<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Quarter Ended Commission File Number
DECEMBER 31, 1998 1-11747
----------------- -------
THE ASHTON TECHNOLOGY GROUP, INC.
---------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 22-6650372
-------- ----------
(State of Incorporation) (I.R.S. Employer Identification Number)
1900 MARKET STREET, SUITE 701, PHILADELPHIA, PA 19103
-----------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number, including area code: 215-751-1900
------------
(Former name, former address and former fiscal year if changed since last
report)
Number of shares of common stock outstanding on December 31, 1998: 15,046,409
----------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (of 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
----- -----
<PAGE>
THE ASHTON TECHNOLOGY GROUP, INC.
INDEX - FORM 10-QSB
DECEMBER 31, 1998
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------- ----
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets December 31, 1998 and March 31, 1998... 4
Consolidated Statements of Operations -
For the Three and Nine Months Ended December 31, 1998 and 1997...... 5
Consolidated Statements of Cash Flows -
For the Nine Months Ended December 31, 1998 and 1997................ 6
Notes to Unaudited Consolidated Financial Statements................ 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................ 15
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings.............................................. 20
Item 2. Changes in Securities and Use of Proceeds...................... 20
Item 3. Defaults Upon Senior Securities................................ 20
Item 4. Submission of Matters to a Vote................................ 20
Item 5. Other Information.............................................. 20
Item 6. Exhibits and Reports on Form 8-K............................... 21
Signatures................................................................ 22
<PAGE>
PART I - FINANCIAL INFORMATION
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-QSB constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and the Private Securities Litigation Reform Act of
1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the actual results,
performance or achievements of the Company to differ materially from any future
results, performance or achievements expressed or implied by such forward-
looking statements. Such risks, uncertainties and other important factors
include, among others: dependence on arrangements with self-regulatory
organizations; dependence on proprietary technology; technological changes and
costs of technology; industry trends; competition; ability to develop markets;
changes in business strategy or development plans; availability, terms and
deployment of capital; availability of qualified personnel; changes in
government regulation; general economic and business conditions; and other
factors referenced in this Form 10-QSB. Such forward-looking statements speak
only as of the date of this Form 10-QSB. For discussion of the factors that
might cause performance of the Company to differ with actual results, see Item
2: Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Company's other periodic reports and registration statements
filed with the Securities Exchange Commission (the "SEC" or "Commission"). The
Company expressly disclaims any obligation or undertaking to disseminate any
updates or revisions to any forward-looking statement contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
ITEM 1. FINANCIAL STATEMENTS
<PAGE>
<TABLE>
<CAPTION>
The Ashton Technology Group, Inc. and Subsidiaries
Consolidated Balance Sheets
As of December 31, 1998 and March 31, 1998
DECEMBER 31, 1998 MARCH 31, 1998
------------------- -----------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................. $ 513,750 $ 815,680
Accounts receivable and prepayments....................... 715,909 130,843
Current portion of notes receivable....................... 100,676 103,619
Stock subscriptions receivable............................ --- 245,000
----------------- ------------------
Total current assets................................. 1,330,335 1,295,142
Notes receivable, net of current portion.................. 755,717 458,040
Property and equipment, net............................... 1,053,502 849,799
Investment in E.Com International, Inc.................... 105,000 105,000
Capitalized software development costs.................... 143,030 224,686
Other assets.............................................. 100,162 65,353
----------------- ------------------
TOTAL ASSETS $3,487,746 $2,998,020
================= ==================
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
Accounts payable and accrued expenses..................... $ 177,621 $ 1,736,447
Notes payable............................................. 25,000 25,000
Other liabilities......................................... 141,049 ---
------------------ -----------------
Total current liabilities............................ 343,670 1,761,447
STOCKHOLDERS' EQUITY:
Preferred stock Series A - par value: $10; shares
authorized:
3,000,000; shares issued and outstanding; 206,844 and 2,068,438 2,500,000
250,000.................................................
Preferred stock Series B - par value: $10; shares
authorized: 5,825,000 3,188,875
590,000; shares issued and outstanding; 582,500 and
460,000.................................................
Preferred stock Series C - par value: $10; shares
authorized: --- 550,000
590,000; shares issued and outstanding; none and 55,000..
Preferred stock Series D - par value: $1,000,000; shares
authorized: 10; shares issued and outstanding; .428 and 428,225 ---
none....................................................
Preferred stock Series E - par value: $1,000,000; shares
authorized: 10; shares issued and outstanding; 1.263 and 1,263,000 ---
none....................................................
Common stock - par value: $.01; shares authorized:
60,000,000; 150,464 81,436
shares issued and outstanding; 15,046,409 and 8,143,571.
Additional paid-in capital................................ 30,592,123 15,730,870
Deferred consulting expense............................... (213,281) (438,281)
Accumulated deficit....................................... (36,969,893) (20,376,327)
------------------ -----------------
Total stockholders' equity................................ 3,144,076 1,236,573
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,487,746 $ 2,998,020
================== =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
The Ashton Technology Group, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three and Nine Months Ended December 31, 1998 and 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues............................................ $ 427,884 $ 505,310 $ 1,079,836 $ 3,340,367
Costs and expenses:
Cost of revenues................................... 56,250 431,233 168,750 2,620,896
Amortization of software development costs......... 47,677 49,500 143,031 147,700
Depreciation and amortization...................... 92,499 120,880 279,128 364,834
Noncash compensatory charges....................... --- --- 4,626,136 ---
Selling, general and administrative................ 2,535,181 1,001,451 7,284,864 3,137,755
------------ ----------- ------------ ------------
Total costs and expenses....................... 2,731,607 1,603,064 12,501,909 6,271,185
------------ ----------- ------------ ------------
Loss from operations................................ (2,303,723) (1,097,754) (11,422,073) (2,930,818)
Other income/(expenses):
Loss on sale of subsidiary......................... --- (385,930) --- (385,930)
Net interest income (expense)...................... 35,640 (55,043) 111,081 (142,070)
Other income....................................... 290,080 --- 290,080 ---
------------ ----------- ------------ ------------
Total other income (expenses).................. 325,720 (440,973) 401,161 (528,000)
------------ ----------- ------------ ------------
Loss before provision for income taxes and minority
interest in earnings of subsidiary................. (1,978,003) (1,538,727) (11,020,912) (3,458,818)
Provision for income taxes.......................... --- 27,749 --- 41,775
------------ ----------- ------------ ------------
Loss before minority interest in earnings of
subsidiary......................................... (1,978,003) (1,566,476) (11,020,912) (3,500,593)
Minority interest in earnings of subsidiary......... --- 10,223 --- (11,464)
------------ ----------- ------------ ------------
Net loss............................................ $ (1,978,003) $(1,556,253) $(11,020,912) $(3,512,057)
============ =========== ============ ============
Net loss per share.................................. $(.18) $(.21) $(1.07) $(.46)
Dividends attributed to preferred stock............. (129,471) --- (489,170) ---
Beneficial conversion feature of preferred stock.... --- (926,282) (5,083,484) (926,282)
Dividends in arrears on preferred stock............. (98,507) --- (312,467) --
------------ ----------- ------------ ------------
Net loss applicable to common stock................. $ (2,205,981) $(2,482,535) $(16,906,033) $(4,438,339)
============ =========== ============ ============
Net loss applicable per common share................ $(.20) $(.33) $(1.63) $(.59)
============ =========== ============ ============
Weighted average number of common shares outstanding 10,907,910 7,562,500 10,350,524 7,562,500
============ =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
The Ashton Technology Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended December 31, 1998 and 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED DECEMBER 31,
1998 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................ $(11,020,912) $(3,512,057)
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
Depreciation and amortization.................................. 422,159 554,081
Increase in minority interest in subsidiary.................... --- 11,464
Loss on sale of subsidiary..................................... --- 385,930
Noncash compensatory charge for common stock options........... 4,626,136 ---
Deferred consulting costs...................................... 509,375 ---
Changes in operating asset and liabilities
(Increase) in receivables and prepayments...................... (585,066) (310,411)
(Increase) in notes receivable................................. (380,000) (594,125)
Decrease in stock subscription receivable...................... 245,000 ---
(Increase)/Decrease in other assets............................ (34,809) 39,088
(Decrease) in accounts payable and accrued expenses expenses (1,558,826) (495,850)
Increase (Decrease) in other liabilities expenses 141,049 (52,722)
------------------- -----------------
Net cash used in operating activities........................ (7,635,894) (3,974,602)
------------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets....................................... (481,237) (121,797)
Investment in E.Com International, Inc. expenses --- (105,000)
Net proceeds from sale of subsidiary expenses --- 554,552
Cash received from notes receivable............................ 85,266 8,026
Capitalized software development costs......................... (61,375) (365,640)
------------------- -----------------
Net cash used in investing activities........................ (457,346) (29,859)
------------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividends paid in cash......................... (319,062) ---
Issuance costs for preferred stock and notes payable........... (864,628) (702,997)
Issuance costs for common stock................................ (300,000) ---
Proceeds from issuance of notes payable expenses --- 3,000,000
Proceeds from issuance of preferred stock...................... 6,275,000 2,500,000
Proceeds from issuance of common stock......................... 3,000,000 ---
------------------- -----------------
Net cash provided by financing activities.................... 7,791,310 4,797,003
------------------- -----------------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS............ (301,930) 792,542
Cash and cash equivalents, beginning of period.................. 815,680 60,841
------------------- -----------------
Cash and cash equivalents, end of period........................ $ 513,750 $ 853,383
=================== =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
-------------------------------------------------
The accompanying unaudited consolidated financial statements for the three
months and nine months ended December 31, 1998 include the accounts of The
Ashton Technology Group, Inc. ("ATG(TM)" or the "Company") and its subsidiaries,
Universal Trading Technologies Corporation ("UTTC(TM)"), Gomez Advisors, Inc.
