of its subsidiaries, or
arrangements by which the Company or any of its subsidiaries is or may become
bound to issue additional shares of capital stock of the Company or any of its
subsidiaries, and (ii) there are no agreements or arrangements under which the
Company or any of its subsidiaries is obligated to register the sale of any of
its or their securities under the Act (except the Registration Rights
Agreement).
5.8 INTELLECTUAL PROPERTY. The Company has valid, unrestricted
and exclusive ownership of or rights to use the patents, trademarks, trademark
registrations, trade names, copyrights, know-how, technology and other
intellectual property necessary to the conduct of its business. EXHIBIT M lists
all patents, trademarks, trademark registrations, trade names and copyrights of
the Company. The Company has granted such licenses or has assigned or otherwise
transferred a portion of (or all of) such valid, unrestricted and exclusive
patents, trademarks, trademark registrations, trade names, copyrights, know-how,
technology and other intellectual property necessary to the conduct of its
business as set forth in EXHIBIT M. The Company has been granted licenses,
know-how, technology and/or other intellectual property necessary to the conduct
of its business as set forth in EXHIBIT M. To the best of the Company's
knowledge after due inquiry, the Company is not infringing on the intellectual
property rights of any third party, nor is any third party infringing on the
Company's intellectual property rights. There are no restrictions in any
agreements, licenses, franchises, or other instruments that preclude the Company
from engaging in its business as presently conducted.
5.9 USE OF PROCEEDS. As of the date hereof, the Company
expects to use the proceeds from this Offering (less fees and expenses) for the
purposes and in the approximate amounts set forth on the Use of Proceeds
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Schedule set forth as EXHIBIT L hereto. These purposes and amounts are estimates
and are subject to change without notice to any Investor.
5.10 NO RIGHTS OF PARTICIPATION. No person or entity,
including, but not limited to, current or former stockholders of the Company,
underwriters, brokers, agents or other third parties, has any right of first
refusal, preemptive right, right of participation, or any similar right to
participate in the financing contemplated by this Agreement which has not been
waived.
5.11 COMPANY ACKNOWLEDGMENT. The Company hereby acknowledges
that Investor may elect to hold the Securities for various periods of time, as
permitted by the terms of this Agreement, the Warrants, and other agreements
contemplated hereby, and the Company further acknowledges that Investor has made
no representations or warranties, either written or oral, as to how long the
Securities will be held by Investor or regarding Investor's trading history or
investment strategies.
5.12 NO ADVANCE REGULATORY APPROVAL. The Company acknowledges
that this Investment Agreement, the transaction contemplated hereby and the
Registration Statement contemplated hereby have not been approved by the SEC, or
any other regulatory body and there is no guarantee that this Investment
Agreement, the transaction contemplated hereby and the Registration Statement
contemplated hereby will ever be approved by the SEC or any other regulatory
body. The Company is relying on its own analysis and is not relying on any
representation by Investor that either this Investment Agreement, the
transaction contemplated hereby or the Registration Statement contemplated
hereby has been or will be approved by the SEC or other appropriate regulatory
body.
5.13 UNDERWRITER'S FEES AND RIGHTS OF FIRST REFUSAL. The
Company is not obligated to pay any compensation or other fees, costs or related
expenditures in cash or securities to any underwriter, broker, agent or other
representative other than the Investor in connection with this Offering.
5.14 AVAILABILITY OF SUITABLE FORM FOR REGISTRATION. The
Company is currently eligible and agrees to maintain its eligibility to register
the resale of its Common Stock on a registration statement on a suitable form
under the Act.
5.15 NO INTEGRATED OFFERING. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any of the Company's securities or
solicited any offers to buy any security under circumstances that would prevent
the parties hereto from consummating the transactions contemplated hereby
pursuant to an exemption from registration under Regulation D of the Act or
would require the issuance of any other securities to be integrated with this
Offering under the Rules of Nasdaq. The Company has not engaged in any form of
general solicitation or advertising in connection with the offering of the
Common Stock or the Warrants.
5.16 FOREIGN CORRUPT PRACTICES. Neither the Company, nor any
of its subsidiaries, nor any director, officer, agent, employee or other person
acting on behalf of the Company or any subsidiary has, in the course of its
actions for, or on behalf of, the Company, used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful expenses relating
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to political activity; made any direct or indirect unlawful payment to any
foreign or domestic government official or employee from corporate funds;
violated or is in violation of any provision of the U.S. Foreign Corrupt
Practices Act of 1977, as amended; or made any bribe, rebate, payoff, influence
payment, kickback or other unlawful payment to any foreign or domestic
government official or employee.
5.17 KEY EMPLOYEES. Each "Key Employee" (as defined in EXHIBIT
N) is currently serving the Company in the capacity disclosed in EXHIBIT N. No
Key Employee, to the best knowledge of the Company and its subsidiaries, is, or
is now expected to be, in violation of any material term of any employment
contract, confidentiality, disclosure or proprietary information agreement,
non-competition agreement, or any other contract or agreement or any restrictive
covenant, and the continued employment of each Key Employee does not subject the
Company or any of its subsidiaries to any liability with respect to any of the
foregoing matters. No Key Employee has, to the best knowledge of the Company and
its subsidiaries, any intention to terminate his employment with, or services
to, the Company or any of its subsidiaries.
5.18 REPRESENTATIONS CORRECT. The foregoing representations,
warranties and agreements are true, correct and complete in all material
respects, and shall survive any Put Closing and the issuance of the shares of
Common Stock thereby.
5.19 TAX STATUS. The Company has made or filed all federal and
state income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject (unless and only to the extent that the
Company has set aside on its books provisions reasonably adequate for the
payment of all unpaid and unreported taxes) and has paid all taxes and other
governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and as set aside on its books provision reasonably
adequate for the payment of all taxes for periods subsequent to the periods to
which such returns, reports or declarations apply. There are no unpaid taxes in
any material amount claimed to be due by the taxing authority of any
jurisdiction, and the officers of the Company know of no basis for any such
claim.
5.20 TRANSACTIONS WITH AFFILIATES. Except as set forth in the
Disclosure Documents, none of the officers, directors, or employees of the
Company is presently a party to any transaction with the Company (other than for
services as employees, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or, to the
knowledge of the Company, any corporation, partnership, trust or other entity in
which any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner.
5.21 APPLICATION OF TAKEOVER PROTECTIONS. The Company and its
board of directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination or other
similar anti-takeover provision under Florida law which is or could become
applicable to the Investor as a result of the transactions contemplated by this
Agreement, including, without limitation, the issuance of the Common Stock, any
exercise of the Warrants and ownership of the Common Shares and Warrant Shares.
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The Company has not adopted and will not adopt any "poison pill" provision that
will be applicable to Investor as a result of transactions contemplated by this
Agreement.
5.22 OTHER AGREEMENTS. The Company has not, directly or
indirectly, made any agreements with the Investor under a subscription in the
form of this Agreement for the purchase of Common Stock, relating to the terms
or conditions of the transactions contemplated hereby or thereby except as
expressly set forth herein, respectively, or in exhibits hereto or thereto.
5.23 MAJOR TRANSACTIONS. There are no other Major Transactions
currently pending or contemplated by the Company.
5.24 FINANCINGS. There are no other financings currently
pending or contemplated by the Company.
5.25 SHAREHOLDER AUTHORIZATION. If required, the Company
shall, at its next annual shareholder meeting following its listing on either
the Nasdaq Small Cap Market or the Nasdaq National Market, or at a special
meeting to be held as soon as practicable thereafter, use its best efforts to
obtain approval of its shareholders to (i) authorize the issuance of the full
number of shares of Common Stock which would be issuable under this Agreement
and eliminate any prohibitions under applicable law or the rules or regulations
of any stock exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Company or any of its securities with
respect to the Company's ability to issue shares of Common Stock in excess of
the Cap Amount (such approvals being the "20% Approval") and (ii) the increase
in the number of authorized shares of Common Stock of the Company (the "Share
Authorization Increase Approval") such that at least 10,000,000 shares can be
reserved for this Offering. In connection with such shareholder vote, the
Company shall use its best efforts to cause all officers and directors of the
Company to promptly enter into irrevocable agreements to vote all of their
shares in favor of eliminating such prohibitions. As soon as practicable after
the 20% Approval and the Share Authorization Increase Approval, the Company
agrees to use its best efforts to reserve 10,000,000 shares of Common Stock for
issuance under this Agreement.
5.26 ACKNOWLEDGMENT OF LIMITATIONS ON PUT AMOUNTS. The Company
understands and acknowledges that the amounts available under this Investment
Agreement are limited, among other things, based upon the liquidity of the
Company's Common Stock traded on its Principal Market.
6. COVENANTS OF THE COMPANY
6.1 INDEPENDENT AUDITORS. The Company shall, until at least
the Termination Date, maintain as its independent auditors an accounting firm
authorized to practice before the SEC.
6.2 CORPORATE EXISTENCE AND TAXES. The Company shall, until at
least the Termination Date, maintain its corporate existence in good standing
and, remain a "Reporting Issuer" (defined as a Company which files periodic
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reports under the Exchange Act), remain a Reporting Issuer (provided, however,
that the foregoing covenant shall not prevent the Company from entering into any
merger or corporate reorganization as long as the surviving entity in such
transaction, if not the Company, assumes the Company's obligations with respect
to the Common Stock and has Common Stock listed for trading on a stock exchange
or on Nasdaq and is a Reporting Issuer) and shall pay all its taxes when due
except for taxes which the Company disputes.
6.3 REGISTRATION RIGHTS. The Company will enter into a
registration rights agreement covering the resale of the Common Shares and the
Warrant Shares substantially in the form of the Registration Rights Agreement
attached as EXHIBIT A.
6.4 ASSET TRANSFERS. The Company shall not (i) transfer, sell,
convey or otherwise dispose of any of its material assets to any entity other
than a wholly-owned subsidiary, except for a cash or cash equivalent
consideration and for a proper business purpose or (ii) transfer, sell, convey
or otherwise dispose of any of its material assets to any Affiliate, as defined
below, during the Term of this Agreement. For purposes hereof, "Affiliate" shall
mean any officer of the Company, director of the Company or owner of twenty
percent (20%) or more of the Common Stock or other securities of the Company.
6.5 RIGHTS OF FIRST REFUSAL.
6.5.1 CAPITAL RAISING LIMITATIONS. During the period
from the date of this Agreement until the date that is ninety (90) days after
the Termination Date, or if the Company terminates the Agreement, then until the
date that is thirty (30) days after the Company shall not issue or sell, or
agree to issue or sell Equity Securities (as defined below), for cash in private
capital raising transactions without obtaining the prior written approval of the
Investor of the Offering (the limitations referred to in this subsection 6.6.1
are collectively referred to as the "Capital Raising Limitations"). For purposes
hereof, the following shall be collectively referred to herein as, the "Equity
Securities": (i) Common Stock or any other equity securities, (ii) any debt or
equity securities which are convertible into, exercisable or exchangeable for,
or carry the right to receive additional shares of Common Stock or other equity
securities, or (iii) any securities of the Company pursuant to an equity line
structure or format similar in nature to this Offering. 6.5.2 INVESTOR'S RIGHT
OF FIRST REFUSAL. For any private capital raising transactions of Equity
Securities which close after the date hereof and on or prior to the date that is
one (1) year after the Termination Date of this Agreement, not including any
warrants issued in conjunction with this Investment Agreement, the Company
agrees to deliver to Investor, at least ten (10) days prior to the closing of
such transaction, written notice describing the proposed transaction, including
the terms and conditions thereof, and providing the Investor and its affiliates
an option during the ten (10) day period following delivery of such notice to
purchase the securities being offered in such transaction on the same terms as
contemplated by such transaction.
6.5.3 EXCEPTIONS TO RIGHTS OF FIRST REFUSAL.
Notwithstanding the above, the Rights of First Refusal shall not apply to any
transaction involving issuances of securities in connection with a merger,
consolidation, acquisition or sale of assets, or in connection with any
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strategic partnership or joint venture (the primary purpose of which is not to
raise equity capital), or in connection with the disposition or acquisition of a
business, product or license by the Company or exercise of options by employees,
consultants or directors.
6.7 FINANCIAL 10-KSB STATEMENTS, ETC. AND CURRENT REPORTS ON
FORM 8-K. The Company shall deliver to the Investor copies of its annual reports
on Form 10-KSB, and quarterly reports on Form 10-QSB and shall deliver to the
Investor current reports on Form 8-K within two (2) days of filing for the Term
of this Agreement.
6.7 OPINION OF COUNSEL. Investor shall, concurrent with the
Investment Commitment Closing, receive an opinion letter from the Company's
legal counsel, in the form attached as EXHIBIT B, or in such form as agreed upon
by the parties, and shall, concurrent with each Put Date, receive an opinion
letter from the Company's legal counsel, in the form attached as EXHIBIT I or in
such form as agreed upon by the parties.
6.8 REMOVAL OF LEGEND. If the certificates representing any
Securities are issued with a restrictive Legend in accordance with the terms of
this Agreement, the Legend shall be removed and the Company shall issue a
certificate without such Legend to the holder of any Security upon which it is
stamped, and a certificate for a security shall be originally issued without the
Legend, if (a) the sale of such Security is registered under the Act, or (b)
such holder provides the Company with an opinion of counsel, in form, substance
and scope customary for opinions of counsel in comparable transactions (the
reasonable cost of which shall be borne by the Investor), to the effect that a
public sale or transfer of such Security may be made without registration under
the Act, or (c) such holder provides the Company with reasonable assurances that
such Security can be sold pursuant to Rule 144. Each Investor agrees to sell all
Securities, including those represented by a certificate(s) from which the
Legend has been removed, or which were originally issued without the Legend,
pursuant to an effective registration statement and to deliver a prospectus in
connection with such sale or in compliance with an exemption from the
registration requirements of the Act.
6.9 LISTING. Subject to the remainder of this Section 6.9, the
Company shall ensure that its shares of Common Stock (including all Warrant
Shares and Put Shares) are listed and available for trading on the O.T.C.
Bulletin Board. Thereafter, the Company shall (i) use its best efforts to
continue the listing and trading of its Common Stock on the O.T.C. Bulletin
Board or to become eligible for and listed and available for trading on the
Nasdaq Small Cap Market, the NMS, or the New York Stock Exchange ("NYSE"); and
(ii) comply in all material respects with the Company's reporting, filing and
other obligations under the By-Laws or rules of the National Association of
Securities Dealers ("NASD") and such exchanges, as applicable.
6.10 THE COMPANY'S INSTRUCTIONS TO TRANSFER AGENT. The Company
will instruct the Transfer Agent of the Common Stock, by delivering instructions
in the form of EXHIBIT T hereto, to issue certificates, registered in the name
of each Investor or its nominee, for the Put Shares and Warrant Shares in such
amounts as specified from time to time by the Company upon any exercise by the
Company of a Put and/or exercise of the Warrants by the holder thereof. Such
certificates shall not bear a Legend unless issuance with a Legend is permitted
by the terms of this Agreement and Legend removal is not permitted by Section
6.8 hereof and the Company shall cause the Transfer Agent to issue such
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certificates without a Legend. Nothing in this Section shall affect in any way
Investor's obligations and agreement set forth in Sections 3.3.2 or 3.3.3 hereof
to resell the Securities pursuant to an effective registration statement and to
deliver a prospectus in connection with such sale or in compliance with an
exemption from the registration requirements of applicable securities laws. If
(a) an Investor provides the Company with an opinion of counsel, which opinion
of counsel shall be in form, substance and scope customary for opinions of
counsel in comparable transactions, to the effect that the Securities to be sold
or transferred may be sold or transferred pursuant to an exemption from
registration or (b) an Investor transfers Securities, pursuant to Rule 144, to a
transferee which is an accredited investor, the Company shall permit the
transfer, and, in the case of Put Shares and Warrant Shares, promptly instruct
its transfer agent to issue one or more certificates in such name and in such
denomination as specified by such Investor. The Company acknowledges that a
breach by it of its obligations hereunder will cause irreparable harm to an
Investor by vitiating the intent and purpose of the transaction contemplated
hereby. Accordingly, the Company acknowledges that the remedy at law for a
breach of its obligations under this Section 6.10 will be inadequate and agrees,
in the event of a breach or threatened breach by the Company of the provisions
of this Section 6.10, that an Investor shall be entitled, in addition to all
other available remedies, to an injunction restraining any breach and requiring
immediate issuance and transfer, without the necessity of showing economic loss
and without any bond or other security being required.
6.11 STOCKHOLDER 20% APPROVAL. Prior to the closing of any Put
that would cause the Aggregate Issued Shares to exceed the Cap Amount, if
required by the rules of NASDAQ because the Company's Common Stock is listed on
NASDAQ, the Company shall obtain approval of its stockholders to authorize (i)
the issuance of the full number of shares of Common Stock which would be
issuable pursuant to this Agreement but for the Cap Amount and eliminate any
prohibitions under applicable law or the rules or regulations of any stock
exchange, interdealer quotation system or other self-regulatory organization
with jurisdiction over the Company or any of its securities with respect to the
Company's ability to issue shares of Common Stock in excess of the Cap Amount
(such approvals being the "Stockholder 20% Approval").
6.12 PRESS RELEASE. The Company agrees that the Investor shall
have the right to review and comment upon any press release issued by the
Company in connection with the Offering which approval shall not be unreasonably
withheld by Investor.
6.13 CHANGE IN LAW OR POLICY. In the event of a change in law,
or policy of the SEC, as evidenced by a No-Action letter or other written
statements of the SEC or the NASD which causes the Investor to be unable to
perform its obligations hereunder, this Agreement shall be automatically
terminated and no further Commitment Fees shall be due.
7. INVESTOR COVENANT/MISCELLANEOUS.
7.1 REPRESENTATIONS AND WARRANTIES SURVIVE THE CLOSING;
SEVERABILITY. Investor's and the Company's representations and warranties shall
survive the Investment Date and any Put Closing contemplated by this Agreement
notwithstanding any due diligence investigation made by or on behalf of the
party seeking to rely thereon. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
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unenforceable or void, or is altered by a term required by the Securities
Exchange Commission to be included in the Registration Statement, this Agreement
shall continue in full force and effect without said provision; provided that if
the removal of such provision materially changes the economic benefit of this
Agreement to the Investor, this Agreement shall terminate.
7.2 SUCCESSORS AND ASSIGNS. This Agreement shall not be
assignable without the Company's written consent. If assigned, the terms and
conditions of this Agreement shall inure to the benefit of and be binding upon
the respective successors and assigns of the parties. Nothing in this Agreement,
express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement. Investor may assign Investor's rights
hereunder, in connection with any private sale of the Common Stock of such
Investor, so long as, as a condition precedent to such transfer, the transferee
executes an acknowledgment agreeing to be bound by the applicable provisions of
this Agreement in a form acceptable to the Company and provides an original copy
of such acknowledgment to the Company.
7.3 EXECUTION IN COUNTERPARTS PERMITTED. This Agreement may be
executed in any number of counterparts, each of which shall be enforceable
against the parties actually executing such counterparts, and all of which
together shall constitute one (1) instrument.
7.4 TITLES AND SUBTITLES; GENDER. The titles and subtitles
used in this Agreement are used for convenience only and are not to be
considered in construing or interpreting this Agreement. The use in this
Agreement of a masculine, feminine or neither pronoun shall be deemed to include
a reference to the others.
7.5 WRITTEN NOTICES, ETC. Any notice, demand or request
required or permitted to be given by the Company or Investor pursuant to the
terms of this Agreement shall be in writing and shall be deemed given when
delivered personally, or by facsimile or upon receipt if by overnight or two (2)
day courier, addressed to the parties at the addresses and/or facsimile
telephone number of the parties set forth at the end of this Agreement or such
other address as a party may request by notifying the other in writing;
provided, however, that in order for any notice to be effective as to the
Investor such notice shall be delivered and sent, as specified herein, to all
the addresses and facsimile telephone numbers of the Investor set forth at the
end of this Agreement or such other address and/or facsimile telephone number as
Investor may request in writing.
7.6 EXPENSES. Except as set forth in the Registration Rights
Agreement, each of the Company and Investor shall pay all costs and expenses
that it respectively incurs, with respect to the negotiation, execution,
delivery and performance of this Agreement.
7.7 ENTIRE AGREEMENT; WRITTEN AMENDMENTS REQUIRED. This
Agreement, including the Exhibits attached hereto, the Common Stock
certificates, the Warrants, the Registration Rights Agreement, and the other
documents delivered pursuant hereto constitute the full and entire understanding
and agreement between the parties with regard to the subjects hereof and
thereof, and no party shall be liable or bound to any other party in any manner
by any warranties, representations or covenants, whether oral, written, or
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otherwise except as specifically set forth herein or therein. Except as
expressly provided herein, neither this Agreement nor any term hereof may be
amended, waived, discharged or terminated other than by a written instrument
signed by the party against whom enforcement of any such amendment, waiver,
discharge or termination is sought.