("GA"), ATG(TM)" International ("International") and Electronic Market Center,
Inc. ("EMC"). As of December 31, 1998, all subsidiaries are wholly-owned by
ATG(TM) except UTTC(TM), of which the Company owns approximately 96% of the
common stock. Also included is REB Securities, Inc. ("REB"), a wholly-owned
subsidiary of UTTC(TM). The financial statements for the year ended March 31,
1998 do not include International, EMC, or REB, which were formed by ATG(TM) in
July, June and April 1998, respectively. All significant intercompany accounts
and transactions have been eliminated.
The accompanying unaudited consolidated statements of operations for the three
months and nine months ended December 31, 1997, respectively, and the
accompanying unaudited consolidated statements of cash flows for the nine months
ended December 31, 1997 include the results of Computer Science Innovations,
Inc. ("CSI(R)"). CSI(R) was a subsidiary of the Company during these periods.
CSI(R) was incorporated in Florida in March 1983 and specialized in utilizing
computer technologies and sophisticated mathematical techniques to address
complex information retrieval and management problems. During the fiscal year
ended March 31, 1998, CSI(R) was the primary revenue provider for the Company.
On November 6, 1997, ATG(TM) sold CSI(R) to George H. Milligan and Susanne L.
Cavadeas, as Trustees of the Trust Created by The Computer Science Innovations,
Inc. Leveraged ESOP, for $1,723,000, payable as follows: (1) forgiveness of a
$500,000 loan plus interest of $28,875, (2) $600,000 in cash, and (3) a five
year 8 1/4% note of $594,125. In addition, the Company received cash in the
amount of approximately $340,000 due to a Tax Allocation Agreement. The Company
recognized a loss on the sale of $385,930.
The accompanying unaudited consolidated financial statements have been prepared
by the Company in accordance with generally accepted accounting principles for
interim financial statements and in accordance with the instructions for Form
10-QSB. Accordingly, they do not contain all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, the accompanying unaudited
consolidated financial statements have been prepared on the same basis as the
audited statements and include all adjustments, consisting only of normal
recurring adjustments, which are necessary for a fair statement of the results
of the interim periods presented. These financial statements should be read in
conjunction with the footnotes contained in the Company's 10-KSB for the fiscal
year ended March 31, 1998. The Statements of Operations for the nine months
ended December 31, 1998 are not necessarily indicative of the results that may
be expected for the fiscal year ended March 31, 1999.
The preparation of interim financial statements, in conformity with generally
accepted accounting principles, also requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities; the
disclosure of contingent assets and liabilities at the date of the interim
statements; and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. ACCOUNTS RECEIVABLE AND PREPAYMENTS
------------------------------------
Accounts receivable includes $290,080 from Alliant Techsystems, Inc. ("Alliant")
payable as a result of judgements rendered in favor of the Company (See "Part
II, Item 1. Legal Proceedings"). Such judgements were recorded as other income
during the quarter ended December 31, 1998. The cash payment from Alliant was
received on January 12, 1999. Excluding the receivable from Alliant, accounts
receivable and prepayments are primarily attributable to GA and consist of
billed receivables arising from recognized revenues. Revenues include GA
advisory service fees and advertising fees.
<PAGE>
3. CERTAIN TRANSACTIONS
--------------------
The Company and Raymond T. Tate ("Tate"), formerly Chairman of the Board of
Directors, entered into a consulting agreement, dated October 22, 1996 (the
"Consulting Agreement"). Under the terms of the Consulting Agreement, the
Company retained Tate to act as a consultant to CSI(R) for the period from
October 22, 1996 to December 31, 1998. As compensation for such services, the
Company agreed to pay Raymond Tate Associates and Tate $120,000 per annum and
certain other expenses. The total cost of the Consulting Agreement was charged
to operations during the year ended March 31, 1997 and was included in corporate
restructuring costs. Tate also agreed not to compete with the Company in the
Financial Services Industry (as such term is defined in the Consulting
Agreement) during the term of the Consulting Agreement. For the nine months
ended December 31, 1998, the Company paid Raymond Tate Associates and Tate
$91,692. As of December 31, 1998, all payments to Raymond Tate Associates and
Tate pursuant to the Consulting Agreement have been completed.
On May 1, 1997, David N. Rosensaft ("Rosensaft") commenced an action in the U.S.
District Court for the Southern District of New York captioned Rosensaft v. The
Ashton Technology Group, Inc., et al, No. 97 Civ. 3138 ("the Rosensaft
lawsuit"). On January 14, 1998, the Company entered into an agreement with The
Dover Group, Inc. ("Dover") and Fredric W. Rittereiser (the Company's President,
Chief Executive Officer and a director of the Company), whereby Dover and Mr.
Rittereiser agreed to reimburse $413,980 in legal costs associated with the
Rosensaft lawsuit to the Company to the extent such costs were not covered by
the Company's directors' and officers' liability insurance carrier. Dover and
Mr. Rittereiser pledged 333,334 shares of UTTC(TM) stock as collateral in
support of their agreement to pay the legal costs. The Company has submitted a
claim to its insurance carrier in the full amount of such legal costs. To date,
the Company and its insurance carrier have not reached agreement as to whether
the legal costs are covered by the Company's directors' and officers' liability
insurance policy. On March 4, 1998, the U.S. District Court entered an order
awarding damages against Dover and Mr. Rittereiser in the amount of $1.2
million. Mr. Rittereiser is the sole shareholder, director and officer of
Dover. Dover and Mr. Rittereiser offered to settle the litigation for, among
other things, a cash payment of $1.2 million. On April 7, 1998, the Company's
Board of Directors, after due deliberation, concluded that the Company and its
UTTC(TM) subsidiary derived mutual benefit from the Rosensaft settlement by
Dover and Mr. Rittereiser. The Board resolved to fund one-third of the $1.2
million settlement amount. Separately, UTTC(TM) agreed to fund one-third of the
Rosensaft settlement amount. On April 8, 1998, the Company loaned $380,000 to
Dover and Mr. Rittereiser at an annual rate of 9%, for thirty months. In
exchange for the loan to satisfy the Rosensaft settlement, Dover pledged 300,000
shares of the Company's common stock ("Common Stock") under its control and
entered into a Promissory Note in favor of the Company.
On November 4, 1997, Ashton sold CSI(R) to a trust created by the Computer
Science Innovations Inc. leveraged ESOP for $1,723,000. The Company received
$600,000 in cash, a $594,125 five-year 8 1/4% note and the forgiveness of
$528,875 due to CSI(R), which included $28,875 of accrued interest. Based on
rates of return currently available to the Company for investments with similar
terms and maturities, the fair value of the note receivable approximates the
carrying amount. As of December 31, 1998, the outstanding balance of the note
is $476,393.
Since 1996, the Company has utilized Dover for various services including
advising the Company on its acquisitions of UTTC(TM) and CSI(R) and consulting
services related to the Company's financings and product development efforts.
Mr. Rittereiser, is the Chairman of Dover. For the nine months ended December
31, 1998, the Company paid consulting fees to Dover amounting to $135,000
compared to $25,000 for the same period of 1997.
During 1998, the Company retained Richard Butler, a member of the Company's
Board of Directors, to provide strategic marketing services. For the nine
months ended December 31, 1998, the Company paid consulting fees to Richard
Butler amounting to $60,000 compared to $0 for the same period of 1997.
<PAGE>
During 1997, the Company retained Adirondack Capital, L.L.C. ("Adirondack") to
provide investment banking and financial advisory services. K. Ivan F. Gothner,
a member of the Company's Board of Directors, is the Managing Director of
Adirondack. For the nine months ended December 31, 1998, the Company paid
consulting fees and reimbursed expenses to Adirondack amounting to $114,131
compared to $114,532 for the same period of 1997. Additionally, the Company has
paid Adirondack $300,000 (an amount equal to 5% of the proceeds from the sale of
the Series C Preferred, the Series D Preferred and the Series E Preferred) and
an option to purchase 600,000 shares of Common Stock at $1.875 per share and an
option to purchase 600,000 shares of UTTC(TM) common stock at $1.00 per share.
Pursuant to the Private Equity Line of Credit Agreement (the "Private Equity
Agreement" or "Agreement"), the Company has also agreed to pay Adirondack an
amount equal to 5% of the proceeds from the sale of Common Stock (each such sale
a "Put"). As of December 31, 1998, Adirondack has been paid $150,000 pursuant
to the Private Equity Agreement. (See "Notes to Unaudited Financial Statements
Shareholders' Equity").