7.8 ACTIONS AT LAW OR EQUITY; JURISDICTION AND VENUE. The
parties acknowledge that any and all actions, whether at law or at equity, and
whether or not said actions are based upon this Agreement between the parties
hereto, shall be filed in any state or federal court sitting in Atlanta,
Georgia. Georgia law shall govern both the proceeding as well as the
interpretation and construction of the Transaction Documents and the transaction
as a whole. In any litigation between the parties hereto, the prevailing party,
as found by the court, shall be entitled to an award of all attorney's fees and
costs of court. Should the court refuse to find a prevailing party, each party
shall bear its own legal fees and costs.
8. SUBSCRIPTION AND WIRING INSTRUCTIONS; IRREVOCABILITY.
8.1 SUBSCRIPTION
(a) WIRE TRANSFER OF SUBSCRIPTION FUNDS. Investor shall
deliver Put Dollar Amounts (as payment towards any
Put Share Price) by wire transfer, to the Company
pursuant to a wire instruction letter to be provided
by the Company, and signed by the Company.
(b) IRREVOCABLE SUBSCRIPTION. Investor hereby
acknowledges and agrees, subject to the provisions of
any applicable laws providing for the refund of
subscription amounts submitted by Investor, that this
Agreement is irrevocable and that Investor is not
entitled to cancel, terminate or revoke this
Agreement or any other agreements executed by such
Investor and delivered pursuant hereto, and that this
Agreement and such other agreements shall survive the
death or disability of such Investor and shall be
binding upon and inure to the benefit of the parties
and their heirs, executors, administrators,
successors, legal representatives and assigns. If the
Securities subscribed for are to be owned by more
than one person, the obligations of all such owners
under this Agreement shall be joint and several, and
the agreements, representations, warranties and
acknowledgments herein contained shall be deemed to
be made by and be binding upon each such person and
his heirs, executors, administrators, successors,
legal representatives and assigns.
8.2 ACCEPTANCE OF SUBSCRIPTION. Ownership of the number
of securities purchased hereby will pass to Investor upon the Warrant Closing or
any Put Closing.
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9. INDEMNIFICATION.
In consideration of the Investor's execution and delivery of the
Investment Agreement, the Registration Rights Agreement and the Warrants (the
"Transaction Documents") and acquiring the Securities thereunder and in addition
to all of the Company's other obligations under the Transaction Documents, the
Company, subject to an absence of a finding of gross negligence or fraud on
behalf of Indemnitees, as defined below, by an administrative tribunal or court
of competent jurisdiction, shall defend, protect, indemnify and hold harmless
Investor and all of its stockholders, officers, directors, employees and direct
or indirect investors and any of the foregoing person's agents, members,
partners or other representatives (including, without limitation, those retained
in connection with the transactions contemplated by this Agreement)
(collectively, the "Indemnitees") from and against any and all actions, causes
of action, suits, claims, losses, costs, penalties, fees, liabilities and
damages, and expenses in connection therewith (irrespective of whether any such
Indemnitee is a party to the action for which indemnification hereunder is
sought), and including reasonable attorney's fees and disbursements (the
"Indemnified Liabilities"), incurred by any Indemnitee as a result of, or
arising out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Company in the Transaction Documents or
any other certificate, instrument or documents contemplated hereby or thereby,
(b) any breach of any covenant, agreement or obligation of the Company contained
in the Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby, (c) any cause of action, suit or claim,
derivative or otherwise, by any stockholder of the Company based on a breach or
alleged breach by the Company or any of its officers or directors of their
fiduciary or other obligations to the stockholders of the Company, or (d) claims
made by third parties against any of the Indemnitees based on a violation of
Section 5 of the Securities Act caused by the integration of the private sale of
common stock to the Investor and the public offering pursuant to the
Registration Statement.
To the extent that the foregoing undertaking by the Company may be
unenforceable for any reason, the Company shall make the maximum contribution to
the payment and satisfaction of each of the Indemnified Liabilities which it
would be required to make if such foregoing undertaking was enforceable which is
permissible under applicable law.
Promptly after receipt by an Indemnified Party of notice of the
commencement of any action pursuant to which indemnification may be sought, such
Indemnified Party will, if a claim in respect thereof is to be made against the
other party (hereinafter "Indemnitor") under this Section 9, deliver to the
Indemnitor a written notice of the commencement thereof and the Indemnitor shall
have the right to participate in and to assume the defense thereof with counsel
reasonably selected by the Indemnitor, provided, however, that an Indemnified
Party shall have the right to retain its own counsel, with the reasonably
incurred fees and expenses of such counsel to be paid by the Indemnitor, if
representation of such Indemnified Party by the counsel retained by the
Indemnitor would be inappropriate due to actual or potential conflicts of
interest between such Indemnified Party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
Indemnitor within a reasonable time of the commencement of any such action, if
prejudicial to the Indemnitor's ability to defend such action, shall relieve the
Indemnitor of any liability to the Indemnified Party under this Section 9, but
the omission to so deliver written notice to the Indemnitor will not relieve it
of any liability that it may have to any Indemnified Party other than under this
Section 9 to the extent it is prejudicial.
37
<PAGE>
Investor shall indemnify Company for any actions taken by Investor that
are found by the Securities & Exchange Administration to be violative of Section
4(2) and thus ruin the 4(2) exemption or to cause integration of the private
sale and the public offering. In addition, Investor shall indemnify Company, in
the same manner as Company agrees to indemnify Investor, for acts on the part of
the Investor that are found to violate clauses (a) or (b) above.
[INTENTIONALLY LEFT BLANK]
38
<PAGE>
10. ACCREDITED INVESTOR. Investor is an "accredited investor"
because (check all applicable boxes):
(a) [ ] it is an organization described in Section 501(c)(3)
of the Internal Revenue Code, or a corporation,
limited duration company, limited liability company,
business trust, or partnership not formed for the
specific purpose of acquiring the securities offered,
with total assets in excess of $5,000,000.
(b) [ ] any trust, with total assets in excess of $5,000,000,
not formed for the specific purpose of acquiring the
securities offered, whose purchase is directed by a
sophisticated person who has such knowledge and
experience in financial and business matters that he
is capable of evaluating the merits and risks of the
prospective investment.
(c) [ ] a natural person, who
[ ] is a director, executive officer or general partner
of the issuer of the securities being offered or sold
or a director, executive officer or general partner
of a general partner of that issuer.
[ ] has an individual net worth, or joint net worth with
that person's spouse, at the time of his purchase
exceeding $1,000,000.
[ ] had an individual income in excess of $200,000 in
each of the two most recent years or joint income
with that person's spouse in excess of $300,000 in
each of those years and has a reasonable expectation
of reaching the same income level in the current
year.
(d) [ ] an entity each equity owner of which is an entity
described in a - b above or is an individual who
could check one (1) of the last three (3) boxes under
subparagraph (c) above.
(e) [ ] other [specify] ____________________________________.
39
<PAGE>
The undersigned hereby subscribes the Maximum Offering Amount and
acknowledges that this Agreement and the subscription represented hereby shall
not be effective unless accepted by the Company as indicated below.
IN WITNESS WHEREOF, the undersigned Investor does represent and certify
under penalty of perjury that the foregoing statements are true and correct and
that Investor by the following signature(s) executed this Agreement.
Dated this _____ day of January 2000.
- - ------------------------------------ ------------------------------------
Your Signature PRINT EXACT NAME IN WHICH YOU WANT
THE SECURITIES TO BE REGISTERED
- - ------------------------------------ SECURITY DELIVERY INSTRUCTIONS:
Name: Please Print Please type or print address where
your security is to be delivered
- - ------------------------------------ ATTN: ______________________________
Title/Representative Capacity
(if applicable)
- - ------------------------------------ ------------------------------------
Name of Company You Represent Street Address
(if applicable)
- - ------------------------------------ ------------------------------------
Place of Execution of this Agreement City, State or Province, Country,
Offshore Postal Code
NOTICE DELIVERY INSTRUCTIONS: WITH A COPY DELIVERED TO:
Please print address where any Notice Please print address where Copy is
is to be delivered to be delivered
ATTN: ATTN:
- - ------------------------------------ ------------------------------------
- - ------------------------------------ ------------------------------------
Street Address Street Address
- - ------------------------------------
- - ------------------------------------
City, State or Province, Country, Offshore City, State or Country, Offshore
Postal Code Postal Code
Telephone: __________________________ Telephone: _________________________
Facsimile: __________________________ Facsimile: _________________________
Facsimile: __________________________ Facsimile: _________________________
THIS AGREEMENT IS ACCEPTED BY THE COMPANY IN THE AMOUNT OF THE MAXIMUM OFFERING
AMOUNT ON THE ____ DAY OF JANUARY 2000.
MERCHANTONLINE.COM, INC.
By: /s/ TAREK KIRSCHEN
-------------------------------------
Tarek Kirschen, President and CEO
Address:
Attn: Tarek Kirschen
President and CEO
1600 S. Dixie Hwy, Suite 300
Boca Raton, FL 33432
Telephone: (561) 395-3585
Facsimile: (561) 395-4241
40
<PAGE>
ADVANCE PUT NOTICE
MERCHANTONLINE.COM, INC. (the "Company") hereby intends, subject to the
Individual Put Limit (as defined in the Investment Agreement), to elect to
exercise a Put to sell the number of shares of Common Stock of the Company
specified below, to _____________________________, the Investor, as of the
Intended Put Date written below, all pursuant to that certain Investment
Agreement (the "Investment Agreement") by and between the Company and Swartz
Private Equity, LLC dated on or about January, 2000.
Date of Advance Put Notice: ___________________
Intended Put Date :___________________________
Intended Put Share Amount: __________________
Company Designation Maximum Put Dollar Amount (Optional):
Company Designation Minimum Put Share Price (Optional):
MERCHANTONLINE.COM, INC.
By:
-----------------------------------
Tarek Kirschen, President and CEO
Address:
Attn: Tarek Kirschen
President and CEO
1600 S. Dixie Hwy, Suite 300
Boca Raton, FL 33432
Telephone: (561) 395-3585
Facsimile: (561) 395-4241
41
<PAGE>
EXHIBIT E
42
<PAGE>
CONFIRMATION OF ADVANCE PUT NOTICE
_________________________________, the Investor, hereby confirms receipt of
MERCHANTONLINE.COM, INC.'S (the "Company") Advance Put Notice on the Advance Put
Date written below, and its intention to elect to exercise a Put to sell shares
of common stock ("Intended Put Share Amount") of the Company to the Investor, as
of the intended Put Date written below, all pursuant to that certain Investment
Agreement (the "Investment Agreement") by and between the Company and Swartz
Private Equity, LLC dated on or about January , 2000.
Date of Confirmation: ____________________
Date of Advance Put Notice: _______________
Intended Put Date: ________________________
Intended Put Share Amount: ________________
Company Designation Maximum Put Dollar Amount (Optional):
__________________________________________.
Company Designation Minimum Put Share Price (Optional):
__________________________________________.
INVESTOR(S)
_________________________________________
Investor's Name
By: _____________________________________
(Signature)
Address:_________________________________
_________________________________________
_________________________________________
_________________________________________
Telephone No.: __________________________
Facsimile No.: _________________________
43
<PAGE>
EXHIBIT F
44
<PAGE>
PUT NOTICE
MERCHANTONLINE.COM, INC. (the "Company") hereby elects to exercise a Put to sell
shares of common stock ("Common Stock") of the Company to
_____________________________, the Investor, as of the Put Date, at the Put
Share Price and for the number of Put Shares written below, all pursuant to that
certain Investment Agreement (the "Investment Agreement") by and between the
Company and Swartz Private Equity, LLC dated on or about January, 2000.
Put Date :_________________
Intended Put Share Amount (from Advance Put
Notice):_________________ Common Shares
Company Designation Maximum Put Dollar
Amount (Optional):
________________________________________.
Company Designation Minimum Put Share Price
(Optional):
________________________________________.
Note: Capitalized terms shall have the meanings ascribed to them in this
Investment Agreement.
MERCHANTONLINE.COM, INC.
By: /s/ TAREK KIRSCHEN
--------------------------------------
Tarek Kirschen, President and CEO
Address:
Attn: Tarek Kirschen
President and CEO
1600 S. Dixie Hwy, Suite 300
Boca Raton, FL 33432
Telephone: (561) 395-3585
Facsimile: (561) 395-4241
45
<PAGE>
EXHIBIT G
46
<PAGE>
CONFIRMATION OF PUT NOTICE
_________________________________, the Investor, hereby confirms receipt of
MERCHANTONLINE.COM, INC. (the "Company") Put Notice and election to exercise a
Put to sell ___________________________ shares of common stock ("Common Stock")
of the Company to Investor, as of the Put Date, all pursuant to that certain
Investment Agreement (the "Investment Agreement") by and between the Company and
Swartz Private Equity, LLC dated on or about January, 2000.
Date of this Confirmation: ________________
Put Date :_________________
Number of Put Shares of
Common Stock to be Issued: _____________
Volume Evaluation Period:_____ Business Days
Pricing Period: _____ Business Days
INVESTOR(S)
Investor's Name
By: _________________________________________
(Signature)
Address:_____________________________________
_____________________________________________
_____________________________________________
_____________________________________________
Telephone No.: ______________________________
Facsimile No.: ______________________________
47
<PAGE>
EXHIBIT H
48
<PAGE>
PUT CANCELLATION NOTICE
MERCHANTONLINE.COM, INC. (the "Company") hereby cancels the Put specified below,
pursuant to that certain Investment Agreement (the "Investment Agreement") by
and between the Company and Swartz Private Equity, LLC dated on or about
DECEMBER___, 1999, as of the close of trading on the date specified below (the
"Cancellation Date," which date must be on or after the date that this notice is
delivered to the Investor), provided that such cancellation shall not apply to
the number of shares of Common Stock equal to the Truncated Put Share Amount (as
defined in the Investment Agreement).
Cancellation Date: _____________________
Put Date of Put Being Canceled: __________
Number of Shares Put on Put Date: _________
Reason for Cancellation (check one):
[ ] Material Facts, Ineffective Registration
Period.
[ ] Delisting Event
The Company understands that, by canceling this Put, it must give twenty (20)
Business Days advance written notice to the Investor before effecting the next
Put.
MERCHANTONLINE.COM, INC.
By: /s/ TAREK KIRSCHEN
-------------------------------------
Tarek Kirschen, President and CEO
Address:
Attn: Tarek Kirschen
President and CEO
1600 S. Dixie Hwy, Suite 300
Boca Raton, FL 33432
Telephone: (561) 395-3585
Facsimile: (561) 395-4241
49
<PAGE>
EXHIBIT Q
50
<PAGE>
PUT CANCELLATION NOTICE CONFIRMATION
The undersigned Investor to that certain Investment Agreement (the "Investment
Agreement") by and between the MERCHANTONLINE.COM, INC.'s, and Swartz Private
Equity, LLC dated on or about DECEMBER ___, 1999, hereby confirms receipt of
MERCHANTONLINE.COM, INC.'S (the "Company") Put Cancellation Notice, and confirms
the following:
DATE OF THIS CONFIRMATION: __________
PUT CANCELLATION DATE: ______________
INVESTOR(S)
_____________________________________
Investor's Name
By: _________________________________
(Signature)
Address:____________________________________
____________________________________
Telephone No.: _____________________________
Facsimile No.: _____________________________
51
<PAGE>
EXHIBIT S
52
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is entered into as
of January, 2000, by and among MerchantOnline.com, Inc., a corporation duly
incorporated and existing under the laws of the State of Florida (the "Company")
and the subscriber as named on the signature page hereto (hereinafter referred
to as "Subscriber").
RECITALS:
WHEREAS, pursuant to the Company's offering ("Offering") of up to
Thirty Five Million Dollars ($35,000,000), excluding any funds paid upon
exercise of the Warrants, of Common Stock of the Company pursuant to that
certain Investment Agreement of even date herewith (the "Investment Agreement")
between the Company and the Subscriber, the Company has agreed to sell and the
Subscriber has agreed to purchase, from time to time as provided in the
Investment Agreement, shares of the Company's Common Stock for a maximum
aggregate offering amount of Thirty Five Million Dollars ($35,000,000);
WHEREAS, pursuant to the terms of the Investment Agreement, the Company
has agreed to issue to the Subscriber, from time to time, Commitment Warrants
and Purchase Warrants, each as defined in the Investment Agreement, to purchase
a number of shares of Common Stock, exercisable for five (5) years from their
respective dates of issuance (collectively, the "Subscriber Warrants" or the
"Warrants"); and
WHEREAS, pursuant to the terms of the Investment Agreement, the Company
has agreed to provide the Subscriber with certain registration rights with
respect to the Common Stock to be issued in the Offering and the Common Stock
issuable upon exercise of the Subscriber Warrants as set forth in this
Registration Rights Agreement.
TERMS:
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in Agreement and
for other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties hereto agree as follows:
1. CERTAIN DEFINITIONS. As used in this Agreement (including the
Recitals above), the following terms shall have the following meanings (such
meanings to be equally applicable to both singular and plural forms of the terms
defined):
"1934 Act" shall mean the Securities Exchange Act of 1934, as
amended, together with the rules and regulations promulgated thereunder.
"Additional Registration Statement" shall have the meaning set
forth in Section 3(b).
"Amended Registration Statement" shall have the meaning set
forth in Section 3(b).
1
<PAGE>
"Business Day" shall have the meaning set forth in the
Investment Agreement.
"Closing Bid Price" shall have the meaning set forth in the
Investment Agreement.
"Common Stock" shall mean the common stock, par value $0.01,
of the Company.
"Due Date" shall mean the date that is one hundred twenty
(120) days after the date of this Agreement.
"Effective Date" shall have the meaning set forth in Section
2.4.
"Filing Date" shall mean the date that is forty-five (45) days
after the date of this Agreement.
"Holder" shall mean Subscriber, and any other person or entity
owning or having the right to acquire Registrable Securities or any permitted
assignee thereof;
"Piggyback Registration" and "Piggyback Registration
Statement" shall have the meaning set forth in Section 4.
"Put" shall have the meaning as set forth in the Investment
Agreement.
"Register," "Registered," and "Registration" shall mean and
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act of 1933, as
amended (the "Act"), and pursuant to Rule 415 under the Act or any successor
rule, and the declaration or ordering of effectiveness of such registration
statement or document.
"Registrable Securities" shall have the meaning set forth in
Section 2.1.
"Registration Statement" shall have the meaning set forth in
Section 2.2.
"Rule 144" shall mean Rule 144, as amended, promulgated under
the Act.
"Subscriber" shall have the meaning set forth in the preamble
to this Agreement.
"Subscriber Warrants" shall have the meaning set forth in the
above Recitals.
"Investment Agreement" shall have the meaning set forth in the
Recitals hereto.
"Supplemental Registration Statement" shall have the meaning
set forth in Section 3(b).
2
<PAGE>
"Warrants" shall have the meaning set forth in the above
Recitals.
"Warrant Shares" shall mean shares of Common Stock issuable
upon exercise of any Warrant.
2. REQUIRED REGISTRATION.
2.1 REGISTRABLE SECURITIES. "Registrable Securities" shall
mean those shares of the Common Stock of the Company together with any capital
stock issued in replacement of, in exchange for or otherwise in respect of such
Common Stock, that are: (i) issuable or issued to the Subscriber pursuant to the
Investment Agreement or in this Agreement, and (ii) issuable or issued upon
exercise of the Subscriber Warrants; provided, however, that notwithstanding the
above, the following shall not be considered Registrable Securities:
(a) any Common Stock which would otherwise be deemed to be
Registrable Securities, if and to the extent that those shares of Common Stock
may be resold in a public transaction without volume limitations or other
material restrictions without registration under the Act, including without
limitation, pursuant to Rule 144 under the Act; and
(b) any shares of Common Stock which have been sold in a
private transaction in which the transferor's rights under this Agreement are
not assigned.
2.2 FILING OF INITIAL REGISTRATION STATEMENT. The Company
shall, by the Filing Date, file a registration statement ("Registration
Statement") on Form S-1 (or other suitable form, at the Company's discretion,
but subject to the reasonable approval of Subscriber), covering the resale of a
number of shares of Common Stock as Registrable Securities equal to at least Ten
Million (10,000,000) shares of Common Stock and shall cover, to the extent
allowed by applicable law, such indeterminate number of additional shares of
Common Stock that may be issued or become issuable as Registrable Securities by
the Company pursuant to Rule 416 of the Act.
2.3 [INTENTIONALLY LEFT BLANK].
2.4 REGISTRATION EFFECTIVE DATE. The Company shall use its
best efforts to have the Registration Statement declared effective by the SEC
(the date of such effectiveness is referred to herein as the "Effective Date")
by the Due Date.