4. PROPERTY AND EQUIPMENT
----------------------
Property and equipment are carried at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets (generally
three to five years). Leasehold improvements are amortized over the term of the
lease, which is shorter than the estimated useful life of the leasehold
improvements.
5. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
--------------------------------------
The Company capitalizes internally generated software development costs in
compliance with SFAS No. 86, Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed. The Company capitalizes software
development costs where technological feasibility of the product has been
established. The establishment of technological feasibility and the ongoing
assessment of recoverability of capitalized software development costs require
considerable judgement by management. Capitalized software development costs
related to the VWAP(R) Trading System ("VTS(TM)") amounted to $61,375 and
$365,640 for the nine months ended December 31, 1998 and 1997, respectively.
Capitalization of computer software costs is discontinued when the computer
software product is available to be sold, leased or otherwise, marketed.
Amortization begins when the product is available for release to customers. The
Company is amortizing capitalized software costs related to the VTS(TM) using
the straight-line method over the estimated economic useful life, which is
estimated at two years.
6. INVESTMENT IN E.COM INTERNATIONAL, INC.
---------------------------------------
In November 1997, the Company entered into a strategic relationship with E.Com
International, Inc. ("E.Com") to support its goal of providing remote wireless
access to its family of online transaction systems. Under this relationship,
the Company is the exclusive distributor of E.Com's products for the
professional financial services market. E.Com develops and markets integrated
wireless mobile computing devices, which provide user access to the Internet,
corporate networks, and remote databases. The Company has purchased 35,000
shares of E.Com common stock and warrants to purchase E.Com common stock at
$3.00 per share in a private placement.
On October 2, 1998, E.Com filed a Current Report on Form 8-K stating E.Com is
exploring various alternative financing strategies, including private and public
financing, selling assets and bank borrowings. Absent successful completion of
such a financing, E.Com has indicated it will not have sufficient liquid assets
to continue operations as currently conducted. The Company is monitoring
E.Com's progress in obtaining such financing and the impact of any such
financing upon the value of the Company's investment in E.Com. Any decrease in
the value of the Company's investment is not expected to have a material impact
on the Company's consolidated financial position.
<PAGE>
7. SHAREHOLDERS' EQUITY
--------------------
On April 3, 1998 (the "Subscription Date"), the Company entered into the Private
Equity Agreement with a group of accredited investors (the "Private Equity
Investors") which provided for an aggregate commitment of $18,000,000 to the
Company. On the Subscription Date, the Private Equity Investors purchased three
shares of Series D Convertible Preferred Stock (the "Series D Preferred") with a
liquidation preference of $1,000,000 per share for an aggregate purchase price
of $3,000,000 and the Company agreed to promptly file a registration statement
with the SEC under the Securities Act of 1933, as amended, registering shares of
Common Stock issuable in connection with the transactions contemplated by the
Private Equity Agreement (the "Registration Statement"). The Company filed this
Registration Statement with the Commission on June 29, 1998 and it became
effective on August 13, 1998. The Agreement provided that the Private Equity
Investors would be obligated to purchase Series E Convertible Preferred Stock
(the "Series E Preferred") with a liquidation preference of $1,000,000 per share
for an aggregate purchase price of $2,000,000. The Private Equity Investors
purchased such shares of Series E Preferred on July 15, 1998.
In addition, on the Subscription Date, the Private Equity Investors received
warrants (each, a "Warrant") to purchase up to an aggregate of 250,000 shares of
Common Stock and received additional Warrants to purchase up to an aggregate of
100,000 of such shares on July 15, 1998. The Warrants are exercisable for five
years at an exercise price of $4.58 per share.
The conversion price of the Series D Preferred is an amount equal to 75% of the
average closing bid price per share over the five days preceding the conversion
date (the "Market Price"). The conversion price of the Series E Preferred is
80% of the Market Price. Each of the Series D Preferred and Series E Preferred
(i) ranks pari passu with the other authorized Preferred Stock of the Company
and (ii) is entitled to a cumulative dividend of 8% per annum on its respective
liquidation preference. Between August 20, 1998 and December 31, 1998, 2.745
shares of the Series D Preferred were converted into 2,694,948 shares of Common
Stock. Between December 1, 1998 and December 31, 1998, .84 shares of the Series
E Preferred were converted into 763,497 shares of Common Stock.
Following the purchase of the Series E Preferred and subject to the satisfaction
of certain other conditions, the Company may from time to time Put to the
Private Equity Investors shares of the Common Stock for an aggregate Put price
of $13,000,000. The Put price per share is an amount equal to 85% of the
average of the lowest bid prices of such Common Stock over the seven day period
beginning three days before and ending three days after the Company gives notice
of a Put. The Private Equity Investors are not obligated to purchase any Put
shares unless, among other things, (i) the Registration Statement is effective,
(ii) the Company is listed and its Common Stock is trading on a national
exchange or quotation system, (iii) the closing bid price of the Common Stock on
the day immediately preceding such purchase is at least $1.50 per share, and
(iv) the Common Stock has traded at an average volume of at least 25,000 shares
a day for the thirty trading days preceding such purchase.
Between August 20, 1998 and December 31, 1998, the Company exercised four Puts
to the Private Equity Investors in the aggregate amount of $3,000,000. The
Company has issued 2,423,802 shares of Common Stock to the Private Equity
Investors in connection with the Puts.
On September 1, 1998, the Company entered into an agreement with the Private
Equity Investors to amend the Private Equity Agreement. The amendment clarifies
that each of the Private Equity Investors may not beneficially own more than
4.99 percent of the Company's Common Stock at one time, including Common Stock
underlying convertible securities that would be deemed to be beneficially owned
pursuant to section 13(d) of the Securities Exchange Act of 1934 and Rule 13d-3
promulgated thereunder.
<PAGE>
On the Subscription Date, the Company paid Settondown Capital International Ltd.
(the "Placement Agent"), a fee of (i) $150,000, (ii) 0.15 shares of Series D
Preferred, (iii) a Warrant, on the same terms as the Warrants issued to the
Private Equity Investors, to purchase up to 190,000 shares of Common Stock, (iv)
20,000 shares of Common Stock and (v) attorney fees of $30,000. On July 15,
1998, the Company paid the Placement Agent, $100,000 and 0.1 shares of Series E
Preferred and a Warrant to purchase up to 60,000 shares of Common Stock, on the
same terms as the Warrant issued on the Subscription Date. In addition, on the
completion of each Put by the Company pursuant to the Private Equity Agreement,
the Company has agreed to pay the Placement Agent an amount equal to 5% of the
proceeds of each such Put.
In November 1998, the Company amended a consulting agreement with Continental
Capital & Equity Corporation whereby the Company issued 175,000 additional
shares of Common Stock, with a fair market value of $284,375, in exchange for
additional advisory and promotional services, a reduction in cash payments
required pursuant to a previous consulting agreement and extended the term of
the consulting agreement. During the quarter, the Company recorded a deferred
consulting expense of $284,375 as a reduction to stockholders' equity as a
result of amending the consulting agreement. The consulting cost will be
amortized over the revised term of the agreement. For the nine months ended
December 31, 1998, the Company charged $509,375 to selling, general and
administrative expenses for amortization of deferred consulting expenses related
to the consulting agreement and the amended consulting agreement.
8. EMPLOYEE STOCK OPTION PLAN
--------------------------
Stock options are granted to officers, directors, employees and others who
provide services to the Company at the discretion of the Board of Directors.
During the quarter ended September 30, 1998, the Company issued options to
purchase 4,760,000 shares of the Company's Common Stock to officers, directors
and employees of the Company pursuant to the Company's plan to grant 6,000,000
shares of Common Stock at $1.875. On November 11, 1998, the Board of Directors
authorized the adoption of a non-qualified stock plan for one million shares of
Common Stock. Options to purchase 410,000 shares of Common Stock were issued to
newly hired officers and employees pursuant to the terms of employment offers
made to the new officers and employees. Options to purchase 590,000 shares of
Common Stock will be issued in the future to employees and others as determined
by the Board of Directors. The exercise price of the remaining options was set
at $2.00 per share (which was approximately 60% above the price of the Common
Stock on November 11, 1998).
A summary of the status of the Company's employee stock options outstanding as
of December 31, 1998 is as follows:
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------
OPTIONS WEIGHTED-AVERAGE
EXERCISE PRICE
--------------------------------------------
<S> <C> <C>
Outstanding at beginning of year....................... 450,000 $6.28
Granted during period.................................. 5,170,000 1.92
--------------------------------------------
Outstanding at end of period........................... 5,620,000 $2.27
============================================
</TABLE>
The following table summarizes information about employee stock options
outstanding and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OUTSTANDING WEIGHTED-AVERAGE REMAINING
RANGE OF EXERCISE PRICE AND EXERCISABLE CONTRACTUAL LIFE EXERCISE PRICE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$1.40-2.00 --- --- ---
$3.00-4.00 210,000 7.25 years $ 4.00
14.25 60,000 7.25 years $14.25
</TABLE>
<PAGE>
Stock options granted during the nine months ended December 31, 1998 vest over
one-to-three years and have a maximum exercise term of five years. Stock
options issued during the fiscal year ended March 31, 1997 had a maximum
exercise term of ten years. All stock options granted by the Company include
provisions for: (i) forfeiture in the event the employee dies or ceases to be in
the employment of ATG(TM), or one of its subsidiaries, during the first year of
employment; and (ii) immediate vesting upon a merger, consolidation or change of
control of the Company. The Company has not registered the Common Stock
underlying the stock options. The Company's assumptions used to calculate the
fair values of options issued to employees include: (i) a risk-free interest
rate of 5.6%, (ii) an expected life of five years, (iii) expected stock
volatility of 20%, and (iv) expected stock dividends of zero.
In addition, as of December 31, 1998, the Company had reserved options to
purchase 7,045,000 shares of GA's common stock for issuance to directors,
officers and employees of GA and ATG(TM) in connection with employment
agreements or as incentives for attracting employees to GA and the Company. See
"Subsequent Events".
The Company also grants stock options to third parties in consideration for
services rendered to the Company. During the nine months ended December 31,
1998, 150,000 options to purchase Common Stock were issued to a consultant who
provides marketing services to the Company. A summary of the status of the
stock options issued to third parties as of December 31, 1998 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
--------------------------------------------
<S> <C> <C>
Outstanding at beginning of year....................... 1,090,000 $1.88
Granted during period.................................. 150,000 1.88
--------------------------------------------
Outstanding at end of period........................... 1,240,000 $1.88
============================================
</TABLE>
The following table summarizes information about third party stock options
outstanding and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
RANGE OF EXERCISE PRICE NUMBER OUTSTANDING WEIGHTED-AVERAGE REMAINING
AND EXERCISABLE CONTRACTUAL LIFE EXERCISE PRICE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$1.88 1,240,000 4.5 years $1.88
</TABLE>
Stock options were granted to third parties pursuant to the Company's plan to
grant 6,000,000 shares of Common Stock at $1.875 to officers, directors,
employees and others who provide services to the Company. Stock options
granted to third parties vest immediately and have a maximum exercise term of
five years. The Company has not registered the Common Stock underlying the
stock options. The Company recognizes a non-cash compensation charge for
options granted to third parties in compliance with SFAS No. 123, Accounting for
Stock-Based Compensation. The Company's assumptions used to calculate the fair
values of options issued to third parties include: (i) a risk-free interest rate
of 5.6%, (ii) an expected life of five years, (iii) expected stock volatility of
20%, and (iv) expected stock dividends of zero.
In 1997, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation. The Company has elected to apply APB Opinion No. 25 and related
interpretations in accounting for stock options issued to employees and has
adopted the disclosure-only provisions of SFAS No. 123. During the quarter
ended September 30, 1998, the Company recognized a noncash compensation charge
of $4,367,809 to reflect the excess of the fair value of the GA options granted
over the exercise price of the GA options granted. The Company also recognized
a noncash compensatory charge of $258,327 related to the 150,000 options granted
to a consultant who provides marketing services to the Company.
<PAGE>
If the Company had elected to recognize compensation cost based on the fair
value of the options granted to directors and employees at the grant date as
prescribed by SFAS No. 123, net loss per share would have been adjusted to the
pro forma amounts indicated in the table below:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
---------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS FOR THE NINE MONTHS ENDED
ENDED DECEMBER 31, 1998 DECEMBER 31, 1997 ENDED DECEMBER 31, 1998 DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss.......... $(11,020,912) $(3,512,057) $(17,169,095) $(3,512,057)
Loss per share.... $ (1.07) $ (.46) $ (1.66) $ (.46)
</TABLE>
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
-------------------------------------
Accounts payable and accrued expenses consist entirely of accrued professional
fees and other expenses.
10. NOTES PAYABLE
-------------
On September 18, 1997, the Company commenced a private offering and exchange
offer pursuant to which it offered to certain investors (i) up to 250,000 shares
of its Series A Convertible PIK Preferred Stock (with a liquidation preference
of $10.00 per share) ( the "Series A Preferred"); (ii) up to 250,000 shares of
its Series B Convertible Preferred Stock (with a liquidation preference of
$10.00 per share) (the "Series B Preferred"); and (iii) the opportunity to
exchange (the "Exchange Offer") up to 300,000 shares of its Series B Preferred
for up to $3,000,000 of convertible and non-convertible notes issued by UTTC(TM)
(the "UTTC(TM) Notes"). One holder of UTTC(TM) convertible and non-convertible
notes totaling $25,000 did not exchange notes for the Series B Preferred.
11. COMPUTATION OF PER SHARE INFORMATION
------------------------------------
Basic loss per share is computed by dividing net loss attributed to common stock
by the weighted average common share outstanding for the period. Basic loss per
share for the nine months ended December 31, 1998 and 1997 are calculated as
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
1998 1997
--------------------------------------------------
<S> <C> <C>
Net loss......................................... $(11,020,912) $(3,512,057)
Dividends paid on preferred stock................ (489,170) ---
Dividends in arrears on preferred stock1......... (312,467) ---
Recognition of beneficial conversion feature of (5,083,484) (926,282)
preferred stock2................................
--------------------------------------------------
Net loss available to common stockholders........ $(16,906,033) $(4,438,339)
==================================================
Net loss per common share........................ $(1.63) $ (.59)
==================================================
</TABLE>
- --------------------------------------------------------------------------------
1 Dividends in arrears represent the accumulated but unpaid dividends for the
Series A Preferred, Series B Preferred, Series D Preferred and Series E
Preferred through December 31, 1998.
2 The "Recognition of Beneficial Conversion Feature of Preferred Stock" reflects
the position of the Financial Accounting Standards Board Emerging Issues Task
Force Topic D-60 ("Topic D-60"). Topic D-60 addresses the position of the
accounting staff of the SEC regarding conversion features of convertible
preferred stock and convertible debt securities that are "in the money" upon
issuance, i.e. the conversion price is below the market price for the common
stock. According to Topic D-60, an issuer of an equity security containing such
a "beneficial conversion feature" must allocate to additional paid-in capital an
amount equal to the intrinsic value of such conversion feature. The discount
resulting from the allocation of proceeds to the "beneficial conversion feature"
is analogous to a dividend and should be recognized as a return to the preferred
shareholders over the minimum period in which the preferred stockholders can
realize that return. The net effect of Topic D-60 causes an increase in the net
loss applicable to common stock in computing net loss per common share. There
is no impact on the Company's net loss, cash flows or stockholders' equity.
<PAGE>
12. RECLASSIFICATIONS
-----------------
Certain reclassifications have been made to prior year's amounts to conform to
the current year's presentation.
13. RECENTLY ADOPTED ACCOUNTING STANDARDS
-------------------------------------
In 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings per Share. The adoption of this statement does not
change net loss per common share for the periods ended December 31, 1998 and
1997. Net loss per common share is computed using the weighted-average number
of shares outstanding.
In June 1997, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. In February 1998, the FASB
issued SFAS No. 132; Employer's Disclosures about Pensions and Other
Postretirement Benefits. SFAS No. 130 establishes new standards for reporting
and displaying comprehensive income and its components. SFAS No. 131 requires
disclosure of certain information regarding operating segments, products and
services, geographic areas of operation and major customers. SFAS No. 132
revises employer's disclosures about pensions and other postretirement benefit
plans. Adoption of these statements had no significant impact on the Company's
consolidated financial position, results of operations or cash flows.
In April, 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of Start-
Up Activities. SOP No. 98-5 requires all costs associated with pre-opening,
pre-operating, organization activities to be expenses as incurred. The Company
will adopt SOP No. 98-5 beginning April 1, 1999. Adoption of this Statement is
not expected to have a material impact on the Company's consolidated financial
position or results of operations.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NINE MONTHS OF FISCAL 1998 COMPARED TO NINE MONTHS OF FISCAL 1997.
- ------------------------------------------------------------------
OVERVIEW
The Company is engaged in the development and commercialization of on-line
transaction systems for participants in the U.S. and international financial
markets. The Company was founded in 1994 to apply advanced telecommunication
and computing technologies to the area of electronic commerce ("e-commerce").
The Company is currently organized as a parent company which has four
subsidiaries: (1) Universal Trading Technologies Corporation ("UTTC(TM)"), (2)
Gomez Advisors, Inc. ("GA"), (3) Electronic Market Center, Inc. ("EMC"), and (4)
ATG(TM) International, Inc. ("International"). As of December 31, 1998, all
subsidiaries are wholly-owned, except for UTTC(TM), of which the Company owns
approximately 96% of the common stock. REB Securities Inc. ("REB") is a wholly-
owned subsidiary of UTTC(TM).