2.5 [INTENTIONALLY LEFT BLANK].
2.6 [INTENTIONALLY LEFT BLANK].
2.7 SHELF REGISTRATION. The Registration Statement shall be
prepared as a "shelf" registration statement under Rule 415, and shall be
maintained effective until all Registrable Securities are resold pursuant to
such Registration Statement.
2.8 SUPPLEMENTAL REGISTRATION STATEMENT. Anytime the
Registration Statement does not cover a sufficient number of shares of Common
3
<PAGE>
Stock to cover all outstanding Registrable Securities, the Company shall
promptly prepare and file with the SEC such Supplemental Registration Statement
and the prospectus used in connection with such registration statement as may be
necessary to comply with the provisions of the Act with respect to the
disposition of all such Registrable Securities and shall use its best efforts to
cause such Supplemental Registration Statement to be declared effective as soon
as possible.
3. OBLIGATIONS OF THE COMPANY. Whenever required under this
Agreement to effect the registration of any Registrable Securities, the Company
shall, as expeditiously and reasonably possible:
(a) Prepare and file with the Securities and Exchange
Commission ("SEC") a Registration Statement with respect to such Registrable
Securities and use its best efforts to cause such Registration Statement to
become effective and to remain effective until all Registrable Securities are
resold pursuant to such Registration Statement.
(b) Prepare and file with the SEC such amendments and
supplements to such Registration Statement and the prospectus used in connection
with such Registration Statement ("Amended Registration Statement") or prepare
and file any additional registration statement ("Additional Registration
Statement," together with the Amended Registration Statement, "Supplemental
Registration Statements") as may be necessary to comply with the provisions of
the Act with respect to the disposition of all securities covered by such
Supplemental Registration Statements or such prior registration statement and to
cover the resale of all Registrable Securities.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
(d) Use its best efforts to register and qualify the
securities covered by such Registration Statement under such other securities or
Blue Sky laws of the jurisdictions in which the Holders are located, of such
other jurisdictions as shall be reasonably requested by the Holders of the
Registrable Securities covered by such Registration Statement and of all other
jurisdictions where legally required, provided that the Company shall not be
required in connection therewith or as a condition thereto to qualify to do
business or to file a general consent to service of process in any such states
or jurisdictions.
(e) [Intentionally Omitted].
(f) As promptly as practicable after becoming aware of such
event, notify each Holder of Registrable Securities of the happening of any
event of which the Company has knowledge, as a result of which the prospectus
included in the Registration Statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, use its best efforts
promptly to prepare a supplement or amendment to the Registration Statement to
correct such untrue statement or omission, and deliver a number of copies of
4
<PAGE>
such supplement or amendment to each Holder as such Holder may reasonably
request.
(g) Provide Holders with notice of the date that a
Registration Statement or any Supplemental Registration Statement registering
the resale of the Registrable Securities is declared effective by the SEC, and
the date or dates when the Registration Statement is no longer effective.
(h) Provide Holders and their representatives the opportunity
and a reasonable amount of time, based upon reasonable notice delivered by the
Company, to conduct a reasonable due diligence inquiry of Company's pertinent
financial and other records and make available its officers and directors for
questions regarding such information as it relates to information contained in
the Registration Statement.
(i) Provide Holders and their representatives the opportunity
to review the Registration Statement and all amendments or supplements thereto
prior to their filing with the SEC by giving the Holder at least ten (10)
business days advance written prior to such filing.
(j) Provide each Holder with prompt notice of the issuance by
the SEC or any state securities commission or agency of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceeding for such purpose. The Company shall use its best efforts to
prevent the issuance of any stop order and, if any is issued, to obtain the
removal thereof at the earliest possible date.
(k) Use its best efforts to list the Registrable Securities
covered by the Registration Statement with all securities exchanges or markets
on which the Common Stock is then listed and prepare and file any required
filing with the NASD, American Stock Exchange, NYSE and any other exchange or
market on which the Common Stock is listed.
4. [INTENTIONALLY LEFT BLANK].
5. [INTENTIONALLY LEFT BLANK].
6. DISPUTE AS TO REGISTRABLE SECURITIES. In the event the Company
believes that shares sought to be registered under Section 2 or Section 4 by
Holders do not constitute "Registrable Securities" by virtue of Section 2.1 of
this Agreement, and the status of those shares as Registrable Securities is
disputed, the Company shall provide, at its expense, an Opinion of Counsel,
reasonably acceptable to the Holders of the Securities at issue (and
satisfactory to the Company's transfer agent to permit the sale and transfer),
that those securities may be sold immediately, without volume limitation or
other material restrictions, without registration under the Act, by virtue of
Rule 144 or similar provisions.
7. FURNISH INFORMATION. At the Company's request, each Holder
shall furnish to the Company such information regarding Holder, the Registrable
Securities held by it, and the intended method of disposition of such securities
to the extent required to effect the registration of its Registrable Securities
or to determine that registration is not required pursuant to Rule 144 or other
applicable provision of the Act. The Company shall include all information
5
<PAGE>
provided by such Holder pursuant hereto in the Registration Statement,
substantially in the form supplied, except to the extent such information is not
permitted by law.
8. EXPENSES. All expenses, other than commissions and fees and
expenses of counsel to the selling Holders, incurred in connection with
registrations, filings or qualifications pursuant hereto, including (without
limitation) all registration, filing and qualification fees, printers' and
accounting fees, fees and disbursements of counsel for the Company, shall be
borne by the Company.
9. INDEMNIFICATION. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, the officers, directors, partners, and in-house
legal counsel of each Holder, any underwriter (as defined in the Act, or as
deemed by the Securities Exchange Commission, or as indicated in a registration
statement) for such Holder and each person, if any, who controls such Holder or
underwriter within the meaning of Section 15 of the Act or the Securities
Exchange Act of 1934, as amended (the "1934 Act"), against any losses, claims,
damages, or liabilities (joint or several) to which they may become subject
under the Act, the 1934 Act or other federal or state law, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements or omissions: (i) any
untrue statement or alleged untrue statement of a material fact contained in
such registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, or (ii)
the omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein not misleading, and
the Company will reimburse each such Holder, officer or director, underwriter or
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement contained
in this subsection 9(a) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability, or action if such settlement is effected
without the consent of the Company (which consent shall not be unreasonably
withheld), nor shall the Company be liable in any such case for any such loss,
claim, damage, liability, or action to the extent that it arises out of or is
based upon a violation which occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by any such Holder, officer, director, underwriter or controlling
person; provided however, that the above shall not relieve the Company from any
other liabilities which it might otherwise have.
(b) Promptly after receipt by an indemnified party under this
Section 9 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 9, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume, the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the reasonably incurred fees and
expenses of one such counsel to be paid by the indemnifying party, if
6
<PAGE>
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential conflicting
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if materially prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under
this Section 9, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 9.
(c) In the event that the indemnity provided in paragraph (a)
of this Section 9 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company and each Holder agree to
contribute to the aggregate claims, losses, damages and liabilities (including
legal or other expenses reasonably incurred in connection with investigating or
defending same) (collectively "Losses") to which the Company and one or more of
the Holders may be subject in such proportion as is appropriate to reflect the
relative fault of the Company and the Holders in connection with the statements
or omissions which resulted in such Losses. Relative fault shall be determined
by reference to whether any alleged untrue statement or omission relates to
information provided by the Company or by the Holders. The Company and the
Holders agree that it would not be just and equitable if contribution were
determined by pro rata allocation or any other method of allocation that does
not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this paragraph (d), no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this Section 9,
each person who controls a Holder of Registrable Securities within the meaning
of either the Securities Act or the Exchange Act and each director, officer,
partner, employee and agent of a Holder shall have the same rights to
contribution as such holder, and each person who controls the Company within the
meaning of either the Act or the Exchange Act and each director and officer of
the Company shall have the same rights to contribution as the Company, subject
in each case to the applicable terms and conditions of this paragraph (c).
(d) The obligations of the Company and Holders under this
Section 9 shall survive the resale, if any, of the Common Stock, the completion
of any offering of Registrable Securities in a Registration Statement under this
Agreement, and otherwise.
10. REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to
making available to the Holders the benefits of Rule 144 promulgated under the
Act and any other rule or regulation of the SEC that may at any time permit a
Holder to sell securities of the Company to the public without registration, the
Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144; and
(b) use its best efforts to file with the SEC in a timely
manner all reports and other documents required of the Company under the Act and
the 1934 Act.
11. AMENDMENT OF REGISTRATION RIGHTS. Any provision of this
Agreement may be amended and the observance thereof may be waived (either
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generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the written
consent of each Holder affected thereby. Any amendment or waiver effected in
accordance with this paragraph shall be binding upon each Holder, each future
Holder, and the Company.
12. NOTICES. All notices required or permitted under this
Agreement shall be made in writing signed by the party making the same, shall
specify the section under this Agreement pursuant to which it is given, and
shall be addressed if to (i) the Company at: Attn: Tarek Kirschen, President and
CEO; MerchantOnline.com, Inc.; 1600 S. Dixie Hwy., Suite 300, Boca Raton, FL
33432; Telephone: (561) 395-3585; Facsimile: (561) 395-4241 (or at such other
location as directed by the Company in writing) and (ii) the Holders at their
respective last address as the party as shown on the records of the Company. Any
notice, except as otherwise provided in this Agreement, shall be made by fax and
shall be deemed given at the time of transmission of the fax.
13. TERMINATION. This Agreement shall terminate on the date all
Registrable Securities cease to exist (as that term is defined in Section 2.1
hereof); but without prejudice to (i) the parties' rights and obligations
arising from breaches of this Agreement occurring prior to such termination (ii)
other indemnification obligations under this Agreement.
14. ASSIGNMENT. No assignment, transfer or delegation, whether by
operation of law or otherwise, of any rights or obligations under this Agreement
by the Company or any Holder, respectively, shall be made without the prior
written consent of the majority in interest of the Holders or the Company,
respectively; provided that the rights of a Holder may be transferred to a
subsequent holder of the Holder's Registrable Securities (provided such
transferee shall provide to the Company, together with or prior to such
transferee's request to have such Registrable Securities included in a
Registration, a writing executed by such transferee agreeing to be bound as a
Holder by the terms of this Agreement), and the Company hereby agrees to file an
amended registration statement or supplement including such transferee or a
selling security holder thereunder; and provided further that the Company may
transfer its rights and obligations under this Agreement to a purchaser of all
or a substantial portion of its business if the obligations of the Company under
this Agreement are assumed in connection with such transfer, either by merger or
other operation of law (which may include without limitation a transaction
whereby the Registrable Securities are converted into securities of the
successor in interest) or by specific assumption executed by the transferee.
15. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Florida applicable to
agreements made in and wholly to be performed in that jurisdiction, except for
matters arising under the Act or the Securities Exchange Act of 1934, which
matters shall be construed and interpreted in accordance with such laws.
16. EXECUTION IN COUNTERPARTS PERMITTED. This Agreement may be
executed in any number of counterparts, each of which shall be enforceable
against the parties actually executing such counterparts, and all of which
together shall constitute one (1) instrument.
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17. SPECIFIC PERFORMANCE. The Holder shall be entitled to the
remedy of specific performance in the event of the Company's breach of this
Agreement, the parties agreeing that a remedy at law would be inadequate.
18. INDEMNITY. Each party shall indemnify each other party against
any and all claims, damages (including reasonable attorney's fees), and expenses
arising out of the first party's breach of any of the terms of this Agreement.
19. ENTIRE AGREEMENT; WRITTEN AMENDMENTS REQUIRED. This Agreement,
the Investment Agreement, the Common Stock certificates, and the other documents
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof,
and no party shall be liable or bound to any other party in any manner by any
warranties, representations or
[INTENTIONALLY LEFT BLANK]
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covenants except as specifically set forth herein or therein. Except as
expressly provided herein, neither this Agreement nor any term hereof may be
amended, waived, discharged or terminated other than by a written instrument
signed by the party against whom enforcement of any such amendment, waiver,
discharge or termination is sought.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
this ___ day of January 2000.
MERCHANTONLINE.COM, INC.
By: /s/ TAREK KIRSCHEN
----------------------------------------
Tarek Kirschen, President and CEO
Address: Attn: Tarek Kirschen, President
and CEO
MerchantOnline.com, Inc.
1600 S. Dixie Hwy., Suite 300
Boca Raton, FL 33432
Telephone: (561) 395-3585
Facsimile: (561) 395-4241
SUBSCRIBER:
SWARTZ PRIVATE EQUITY, LLC.
By: /s/ ERIC S. SWARTZ
----------------------------------------
Eric S. Swartz, Manager
Address: 1080 Holcomb Bridge Road
Bldg. 200, Suite 285
Roswell, GA 30076
Telephone: (770) 640-8130
Facsimile: (770) 640-7150
10
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF OR EXERCISED UNLESS (i) A REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL
HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS
AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. HOLDERS MUST
RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT AND ASSESSMENT OF THE RISKS
INVOLVED. SEE THE RISK FACTORS SET FORTH UNDER THAT CERTAIN INVESTMENT AGREEMENT
BY AND BETWEEN THE COMPANY AND HOLDER REFERENCED THEREIN AS EXHIBIT J.
Warrant to Purchase
"N" shares Warrant Number ____
WARRANT TO PURCHASE COMMON STOCK
OF
MERCHANTONLINE.COM, INC.
THIS CERTIFIES that SWARTZ PRIVATE EQUITY, LLC or any subsequent holder
hereof ("Holder"), has the right to purchase from MerchantOnline.com, Inc. a
Florida corporation (the "Company"), up to "N" fully paid and nonassessable
shares, wherein "N" is defined below, of the Company's common stock, $0.001 par
value per share ("Common Stock"), subject to adjustment as provided herein, at a
price equal to the Exercise Price as defined in Section 3 below, at any time
beginning on the Date of Issuance (defined below) and ending at 5:00 p.m., New
York, New York time the date that is five (5) years after the Date of Issuance
(the "Exercise Period"); provided, that, with respect to each "Put," as that
term is defined in that certain Investment Agreement (the "Investment
Agreement") by and between the initial Holder and Company, dated on or about
January __, 2000, "N" shall equal ten percent (10%) of the number of shares of
Common Stock purchased by the Holder in that Put.
Holder agrees with the Company that this Warrant to Purchase Common
Stock of the Company (this "Warrant") is issued and all rights hereunder shall
be held subject to all of the conditions, limitations and provisions set forth
herein.
1. DATE OF ISSUANCE AND TERM.
This Warrant shall be deemed to be issued on _____________, ______
("Date of Issuance"). The term of this Warrant is five (5) years from the Date
of Issuance.
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2. EXERCISE.
(a) MANNER OF EXERCISE. During the Exercise Period, this Warrant may be
exercised as to all or any lesser number of full shares of Common Stock covered
hereby
EXHIBIT D
(the "Warrant Shares") upon surrender of this Warrant, with the Exercise Form
attached hereto as EXHIBIT A (the "Exercise Form") duly completed and executed,
together with the full Exercise Price (as defined below) for each share of
Common Stock as to which this Warrant is exercised, at the office of the
Company, Attention: Tarek Kirschen, President, MerchantOnline, Inc., 1600 S.
Dixie Hwy., Suite 300, Boca Raton, FL 33432; Telephone: (561) 395-3585;
Facsimile: (561) 395-4241, or at such other office or agency as the Company may
designate in writing, by overnight mail, with an advance copy of the Exercise
Form sent to the Company and its Transfer Agent by facsimile (such surrender and
payment of the Exercise Price hereinafter called the "Exercise of this
Warrant").
(b) DATE OF EXERCISE. The "Date of Exercise" of the Warrant shall be
defined as the date that the advance copy of the completed and executed Exercise
Form is sent by facsimile to the Company, provided that the original Warrant and
Exercise Form are received by the Company as soon as practicable thereafter.
Alternatively, the Date of Exercise shall be defined as the date the original
Exercise Form is received by the Company, if Holder has not sent advance notice
by facsimile. The Company shall not be required to deliver the shares of Common
Stock to the Holder until the requirements of Section 2(a) above are satisfied.
(c) CANCELLATION OF WARRANT. This Warrant shall be canceled upon the
Exercise of this Warrant, and, as soon as practical after the Date of Exercise,
Holder shall be entitled to receive Common Stock for the number of shares
purchased upon such Exercise of this Warrant, and if this Warrant is not
exercised in full, Holder shall be entitled to receive a new Warrant (containing
terms identical to this Warrant) representing any unexercised portion of this
Warrant in addition to such Common Stock.
(d) HOLDER OF RECORD. Each person in whose name any Warrant for shares
of Common Stock is issued shall, for all purposes, be deemed to be the Holder of
record of such shares on the Date of Exercise of this Warrant, irrespective of
the date of delivery of the Common Stock purchased upon the Exercise of this
Warrant. Nothing in this Warrant shall be construed as conferring upon Holder
any rights as a stockholder of the Company.
3. PAYMENT OF WARRANT EXERCISE PRICE.
The Exercise Price ("Exercise Price"), shall initially equal $Y per
share ("Initial Exercise Price"), where "Y" shall equal 110% of the Market Price
for the applicable Put (as each is defined in the Investment Agreement) or, if
the Date of Exercise is more than six (6) months after the Date of Issuance, the
lesser of (i) the Initial Exercise Price or (ii) the "Lowest Reset Price," as
that term is defined below. The Company shall calculate a "Reset Price" on each
six-month anniversary date of the Date of Issuance which shall equal one hundred
and ten percent (110%) of the average closing bid price of the Common Stock for
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the five (5) trading days ending on such six-month anniversary date of the Date
of Issuance. The "Lowest Reset Price" shall equal the lowest Reset Price
determined on any six-month anniversary date of the Date of Issuance preceding
the Date of Exercise, taking into account, as appropriate, any adjustments made
pursuant to Section 5 hereof.
Payment of the Exercise Price may be made by either of the following,
or a combination thereof, at the election of Holder:
(i) CASH EXERCISE: cash, bank or cashiers check or wire transfer;
or
(ii) CASHLESS EXERCISE: subject to the last sentence of this
Section 3, surrender of this Warrant at the principal office of the Company
together with notice of cashless election, in which event the Company shall
issue Holder a number of shares of Common Stock computed using the following
formula:
X = Y (A-B)/A
where: X = the number of shares of Common Stock to be issued to Holder.
Y = the number of shares of Common Stock for which this Warrant is
being exercised.
A = the Market Price of one (1) share of Common Stock (for
purposes of this Section 3(ii), the "Market Price" shall be
defined as the average Closing Bid Price of the Common Stock
for the five (5) trading days prior to the Date of Exercise of
this Warrant (the "Average Closing Price"), as reported by the
O.T.C. Bulletin Board, National Association of Securities
Dealers Automated Quotation System ("Nasdaq") Small Cap
Market, or if the Common Stock is not traded on the Nasdaq
Small Cap Market, the Average Closing Price in any other
over-the-counter market; provided, however, that if the Common
Stock is listed on a stock exchange, the Market Price shall be
the Average Closing Price on such exchange for the five (5)
trading days prior to the date of exercise of the Warrants. If
the Common Stock is/was not traded during the five (5) trading
days prior to the Date of Exercise, then the closing price for
the last publicly traded day shall be deemed to be the closing
price for any and all (if applicable) days during such five
(5) trading day period.
B = the Exercise Price.
For purposes hereof, the term "Closing Bid Price" shall mean the
closing bid price on the O.T.C. Bulletin Board, the National Market System
("NMS"), the New York Stock Exchange, the Nasdaq Small Cap Market, or if no
longer traded on the O.T.C. Bulletin Board, the NMS, the New York Stock
Exchange, the Nasdaq Small Cap Market, the "Closing Bid Price" shall equal the
closing price on the principal national securities exchange or the
over-the-counter system on which the Common Stock is so traded and, if not
3
<PAGE>
available, the mean of the high and low prices on the principal national
securities exchange on which the Common Stock is so traded.
For purposes of Rule 144 and sub-section (d)(3)(ii) thereof, it is
intended, understood and acknowledged that the Common Stock issuable upon
exercise of this Warrant in a cashless exercise transaction shall be deemed to
have been acquired at the time this Warrant was issued. Moreover, it is
intended, understood and acknowledged that the holding period for the Common
Stock issuable upon exercise of this Warrant in a cashless exercise transaction
shall be deemed to have commenced on the date this Warrant was issued.
Notwithstanding anything to the contrary contained herein, this Warrant
may not be exercised in a cashless exercise transaction if, on the Date of
Exercise, the shares of Common Stock to be issued upon exercise of this Warrant
would upon such issuance be then registered pursuant to an effective
registration statement filed pursuant to that certain Registration Rights
Agreement dated on or about January ____, 2000 by and among the Company and
certain investors, or otherwise be registered under the Securities Act of 1933,
as amended.