The Company's limited operating history and dependence upon the operation of its
VTS(TM) makes the prediction of future operating results difficult. Although
the Company has undertaken several initiatives to activate its VTS(TM) and
develop additional sources of revenue, there can be no assurance that the
Company's products will become operational or the Company will become
profitable. For the nine months ended December 31, 1998, GA generated all of
the Company's revenues. GA provides consumer-based e-commerce research and
analysis concerning on-line financial services. GA also provides clients in the
financial services industry with advisory services.
The Company intends to continue to increase its investments in research and
development, sales and marketing and related infrastructure. Such increases
will be dependent upon factors including, but not limited to, operation of the
VTS(TM), success in hiring the appropriate personnel, market acceptance of the
Company's products, and development of a revenue stream from the Company's
products. Due to the anticipated increases in the Company's operating expenses,
the Company's operating results are materially and adversely affected while
revenue is not generated from the Company's products.
At December 31, 1998, the Company's consolidated total assets were $3,487,746
compared to $2,998,020 at March 31, 1998. Current assets totaled $1,330,335
compared to current liabilities of $343,670.
Stockholders' equity at December 31, 1998 increased to $3,144,076 from
$1,236,573 at March 31, 1998 due to the issuance of $1,275,000 of the Series B
Preferred, $3,150,000 of the Series D Preferred, $2,100,000 of the Series E
Preferred and the issuance of 2,423,802 shares of Common Stock for $3,000,000;
partially offset by the net loss of $11,020,912 and issuance costs of
$1,164,628. Preferred stock dividends of $489,170 for the nine months ended
December 31, 1998 represent cash dividends of $319,062 and stock dividends
comprised of 1,968.75 shares of Series A Preferred, .02395 shares of Series D
Preferred, and 135,051 shares of Common Stock issued to the Series D and Series
E Preferred stockholders upon conversion of shares of the Series D Preferred and
Series E Preferred.
RESULTS OF OPERATIONS
The results for the periods ended December 31, 1998 are not comparable to the
same periods ended December 31, 1997 primarily due to the sale of the Company's
CSI(R) subsidiary in November 1997, which had been the Company's primary source
of revenue during the fiscal year ended March 31, 1998.
During the quarter ended December 31, 1998, the Company incurred a net loss of
$1,978,003 as compared to a net loss of $1,556,253 for the same quarter the year
before. The net loss for the nine months ended December 31, 1998 was
$11,020,912 compared to $3,512,057 for the same period the previous year.
Excluding CSI(R), the net loss for the nine months ended December 31, 1997 would
have been $3,580,217.
<PAGE>
On a consolidated basis, the Company's revenue for the quarter ended December
31, 1998 totaled $427,884 compared to $505,310 for the same quarter of 1997.
For the nine months ended December 31, 1998, the Company had revenues of
$1,079,836 compared to revenues of $3,340,367 for the same nine months of 1997.
For the three months and nine months ended December 31, 1998, GA generated all
of the Company's revenue. Excluding CSI(R), revenue for the three months and
nine months ended December 31, 1997 would have amounted to $79,750 and $159,750,
respectively. Costs of revenues for the three months and nine months ended
December 31, 1998 represent the costs associated with the delivery of GA's
advisory services, and include the costs of salaries for personnel providing the
advisory services.
All of GA's revenue for the period from Inception (May 22, 1997) to December 31,
1997 was generated from advisory engagements with clients seeking to improve the
quality of their Internet service offerings. For the nine months ended December
31, 1998, GA's consulting revenue increased by $570,250 compared to the same
period last year. For the nine months ended December 31, 1998, advertising
revenue totaled $349,836 or 32% of total revenue compared to no advertising
revenue during the period from Inception to December 31, 1997. GA anticipates,
on a forward-looking basis, that the acceptance of its internally developed
Scorecard and the proprietary research and analysis underlying its news and
editorial website ("Gomezwire") will enable GA to increase revenue by expanding
its advisory services, attracting advertising from e-commerce vendors and by
introducing other e-commerce segments on its Scorecard.
On April 8, 1997, the Company announced that UTTC(TM) had completed development
of its VTS(TM). Although the VTS(TM) has been operational since April of 1997,
trading on the system as a facility of the PHLX could not begin until the SEC
approved Rule 237 as proposed by the PHLX. An amendment to the proposed rule,
reflecting enhancements made to the system since the SEC first published the
proposed rule in the Federal Register on September 4, 1996, was submitted by the
PHLX to the SEC on October 27, 1997.
On April 16, 1998, the SEC proposed new rules and rule amendments that would
permit ATSs to choose whether to register as national securities exchanges, or
to register as broker-dealers which must comply with additional requirements
depending on their activities and trading volume. Additionally, the SEC
proposed to exclude from rule filing requirements certain pilot trading systems
(the "Pilot Rule") to be launched by national securities exchanges and self-
regulatory organizations collectively, ("SROs"). Anticipating adoption of these
new regulations, the Company has explored the best structure for launching the
VTS(TM) and other electronic trading products while at the same time maintaining
operating flexibility. On December 2, 1998, the SEC adopted new rules and rule
amendments, which were similar to the proposed ATS regulations. The ATS
regulations and Pilot Rule permit the Company to introduce its products,
regardless of whether the PHLX rule proposal is approved by the SEC. The ATS
regulations and Pilot Rule were published in the Federal Register on December
11, 1998. Such regulations are anticipated to become effective in approximately
mid-April 1999. Company personnel have been conducting preparatory system
launch sessions with the staff of the PHLX and joint, full-scale production
testing of the VTS(TM) and PHLX systems has commenced. On a forward-looking
basis, the VTS(TM) is expected to be fully tested for deployment prior to the
effective date of the Pilot Rule. As such, ATG(TM), UTTC(TM) and the PHLX
continue to seek SEC approval of the PHLX's pending rule change filing to permit
the VTS(TM) to commence operations prior to mid- April 1999.
In order to pursue launching the VTS(TM) through a broker-dealer, the Company
formed REB in April 1998. On October 20, 1998, REB was admitted to membership on
the PHLX subject to acquisition of a seat on the PHLX. In response to a SEC
request, ATG(TM) and UTTC(TM) have agreed to operate the VTS(TM) through REB.
REB will operate as the facilities manager for the VTS(TM). On September 24,
1998, REB filed applications with the National Association of Securities Dealers
("NASD") to operate as a registered broker-dealer providing execution service
for institutional investors. REB is awaiting final approval from the NASD. In
addition, REB continues to negotiate a final agreement with a clearing firm.
The PHLX entered into an agreement on June 9, 1998 in which the American Stock
Exchange ("AMEX") would acquire it. The Company's contract with the PHLX is
assignable by its terms with the consent of both parties to the contract. The
Company has stated it does not intend to agree to the assignment of the
contract. Public reports indicate the structure and terms under which the
acquisition of the PHLX by the AMEX would occur are still being negotiated. The
Company cannot predict the impact the proposed merger, should it occur, would
have upon the Company's contract with the PHLX or the operation of the VTS(TM).
<PAGE>
During the three months and the nine months ended December 31, 1998, the Company
incurred total costs and expenses of $2,731,607 and $12,501,909, respectively,
compared to $1,603,064 and $6,271,185 for the same periods ended December 31,
1997. Excluding CSI(R), total costs and expenses for the three months and nine
months ended December 31, 1997 would have been $1,074,314 and $3,159,598,
respectively.
During the three months and nine months ended December 31, 1998, the Company
capitalized system development costs related to the VTS(TM) totaling $0 and
$61,375, respectively, compared to $44,850 and $365,640 for the same periods
last year. The Company believes the VTS(TM) is available and ready to be
marketed and has therefore ceased capitalization of computer software costs
related to the VTS(TM).
Pursuant to APB Opinion No. 25, Accounting for Stock Issued to Employees, the
Company recognized a noncash compensation charge of $4,367,809 to reflect the
excess of the fair value of the GA options granted over the exercise price of
the GA options granted. See "Subsequent Events". The Company also incurred a
noncash charge of $258,327 related to the issuance of non-employee stock options
to a consultant who provides marketing services to the Company. The charges do
not materially affect the balance sheet as the reduction in shareholders' equity
is offset by an increase in additional paid-in capital.
Selling, general and administrative expenses ("SG&A"), excluding the noncash
compensatory charge, totaled $2,535,181 and $7,284,864 for the three months and
nine months ended December 31, 1998, respectively, as compared to $1,001,451 and
$3,137,755 for the same periods of 1997. Excluding CSI(R), SG&A for the three
months and nine months ended December 31, 1997 were $957,965 and $2,704,672,
respectively.
For the nine months ended December 31, 1998, GA's SG&A totaled $1,466,790 or 20%
of the Company's total SG&A. GA's SG&A increased by $1,172,293 from the period
from Inception (May 22, 1997) to December 31, 1997 due primarily to the full
nine months of operation, growth in staff, leasing of office facilities and
other expenses incurred in building GA's infrastructure. The remaining increase
of $3,407,899 in the Company's SG&A for the nine months ended December 31, 1998
relative to the same period last year (excluding CSI(R)) is primarily a result
of growth in staff and increases in marketing, consulting and professional fees.