4
<PAGE>
4. TRANSFER AND REGISTRATION.
(a) TRANSFER RIGHTS. Subject to the provisions of Section 8 of this
Warrant, this Warrant may be transferred on the books of the Company, in whole
or in part, in person or by attorney, upon surrender of this Warrant properly
completed and endorsed. This Warrant shall be canceled upon such surrender and,
as soon as practicable thereafter, the person to whom such transfer is made
shall be entitled to receive a new Warrant or Warrants as to the portion of this
Warrant transferred, and Holder shall be entitled to receive a new Warrant as to
the portion hereof retained.
(b) REGISTRABLE SECURITIES. The Common Stock issuable upon the exercise
of this Warrant constitutes "Registrable Securities" under that certain
Registration Rights Agreement dated on or about January ___, 2000 between the
Company and certain investors and, accordingly, has the benefit of the
registration rights pursuant to that agreement.
5. ANTI-DILUTION ADJUSTMENTS.
(a) STOCK DIVIDEND. If the Company shall at any time declare a dividend
payable in shares of Common Stock, then Holder, upon Exercise of this Warrant
after the record date for the determination of holders of Common Stock entitled
to receive such dividend, shall be entitled to receive upon Exercise of this
Warrant, in addition to the number of shares of Common Stock as to which this
Warrant is exercised, such additional shares of Common Stock as such Holder
would have received had this Warrant been exercised immediately prior to such
record date and the Exercise Price will be proportionately adjusted.
(b) RECAPITALIZATION OR RECLASSIFICATION. If the Company shall at any
time effect a recapitalization, reclassification or other similar transaction of
such character that the shares of Common Stock shall be changed into or become
exchangeable for a larger or smaller number of shares, then upon the effective
date thereof, the number of shares of Common Stock which Holder shall be
entitled to purchase upon Exercise of this Warrant shall be increased or
decreased, as the case may be, in direct proportion to the increase or decrease
in the number of shares of Common Stock by reason of such recapitalization,
reclassification or similar transaction, and the Exercise Price shall be, in the
case of an increase in the number of shares, proportionally decreased and, in
the case of decrease in the number of shares, proportionally increased. The
Company shall give Holder the same notice it provides to holders of Common Stock
of any transaction described in this Section 5(b).
(c) DISTRIBUTIONS. If the Company shall at any time distribute for no
consideration to holders of Common Stock cash, evidences of indebtedness or
other securities or assets (other than cash dividends or distributions payable
out of earned surplus or net profits for the current or preceding years) then,
in any such case, Holder shall be entitled to receive, upon Exercise of this
Warrant, with respect to each share of Common Stock issuable upon such exercise,
the amount of cash or evidences of indebtedness or other securities or assets
which Holder would have been entitled to receive with respect to each such share
of Common Stock as a result of the happening of such event had this Warrant been
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<PAGE>
exercised immediately prior to the record date or other date fixing shareholders
to be affected by such event (the "Determination Date") or, in lieu thereof, if
the Board of Directors of the Company should so determine at the time of such
distribution, a reduced Exercise Price determined by multiplying the Exercise
Price on the Determination Date by a fraction, the numerator of which is the
result of such Exercise Price reduced by the value of such distribution
applicable to one share of Common Stock (such value to be determined by the
Board of Directors of the Company in its discretion) and the denominator of
which is such Exercise Price.
(d) NOTICE OF CONSOLIDATION OR MERGER. In the event of a merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event, as a result of which shares of Common Stock shall be changed into
the same or a different number of shares of the same or another class or classes
of stock or securities or other assets of the Company or another entity or there
is a sale of all or substantially all the Company's assets (a "Corporate
Change"), then this Warrant shall be exerciseable into such class and type of
securities or other assets as Holder would have received had Holder exercised
this Warrant immediately prior to such Corporate Change; provided, however, that
Company may not affect any Corporate Change unless it first shall have given
thirty (30) days notice to Holder hereof of any Corporate Change.
(e) EXERCISE PRICE ADJUSTED. As used in this Warrant, the term
"Exercise Price" shall mean the purchase price per share specified in Section 3
of this Warrant, until the occurrence of an event stated in subsection (a), (b)
or (c) of this Section 5, and thereafter shall mean said price as adjusted from
time to time in accordance with the provisions of said subsection. No such
adjustment under this Section 5 shall be made unless such adjustment would
change the Exercise Price at the time by $.01 or more; provided, however, that
all adjustments not so made shall be deferred and made when the aggregate
thereof would change the Exercise Price at the time by $.01 or more. No
adjustment made pursuant to any provision of this Section 5 shall have the net
effect of increasing the Exercise Price in relation to the split adjusted and
distribution adjusted price of the Common Stock. The number of shares of Common
Stock subject hereto shall increase proportionately with each decrease in the
Exercise Price.
(f) ADJUSTMENTS: ADDITIONAL SHARES, SECURITIES OR ASSETS. In the event
that at any time, as a result of an adjustment made pursuant to this Section 5,
Holder shall, upon Exercise of this Warrant, become entitled to receive shares
and/or other securities or assets (other than Common Stock) then, wherever
appropriate, all references herein to shares of Common Stock shall be deemed to
refer to and include such shares and/or other securities or assets; and
thereafter the number of such shares and/or other securities or assets shall be
subject to adjustment from time to time in a manner and upon terms as nearly
equivalent as practicable to the provisions of this Section 5.
6. FRACTIONAL INTERESTS.
No fractional shares or scrip representing fractional shares
shall be issuable upon the Exercise of this Warrant, but on Exercise of this
Warrant, Holder may purchase only a whole number of shares of Common Stock. If,
on Exercise of this Warrant, Holder would be entitled to a fractional share of
Common Stock or a right to acquire a fractional share of Common Stock, such
6
<PAGE>
fractional share shall be disregarded and the number of shares of Common Stock
issuable upon exercise shall be the next higher number of shares.
7. RESERVATION OF SHARES.
The Company shall at all times reserve for issuance such
number of authorized and unissued shares of Common Stock (or other securities
substituted therefor as herein above provided) as shall be sufficient for the
Exercise of this Warrant and payment of the Exercise Price. The Company
covenants and agrees that upon the Exercise of this Warrant, all shares of
Common Stock issuable upon such exercise shall be duly and validly issued, fully
paid, nonassessable and not subject to preemptive rights, rights of first
refusal or similar rights of any person or entity.
8. RESTRICTIONS ON TRANSFER.
(a) REGISTRATION OR EXEMPTION REQUIRED. This Warrant has been
issued in a transaction exempt from the registration requirements of the Act by
virtue of Regulation D and exempt from state registration under applicable state
laws. The Warrant and the Common Stock issuable upon the Exercise of this
Warrant may not be pledged, transferred, sold or assigned except pursuant to an
effective registration statement or an exemption to the registration
requirements of the Act and applicable state laws.
(b) ASSIGNMENT. If Holder can provide the Company with
reasonably satisfactory evidence that the conditions of (a) above regarding
registration or exemption have been satisfied, Holder may sell, transfer,
assign, pledge or otherwise dispose of this Warrant, in whole or in part. Holder
shall deliver a written notice to Company, substantially in the form of the
Assignment attached hereto as EXHIBIT B, indicating the person or persons to
whom the Warrant shall be assigned and the respective number of warrants to be
assigned to each assignee. The Company shall effect the assignment within ten
(10) days, and shall deliver to the assignee(s) designated by Holder a Warrant
or Warrants of like tenor and terms for the appropriate number of shares.
9. BENEFITS OF THIS WARRANT.
Nothing in this Warrant shall be construed to confer upon any
person other than the Company and Holder any legal or equitable right, remedy or
claim under this Warrant and this Warrant shall be for the sole and exclusive
benefit of the Company and Holder.
10. APPLICABLE LAW.
This Warrant is issued under and shall for all purposes be
governed by and construed in accordance with the laws of the state of Florida,
without giving effect to conflict of law provisions thereof.
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<PAGE>
11. LOSS OF WARRANT.
Upon receipt by the Company of evidence of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of indemnity or security reasonably satisfactory to the Company,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
shall execute and deliver a new Warrant of like tenor and date.
12. NOTICE OR DEMANDS.
Notices or demands pursuant to this Warrant to be given or made by Holder to or
on the Company shall be sufficiently given or made if sent by certified or
registered mail, return receipt requested, postage prepaid, and addressed, until
another address is designated in writing by the Company, to the address set
forth in Section 2(a). Notices or demands pursuant to this Warrant to be given
or made by the Company to or on Holder shall be sufficiently given or made if
sent by certified or registered mail, return receipt requested, postage prepaid,
and addressed, to the address of Holder set forth in the Company's records,
until another address is designated in writing by Holder.
IN WITNESS WHEREOF, the undersigned has executed this Warrant as of the
______ day of ________________, _______.
MERCHANTONLINE.COM, INC.
By: /s/ TAREK KIRSCHEN, President
---------------------------------------
<PAGE>
EXHIBIT A
EXERCISE FORM FOR WARRANT
TO: MERCHANTONLINE.COM, INC.
The undersigned hereby irrevocably exercises the right to purchase
____________ of the shares of Common Stock (the "Common Stock") of
MerchantOnline.com, Inc., a Florida corporation (the "Company"), evidenced by
the attached warrant (the "Warrant"), and herewith makes payment of the exercise
price with respect to such shares in full, all in accordance with the conditions
and provisions of said Warrant.
1. The undersigned agrees not to offer, sell, transfer or otherwise dispose of
any of the Common Stock obtained on exercise of the Warrant, except in
accordance with the provisions of Section 8(a) of the Warrant.
2. The undersigned requests that stock certificates for such shares be issued
free of any restrictive legend, if appropriate, and a warrant representing any
unexercised portion hereof be issued, pursuant to the Warrant in the name of the
undersigned and delivered to the undersigned at the address set forth below:
Dated: _______________________
- - --------------------------------------------------------------------------------
Signature
- - --------------------------------------------------------------------------------
Print Name
- - --------------------------------------------------------------------------------
Address
- - --------------------------------------------------------------------------------
NOTICE
The signature to the foregoing Exercise Form must correspond to the name as
written upon the face of the attached Warrant in every particular, without
alteration or enlargement or any change whatsoever.