The Company continues to invest in the enhancement, marketing and deployment of
the VTS(TM) as well as pursuing opportunities to deploy the Company's trading
systems in the Asian and Canadian markets. The Company's efforts are focused on
(i) enhancements to the VTS(TM), (ii) development of the eMCTM, and (iii)
development of the electronic Options Exchange System ("eOXTM "), an electronic
crossing network for derivative products. The Company also continues to refine
the design requirements and evaluate market acceptance of the electronic Auction
System ("eASTM") and the electronic Public Limit Order Book ("ePLOBTM ").
The Company believes, on a forward-looking basis, that expenses will increase
for the fiscal year ended March 31, 1999 as a whole, when compared to the prior
fiscal year. The Company believes that significant spending related to the
enhancement, development and marketing of its products is required to remain
competitive and establish the necessary trading volumes once the systems are
implemented.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company's principal source of liquidity consisted of
cash and cash equivalents of $513,750. On April 3, 1998, the Company entered
into the Private Equity Agreement with the Private Equity Investors, which
provided for an aggregate commitment of $18,000,000 to the Company, subject to
the satisfaction of certain conditions (See "Notes to Unaudited Consolidated
Financial Statements Shareholders' Equity"). As of December 31, 1998, the
Company has drawn $8,000,000 of the total $18,000,000.
<PAGE>
The Company believes, on a forward-looking basis, it will begin to generate
revenues, in addition to those generated by GA, during its fiscal year ending
March 31, 2000. The level and timing of such revenue are dependent, among other
factors, upon the Company's assumptions regarding (i) the date the VTS(TM)
becomes operational; (ii) the trading volume experienced by the VTS(TM); and
(iii) the pricing the Company is able to obtain. Until adequate revenue is
derived from the VTS(TM), the Company's cash, cash equivalents and cash flow
from operations will not be sufficient to meet the presently anticipated cash
requirements. Therefore, the Company anticipates placing additional Puts to the
Private Equity Investors. Based upon the Company's current plan of operations,
it is anticipated that the remaining amount available under the Private Equity
Agreement will provide sufficient working capital for at least the next 12
months.
The Company's future capital requirements will depend on many factors, including
the timing for launch of the VTSTM, market acceptance of the Company's products,
the timing and extent of spending to support new product development efforts and
the timing of introductions of new products and enhancements to existing
products. The Company may need additional financing in the future if (i) the
Company experiences unexpected costs, (ii) there are further delays in the
introduction of the VTS(TM), or (iii) the Company fails to develop successfully
the market for its products. The Company will require additional financing to
fund development of its products such as eMC(TM). Such financing may be raised
through spin-offs, additional equity offerings, borrowings, or other
collaborative relationships, which may require the Company to share revenue from
its products. There can be no assurance that additional equity or debt
financing, if required, will be available on acceptable terms or at all. In
addition, in order to exercise Puts pursuant to the Private Equity Agreement,
the Company must satisfy certain conditions as required in the Private Equity
Agreement.
YEAR 2000 COMPUTER COMPLIANCE
The Company has assessed the potential impact of what is commonly referred to as
the "Year 2000" or "Y2K" issue, concerning the inability of certain information
systems and automated equipment to properly recognize and process dates
containing the Year 2000 and beyond. If not corrected, these systems and
equipment could fail or create erroneous results. The Company is subject to the
potential impact of the Y2K issue due to the nature of financial information and
the potential impacts which may arise from software, hardware, and equipment
both within the Company's direct control and outside of the Company's control.
The Company views its Y2K risks as arising from three primary sources: (i)
internal software, hardware and equipment utilized in the operations of the
Company; (ii) applications the Company has developed or is developing for use by
its customers; and (iii) third parties with which the Company has material
relationships.
The Company has determined that none of its critical internal systems and
equipment presents Y2K issues. The Company is continuously acquiring and
replacing both hardware and software and is obtaining Y2K compliance
certifications with such purchases. The Company's systems interface
electronically and operationally with software, hardware and equipment outside
of the Company's control. The Company also contracts with third parties for
such services as telecommunications. These third party vendors with whom the
Company has material agreements are large publicly traded organizations. The
Company is reviewing the publicly available Y2K disclosures of these vendors;
however there can be no assurance that the Company will not be adversely
affected by the failure of these third parties to become Y2K compliant. The
Company is not independently verifying the Y2K compliance of these vendors.
The Company has also determined that none of the applications it has developed
for use by its customers present Y2K issues. The Company is in the process of
obtaining an independent certification of its VTS(TM)'s Y2K readiness. In
addition, the Company's customers cannot enter or export non-Y2K compliant dates
into the VTS(TM) and all VTSTM business partners interact with the VTS(TM) via
Y2K compliant interfaces.
<PAGE>
Since the Company's VTS(TM) has not been activated, the potential liabilities
and costs associated with the Y2K compliance issue cannot be estimated with
certainty at this time. The potential costs, including any potential loss of
revenue, would be dependent upon several factors including, but not limited to,
the volume transacted through the Company's products, the Y2K readiness of
customers utilizing the Company's products and the concentration of volume among
the Company's customers. Because of these uncertainties regarding others, there
can be no assurance that the Y2K issue will not have a material financial impact
in any future period. Because of these factors, the Company has no Y2K
contingency plan and does not intend develop such a plan at this time. Should
the Company become aware that certain products or services provided by third
parties are not Y2K compliant, then the Company will develop contingency plans
for those affected services and vendors.
SUBSEQUENT EVENTS
On January 12, 1999, the Company filed a registration statement on Form S-3 with
the Commission to register additional 3,734,000 shares of Common Stock pursuant
to the Private Equity Line Agreement. The registration statement is not yet
effective.
At a meeting of the Board of Directors on January 14, 1999, Mr. Rittereiser was
named Chairman of the Board of Directors and Arthur J. Bacci, the Company's
Chief Financial Officer, was named Corporate Secretary.
On January 22, 1999, the Company, Company management, and management of GA
consummated a recapitalization of outstanding equity securities of GA whereby
(i) the GA common stock owned by the Company was exchanged for preferred stock
of GA; (ii) all existing GA stock options were canceled; (iii) GA common stock
was issued to management and directors of GA; and (iv) a new stock option plan
was adopted for GA employees. As a result of the restructuring, the Company's
initial voting equity ownership of GA will be reduced from 100% to approximately
70%.
On February 8, 1999, GA commenced a private placement of equity securities.
The proceeds from the private placement will be used to expand staffing, for
capital expenditures to build an on-line research station and advanced database
system, to develop and market new products and services, and for general
corporate purposes. The securities offered in the private placement will not be
registered under the Securities Act of 1933, as amended, and may not be sold in
the U.S. absent registration or an applicable exemption from the registration
requirements. GA is also exploring additional financing strategies including an
initial public offering of common stock.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Alliant with whom the Company had a contract for the production of certain ATED
Encryption Devices ("ATEDs") had demanded payment of approximately $292,000,
under the contract between Alliant and the Company, which the Company was
contesting. On October 22, 1997, the Company filed a Complaint against Alliant
in the Court of Common Pleas, County of Philadelphia, Pennsylvania ("PA") for
damages and failure of Alliant to perform its obligations under its contract
with the Company. On December 15, 1997, Alliant filed its Answer and
Counterclaims totaling $292,000. Since the filing of this original lawsuit on
October 22, 1997, the Company encountered warranty-related problems while
testing the ATEDs. Alliant had failed to address the reported problems. As a
result, the Company filed a second Complaint against Alliant for breach of
warranty. The second action was commenced on July 20, 1998 and sought damages
in excess of $50,000.
On November 16, 1998, a non-jury civil trial commenced related to the Company's
first Complaint as well as Alliant's Counterclaim. On November 23, 1998,
judgements were rendered in favor of the Company in the amount of $316,000 (plus
interest of approximately $28,000) that resolved both pending Complaints by the
Company against Alliant. Additionally, a judgement for Company was rendered
which dismissed Alliant's Counterclaims against the Company. See Item 8-
Exhibits and Reports on Form 8-K.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
None.
ITEM 5. OTHER INFORMATION
See "Subsequent Events" in Item 2 of Part I above.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit 3.1 - By-Laws, amended and restated effective November 11, 1998
Exhibit 11 - Earnings per share computation.
Exhibit 27 - Financial Data Schedule.
(B) Reports on Form 8K
December 10, 1998 - Judgements in Alliant Litigation.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Ashton Technology Group, Inc.
---------------------------------
(Registrant)
Date: February 10, 1999 By:
/s/ Arthur J. Bacci
--------------------------------------------
Arthur J. Bacci
Senior Vice President, Chief Financial
Officer and Treasurer
<PAGE>
EXHIBIT INDEX
Page
----
EXHIBIT 3.1
- -----------
By-Laws, amended and restated effective November 11, 1998...... 24
EXHIBIT 11
- ----------
Earnings per share computation................................. 36
EXHIBIT 27
- ----------
Financial Data Schedule........................................ 37
<PAGE>
Exhibit 3.1
THE ASHTON TECHNOLOGY GROUP, INC.
BY-LAWS
AS AMENDED AND RESTATED NOVEMBER 11, 1998
ARTICLE I
Section 1. The registered office shall be at such place within the State
of Delaware as the board of directors may, from time to time, determine.