- - --------------------------------------------------------------------------------
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EXHIBIT B
ASSIGNMENT
(To be executed by the registered holder
desiring to transfer the Warrant)
FOR VALUE RECEIVED, the undersigned holder of the attached warrant (the
"Warrant") hereby sells, assigns and transfers unto the person or persons below
named the right to purchase _______ shares of the Common Stock of
MerchantOnline.com, Inc., evidenced by the attached Warrant and does hereby
irrevocably constitute and appoint _______________________ attorney to transfer
the said Warrant on the books of the Company, with full power of substitution in
the premises.
Dated: ______________________________
Signature
Fill in for new registration of Warrant:
- - -----------------------------------
Name
- - -----------------------------------
Address
- - -----------------------------------
Please print name and address of assignee
(including zip code number)
- - --------------------------------------------------------------------------------
NOTICE
The signature to the foregoing Assignment must correspond to the name as written
upon the face of the attached Warrant in every particular, without alteration or
enlargement or any change whatsoever.
- - --------------------------------------------------------------------------------
FINANCIAL CONSULTING AGREEMENT
This FINANCIAL CONSULTING AGREEMENT (this "Agreement") made as of this
1st day of December, 1999 is by and between MerchantOnline.Com, Inc., a Florida
corporation, with its principal place of business at 1600 S. Dixie Hwy, Suite
300, Boca Raton, FL 33432 (the "Company"), and Robert Hausman, an individual,
having his principal place of business at 3785 Coventry Lane, Boca Raton, FL
33496. (the "Consultant").
R E C I T A L S:
- - - - - - - -
A. The Company is a public company with a class of equity
securities publicly traded, and desires to retain Consultant to provide certain
financial consulting services.
B. Consultant desires to provide certain financial consulting
services to the Company in accordance with the terms and conditions contained
hereinafter.
NOW, THEREFORE, in consideration of the mutual promises set forth
herein, the parties hereto hereby agree as follows:
1. CONSULTING SERVICES. During the term of this Agreement,
Consultant is hereby retained by the Company to provide financial consulting
services to the Company, as said services relate to corporate finance matters,
including, without limitation, advice regarding acquisitions, consolidations,
mergers, joint ventures and financial strategies. Consultant shall provide such
financial consulting services as reasonably requested by the Company during the
term of this Agreement, provided that nothing hereunder shall require Consultant
to devote a minimum number of hours per calendar month toward the performance of
services hereunder. The level and scope of services that may reasonably be
requested hereunder shall be dependent, in part, on the amount of compensation
to be paid Consultant by the Company hereunder. Unless otherwise agreed to by
Consultant, all services hereunder shall be performed by Consultant, in its sole
discretion, at its principal place of business or other offices. Notwithstanding
anything contained herein to the contrary, the services to be performed by
Consultant hereunder may be performed by any employee or consultant to
Consultant.
2. TERM. The term of this Agreement shall be for one year
commencing as of the date first written above and terminating one day prior to
the anniversary hereof; provided, however, that this Agreement shall be
renewable for subsequent one year terms, by mutual agreement of the parties in
writing, at least thirty (30) days prior to the expiration of the then current
term.
3. COMPENSATION. In consideration for the performance of services
hereunder, the Company hereby agrees to pay Consultant the aggregate sum of
$125,000 in monthly installments of $10,416.67 due and payable on the 15th of
each month.. In addition, The Company hereby grants Consultant 300,000 options
to purchase the Company's restricted common stock at a price of $1.87 per share
which represents the bid price for the Company's stock as of the close of
business as of the date of this agreement. The Company hereby agrees to pay on a
pre-approval basis all out-of-pocket expenses incurred by Consultant in
connection with such services to be rendered hereunder. Consultant may, from
time to time, deem it to be in the best interests of the Company to retain an
outside consultant in connection with certain specific acquisitions or proposed
<PAGE>
transactions. In such event, the Company hereby agrees to pay any and all fees
and expenses of such consultant.
4. REPRESENTATIONS OF THE COMPANY. The Company hereby represents
and warrants that any and all information supplied hereunder to Consultant in
connection with any and all services to be performed hereunder by Consultant for
and on behalf of the Company shall be true, complete and correct as of the date
of such dissemination and shall not fail to state a material fact necessary to
make any of such information not misleading. The Company hereby acknowledges
that the ability of Consultant to adequately provide financial consulting
services hereunder and/or to initiate and/or effectuate introductions on behalf
of the Company with respect to potential acquisitions is dependent upon the
prompt dissemination of accurate, correct and complete information to
Consultant. In addition, and notwithstanding anything contained herein to the
contrary, nothing hereunder shall obligate Consultant to make any minimum number
of introductions hereunder or to initiate any merger or acquisitions involving
or relating to the Company. The Company further represents and warrants
hereunder that this Agreement and the transactions contemplated hereunder, have
been duly and validly authorized by all requisite corporate action; that the
Company has the full right, power and capacity to execute, deliver and perform
its obligations hereunder; and that this Agreement, upon execution and delivery
of the same by the Company, will represent the valid and binding obligation of
the Company enforceable in accordance with its terms. The representations and
warranties set forth herein shall survive the termination of this Agreement.
5. INDEMNIFICATION.
(a) The Company hereby agrees to indemnify, defend and hold
harmless Consultant, its officers, directors, principals, employees, affiliates,
and shareholders, and their successors and assigns from and against any and all
claims, damages, losses, liability, deficiencies, actions, suits, proceedings,
costs or legal expenses (collectively the "Losses") arising out of or resulting
from: (i) any breach of a representation, or warranty by the Company contained
in this Agreement; or (ii) any activities or services performed hereunder by
Consultant, unless such Losses were the result of the intentional misconduct or
gross misconduct of Consultant; or (iii) any and all costs and expenses
(including reasonable attorneys' and paralegals' fees) related to the foregoing,
and as more fully described below.
(b) If Consultant receives written notice of the commencement
of any legal action, suit or proceeding with respect to which the Company is or
may be obligated to provide indemnification pursuant to Section 7 above,
Consultant shall, within thirty (30) days of the receipt of such written notice,
give the Company written notice thereof (a "Claim Notice"). Failure to give such
Claim Notice within such thirty (30) day period shall not constitute a waiver by
Consultant of its right to indemnity hereunder with respect to such action, suit
or proceeding. Upon receipt by the Company of a Claim Notice from Consultant
with respect to any claim for indemnification which is based upon a claim made
by a third party ("Third Party Claim"), Consultant may assume the defense of the
Third Party Claim with counsel of its own choosing, as described below. The
Company shall cooperate in the defense of the Third Party Claim and shall
furnish such records, information and testimony and attend all such conferences,
discovery proceedings, hearings, trial and appeals as may be reasonably required
in connection therewith. Consultant shall have the right to employ its own
counsel in any such action, but the fees and expenses of such counsel shall be
2
<PAGE>
at the expense of Consultant unless the Company shall not have promptly employed
counsel to assume the defense of the Third Party Claim, in which event such fees
and expenses shall be borne solely by the Company. The Company shall not satisfy
or settle any Third Party Claim for which indemnification has been sought and is
available hereunder, without the prior written consent of Consultant. If the
Company shall fail with reasonable promptness either to defend such Third Party
Claim or to satisfy or settle the same, Consultant may defend, satisfy or settle
the Third Party Claim at the expense of the Company and the Company shall pay to
Consultant the amount of any such Loss within ten (10) days after written demand
therefor. The indemnification provisions hereunder shall survive the termination
of this Agreement.
6. AMENDMENT. No modification, waiver, amendment, discharge or
change of this Agreement shall be valid unless the same is evidenced by a
written instrument, executed by the party against which such modification,
waiver, amendment, discharge, or change is sought.
7. NOTICES. All notices, demands or other communications given
hereunder shall be in writing and shall be deemed to have been duly given when
delivered in person or transmitted by facsimile transmission or the third
calendar day after being mailed by United States registered or certified mail,
return receipt requested, postage prepaid, to the addresses herein above first
mentioned or to such other address as any party hereto shall designate to the
other for such purpose in the manner hereinafter set forth.
8. ENTIRE AGREEMENT. This Agreement contains all of the
understandings and agreements of the parties with respect to the subject matter
discussed herein. All prior agreements, whether written or oral, are merged
herein and shall be of no force or effect.
9. SEVERABILITY. The invalidity, illegality or unenforceability
of any provision or provisions of this Agreement will not affect any other
provision of this Agreement, which will remain in full force and effect, nor
will the invalidity, illegality or unenforceability of a portion of any
provision of this Agreement affect the balance of such provision. In the event
that any one or more of the provisions contained in this Agreement or any
portion thereof shall for any reason be held to be invalid, illegal or
unenforceable in any respect, this Agreement shall be reformed, construed and
enforced as if such invalid, illegal or unenforceable provision had never been
contained herein.
10. CONSTRUCTION AND ENFORCEMENT. This Agreement shall be
construed in accordance with the laws of the State of Florida, without
application of the principles of conflicts of laws. If it becomes necessary for
any party to institute legal action to enforce the terms and conditions of this
Agreement, the successful party will be awarded reasonable attorneys' fees at
all trial and appellate levels, expenses and costs. Any suit, action or
proceeding with respect to this Agreement shall be brought in the state or
federal courts located in Palm Beach County in the State of Florida. The parties
hereto hereby accept the exclusive jurisdiction of those courts for the purpose
of any such suit, action or proceeding. Venue for any such action, in addition
to any other venue permitted by statute, will be Palm Beach County, Florida. The
parties hereto hereby irrevocably waive, to the fullest extent permitted by law,
any objection that any of them may now or hereafter have to the laying of venue
of any suit, action or proceeding arising out of or relating to this Agreement
3
<PAGE>
or any judgment entered by any court in respect thereof brought in Palm Beach
County, Florida, and hereby further irrevocably waive any claim that any suit,
action or proceeding brought in Palm Beach County, Florida, has been brought in
an inconvenient forum.
11. BINDING NATURE. The terms and provisions of this Agreement
shall be binding upon and inure to the benefit of the parties, and their
respective successors and assigns.
12. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, including facsimile signatures which shall be deemed as original
signatures. All executed counterparts shall constitute one Agreement,
notwithstanding that all signatories are not signatories to the original or the
same counterpart.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
MerchantOnline.Com, Inc.
By: /s/ TAREK S. KIRSCHEN
--------------------------------------------------------------------
Name: Tarek S. Kirschen
--------------------------------------------------------------------
Title: President & Chief Executive Officer
--------------------------------------------------------------------
Robert Hausman
By: /s/ ROBERT HAUSMAN
--------------------------------------------------------------------
Name: Robert Hausman
--------------------------------------------------------------------
4
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<PERIOD-START> NOV-01-1998
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