Section 2. The corporation may also have offices at such other places both
within and without the State of Delaware as the board of directors may from time
to time determine or the business of the corporation may require.
ARTICLE II
Section 1. All meeting of the stockholders for the election of directors
shall be held in the State of Delaware, at such place as may be fixed, from time
to time by the board of directors, or at such other place either within or
without the State of Delaware as shall be designated from time to time by the
board of directors and stated in the notice of the meeting. Meetings of
stockholders for any other purpose may be held at such time and place, within or
without the State of Delaware, as shall be stated in the notice of the meeting
or in a duly executed waiver of notice thereof.
Section 2. Annual meeting of stockholders shall be held on the fifteenth
day of the sixth month following the end of each fiscal year or as soon
thereafter as practicable, as shall be designated from time to time by the board
of directors and stated in the notice of the meeting, at which they shall elect
by a plurality vote a board of directors, and transact such other business as
may properly be brought before the meeting.
Section 3. Written notice of the annual meeting stating place, date and
hour of the meeting shall be given to each stockholder entitled to vote at such
meeting not less than ten nor more than sixty days before the date of the
meeting.
Section 4. Only persons who are nominated in accordance with the
procedures set forth in this Section 4 shall be eligible for election as
directors. Nominations of persons for election to the board of directors of the
corporation may be made at a meeting of stockholders by or at the direction of
the board of directors or by any stockholder of the corporation entitled to vote
for the election of directors at the meeting who complies with the notice
procedures set forth in this Section 4. Such nominations, other than those made
by or under the direction of the board of directors, shall be made pursuant to
timely notice in writing to the secretary of the corporation. To be timely, a
stockholder's notice shall be delivered to or mailed and received at the
principal executive offices of the corporation not less than 60 days nor more
than 90 days prior to the meeting; provided, however, that in the event that
less than 70 days' notice or prior public disclosure of the date of the meeting
is given or made to stockholders, notice by the stockholder to be timely must be
so received not later than the close of business on the 10th day following the
<PAGE>
day on which such notice of the date of the meeting was mailed or such public
disclosure was made. Such stockholder's notice shall set forth (a) as to each
person whom the stockholder proposes to nominate for election or re-election as
a director, (i) the name, age, business address and residence address of such
person, (ii) the principal occupation or employment of such person, (iii) the
class and number of shares of the corporation which are beneficially owned by
such person, and (iv) any other information relating to such person that is
required to be disclosed in solicitations of proxies for election of directors,
or is otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (including without limitation such
persons' written consent to being named in the proxy statement as a nominee and
to serving as a director if elected); and (b) as to the stockholder giving the
notice (i) the name and address, as they appear on the corporation's books, of
such stockholder and (ii) the class and number of shares of the corporation
which are beneficially owned by such stockholder.
At the request of the board of directors any person nominated by the board
of directors for election as a director shall furnish to the secretary of the
corporation that information required to be set forth in a stockholder's notice
of nomination which pertains to the nominee.
No person shall be eligible for election as a director of the corporation
unless nominated in accordance with the procedures set forth in this Section 4.
The chairman of the meeting shall, if the facts warrant, determine and declare
to the meeting that a nomination was not made in accordance with the procedures
prescribed by the by-laws, and if he should so determine, he shall so declare to
the meeting and the defective nomination shall be disregarded.
Section 5. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may be called by the president and shall be called by the
president or secretary at the request in writing of a majority of the board of
directors, or at the request in writing of stockholders owning a majority in
amount of the entire capital stock of the corporation issued and outstanding and
entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.
Section 6. Written notice of a special meeting stating the place, date and
hour of the meeting and the purpose or purposes for which the meeting is called
shall be given not less than ten nor more than sixty days before the date of the
meeting, to each stockholder entitled to vote at such meeting.
Section 7. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.
Section 8. Except as provided by law or the certificate of incorporation,
the holders of a majority of the stock issued and outstanding and entitled to
vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business. If,
however, such quorum shall not be present or represented at any meeting of the
stockholders, the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have power to adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum shall be
present or represented. At such
<PAGE>
adjourned meeting, at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. If the adjournment is for more than thirty days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes, of
the certificate of incorporation or other provisions of the by-laws, a different
vote is required in which case such express provision shall govern and control
the decision of such question.
Section 10. Unless otherwise provided in the certificate of incorporation,
each stockholder shall at every meeting of the stockholders be entitled to one
vote in person or by proxy for each share of the capital stock having voting
power held by such stockholder, but no proxy shall be voted on after three years
from its date, unless the proxy provides for a longer period.
Section 11. Unless otherwise provided in the certificate of incorporation,
any action required to be taken at any annual or special meeting of such
stockholders may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
Prompt notice of the taking of the corporate action without a meeting by less
than unanimous written consent shall be given to those stockholders who have not
consented in writing to such corporate action.
Section 12. At each meeting of the stockholders, the president or, in his
absence or inability to act, a vice president, if there is one (or, in the event
there is more than one vice president, the vice president in the order
designated by the directors, or in the absence of any designation, then in the
order of their election or the secretary or the treasurer, in that order) shall
act as chairman of the meeting. The secretary or, in his absence or inability
to act, any person appointed by the chairman of the meeting shall act as
secretary of the meeting and keep the minutes thereof.
Section 13. The board may, in advance of any meeting of stockholders,
appoint one or more inspectors to act at such meeting or any adjournment
thereof. If the inspectors shall not be so appointed or if any of them shall
fail to appear or act, the chairman of the meeting may appoint inspectors. Each
inspector, before entering upon the discharge of his duties, shall take and sign
an oath faithfully to execute the duties of inspector at such meeting with
strict impartiality and according to the best of his ability. The inspectors
shall determine the number of shares outstanding and the voting power of each,
the number of shares represented at the meeting, the existence of a quorum, the
validity and effect of proxies, and shall receive votes, ballots or consents,
hear and determine all challenges and questions arising in connection with the
right to vote, count and tabulate all votes, ballots or consents, determine the
result, and do
<PAGE>
such acts as are proper to conduct the election or vote with fairness to all
stockholders. On request of the chairman of the meeting or any stockholder
entitled to vote thereat, the inspectors shall make a report in writing of any
challenge, question or matter determined by them and shall execute a certificate
of any fact found by them. No director or candidate for the office of director
shall act as an inspector of an election of directors. Inspectors need not be
stockholders.
ARTICLE III
DIRECTORS
---------
Section 1. The number of directors which shall constitute the entire board
shall not be less than one nor more than seven. The first board shall consist
of one director. Thereafter, within the limits above specified, the number of
directors shall be determined by resolution of the board directors or by the
stockholders at the annual meeting of the stockholders, except as provided in
Section 2 of this Article, and each director elected shall hold office until his
successor is elected and qualified. Directors need not be stockholders.
Section 2. Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, or by a sole remaining
director, and the directors so chosen shall hold office until the next annual
election and until their successors are duly elected and shall qualify, unless
sooner displaced. If there are no directors in office, then an election of
directors may be held in the manner provided by statute. If, at the time of
filling any vacancy or any newly created directorship, the directors then in
office shall constitute less than a majority of the entire board (as constituted
immediately prior to any such increase), the Court of Chancery may, upon
application of any stockholder or stockholders holding at least 10 percent of
the total number of the shares at the time outstanding having the right to vote
for such directors, summarily order an election to be held to fill any such
vacancies or newly created directorships, or to replace the directors chosen by
the directors then in office.
Section 3. The business of the corporation shall be managed by its board
of directors which may exercise all such powers of the corporation and do all
such lawful acts and things as are not by statute or by the certificate of
incorporation or by these by-laws directed or required to be exercised or done
by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
----------------------------------
Section 4. The board of directors of the corporation may hold meetings,
both regular and special, either within or without the State of Delaware.
Section 5. The first meeting of each newly elected board of directors
shall be held immediately following the annual meeting of stockholders at the
place of such annual meeting of stockholder and no notice of such meeting shall
be necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event such meeting is not
held immediately following the annual meeting of stockholders at the place of
such annual meeting of stockholders, the meeting may be held at such time and
place as shall be
<PAGE>
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified, in a written waiver signed by all
of the directors.
Section 6. Regular meetings of the board of directors may be held without
notice at such time and at such place as shall from time to time be determined
by the board.
Section 7. Special meetings of the board may be called by the president
or, in the absence of a president, by the chairman of the board, on one day's
notice to each director, either personally or by mail, telegram or telefax;
special meetings shall be called by the president or secretary in like manner
and on like notice on the written request of a majority of the directors.
Section 8. The board of directors at its first meeting held after each
annual meeting of stockholders may designate one of the directors as the
chairman of the board who shall hold such position until a successor is
appointed and qualified or until his or her earlier resignation or removal. The
chairman of the board shall preside at meetings of the board of directors.
Section 9. At all meetings of the board, a majority of the directors then
in office shall constitute a quorum for the transaction of business and the act
of a majority of the directors present at any meeting at which there is a quorum
shall be the act of the board of directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the board of directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting until a quorum shall be present.
Section 10. Unless otherwise restricted by the certificate of
incorporation or these by-laws, any action required or permitted to be taken at
any meeting of the board of directors or of any committee thereof may be taken
without a meeting if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committees.
Section 11. Unless otherwise restricted by the certificate of
incorporation or these by-laws, members of the board of directors, or any
committee designated by the board of directors, may participate in a meeting of
the board of directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
Section 12. No contract or other transaction between this corporation and
any other corporation shall be impaired, affected or invalidated, nor shall any
director be liable in any way by reason of the fact that any one or more of the
directors of this corporation is or are interested in, or is a director or
officer, or are directors of such other corporation, provided that such facts
are disclosed or made known to the board of directors.
Any director, personally and individually, may be a party to or may be
interested in any contract or transaction of this corporation, and no director
shall be liable in any way by reason of such interest, provided that the fact of
such interest be disclosed or made known to the board of
<PAGE>
directors, and provided that the board of directors shall authorize, approve or
ratify such contract or transaction by the vote (not counting the vote of any
such director) of a majority of a quorum, notwithstanding the presence of any
such director at the meeting at which such action is taken. Such director or
directors may be counted in determining the presence of a quorum at such
meeting. This Section shall not be construed to impair or invalidate or in any
way affect any contract or other transaction which would otherwise be valid
under the law (common, statutory or otherwise) applicable thereto.
COMMITTEES OF DIRECTORS
-----------------------
Section 13. The board of directors may, by resolution passed by a majority
of the entire board, designate one or more committees, each committee to consist
of one or more of the directors of the corporation. The board designate one or
more directors as alternate members of any committee who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at a meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors, shall have and may exercise all the powers and authority of
the board of directors, shall have and may exercise all the powers and authority
of the board of directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or amending the
by-laws of the corporation; and, unless the resolution or the certificate of
incorporation expressly so provides, no such committee shall have the power or
authority to declare a dividend or to authorize the issuance of stock. Such
committee or committee shall have such name or names as may be determined from
time to time by resolution adopted by the board of directors. Each committee
shall keep regular minutes of its meetings and report the same to the board of
directors when required.
COMPENSATION OF DIRECTORS
-------------------------
Section 14. Unless otherwise restricted by the certificate of
incorporation or these by-laws, the board of directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the board of directors and may be paid
a fixed sum for attendance at each meeting of the board of directors or a stated
salary as director. No such payment shall preclude any director from serving
the corporation in any other capacity and receiving compensation therefor.
Members of special or standing committees may be allowed like compensation for
attending committee meetings. Employees of the corporation or any of its
subsidiaries shall not be entitled to compensation for serving as directors or
committee members.
<PAGE>
REMOVAL OF DIRECTORS
--------------------
Section 15. Unless otherwise restricted by the certificate of incorporation
or these by-laws, any director or the entire board of directors may be removed,
with or without cause, by the holders of a majority of shares entitled to vote
at an election of directors.
ARTICLE IV
NOTICES
-------
Section 1. Whenever, under the provision of the statutes or of the
certificate of incorporation or of these by-laws, notice is required to be given
to any director or stockholder, it shall be given in writing, personally, by
hand or by mail, addressed to such director or stockholder at his address as it
appears on the records of the corporation, with postage thereon prepaid, and
such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Notice to directors may also be given by
telegram or by telefax.
Section 2. Whenever any notice is required to be given under the
provisions of the statutes or of the certificate of incorporation or of these
by-laws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
--------
Section 1. The officers of the corporation shall be chosen by the board of
directors and shall be a president, a secretary and a treasurer. The board of
directors may also choose one or more vice presidents and one or more assistant
secretaries and assistant treasurers. Any number of offices may be held by the
same person, unless otherwise provided by law, the certificate of incorporation
or these by-laws.
Section 2. The board of directors at its first meeting after each annual
meeting of stockholders shall choose a president, one or more vice-presidents, a
secretary and a treasurer.
Section 3. The board of directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
Section 4. The salaries of all officers and agents of the corporation
shall be fixed by the board of directors.
<PAGE>
Section 5. The officers of the corporation shall hold office until their
successors are appointed and qualified or until their earlier resignation or
removal. Subject to the terms of an existing agreement, if any, any officer
elected or appointed by the board of directors may be removed at any time by the
affirmative vote of a majority of the board of directors. Any vacancy occurring
in any office of the corporation shall be filled by the board of directors.
THE PRESIDENT
-------------
Section 6. The president shall be the chief executive officer of the
corporation and shall have general and active management of the business of the
corporation, subject to the control of the board of directors, and general and
active supervision and direction over the other officers, agents and employees
and shall see that their duties are properly performed. He shall, if present,
preside at each meeting of the stockholders and, if there is no chairman of the
board, at each meeting of the board of directors, and he shall be an ex officio
-- -------
member of all committees of the board but shall not have a vote. He shall
perform all duties incident to the office of president and chief executive
officer and such other duties as may from time to time be assigned to him by the
board.
Section 7. The president shall executed bonds, mortgage and other
contracts requiring a seal, under the seal of the corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
board of directors to some other officer or agent of the corporation.
THE VICE PRESIDENTS
-------------------
Section 8. In the absence of the president or in the event of his
inability or refusal to act, the vice president, if there is one, (or, in the
event there be more than one vice president, the vice president in the order
designated by the directors, or in the absence of any designation, then in the
order of their election) or the secretary or the treasurer, in that order, shall
perform the duties of the president and, when so acting, shall have all the
powers of and be subject to all the restrictions upon the president and shall
perform such other duties and have such other powers as the board of directors
may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARIES
---------------------------------------
Section 9. The secretary shall attend all meetings of the board of
directors and all meetings of the stockholders and record all the proceedings of
such meetings in a book to be kept for that purpose and shall perform like
duties for the standing committees when required. He shall give, or cause to be
given, notice of all meetings of the stockholders and special meetings of the
board of directors, and shall perform such other duties as may be prescribed by
these by-laws or by the board of directors or president, under whose supervision
he shall be. He shall have custody of the corporate seal of the corporation and
he, or an assistant secretary, shall have the authority to affix the same to any
instrument requiring it and when so affixed, it may be attested by his signature
or by the signature of such assistant secretary. The board of directors may
give general authority to any other officer to affix the seal of the corporation
and to attest the affixing by his signature.
<PAGE>
Section 10. The assistant secretary or, if there be more than one, the
assistant secretaries in the order determined by the board of directors (or if
there be no such determination, then in the order of their election), shall, in
the absence of the secretary or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the secretary and shall perform
such other duties and have such other powers as the board of directors may from
time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
--------------------------------------
Section 11. The treasurer shall have custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the board of directors.
Section 12. The treasurer shall disburse the funds of the corporation as
may be ordered by the board of directors, taking proper vouchers for such
disbursements, and shall render to the president and the board of directors, at
its regular meetings, or when the board of directors so requires, an account of
all his transactions as treasurer and of the financial condition of the
corporation. He shall perform such other duties as may be prescribed by these
by-laws or by the board of directors or president, under whose supervision he
shall be.
Section 13. If required by the board of directors, the treasurer shall
give the corporation a bond (which shall be renewed every six years) in the such
sum and with such surety or sureties as shall be satisfactory to the board of
directors for the faithful performance of the duties of his office and for the
restoration to the corporation, in case of his death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and other property of
whatever kind in his possession or under his control belonging to the
corporation.
Section 14. The assistant treasurer or, if there shall be more than one,
the assistant treasurers in the order determined by the board of directors (or
if there be no such determination, then in the order of their election), shall,
in the absence of the treasurer or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the treasurer and shall
perform such other duties and have such other powers as the board of directors
may from time to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
--------------------
Section 1. Every holder of stock in the corporation shall be entitled to
have a certificate in the name of the corporation signed by the president or a
vice president and the treasurer or an assistant treasurer, or the secretary or
an assistant secretary, of the corporation, certifying the number of shares
owned by him in the corporation.
<PAGE>
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, provided that except as
otherwise provided in Section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
Section 2. Any of or all the signatures on the certificate may be
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issues, it may be issued by the corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of the issue.
LOST CERTIFICATES
-----------------
Section 3. The board of directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the board of directors may, in its
sole discretion and as a condition precedent to the issuance thereof, require
the owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
TRANSFER OF STOCK
-----------------
Section 4. Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, subject to
compliance with federal and state securities laws, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
FIXING RECORD DATE
------------------
Section 5. In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any
<PAGE>
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty nor less than ten days before the date of such meeting,
nor more than sixty days prior to any other action. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the board of directors may fix a new record date for the adjourned meeting.
REGISTERED STOCKHOLDERS
-----------------------
Section 6. The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
GENERAL PROVISIONS
------------------
DIVIDENDS
---------
Section 1. Subject to the provisions of the certificate of incorporation,
as amended by any Certificate of Designation, dividends upon the capital stock
of the corporation, if any, may be declared by the board of directors at any
regular or special meeting, pursuant to law. Subject to the provisions of the
certificate of incorporation, as amended by any Certificate of Designation,
dividends may be paid in cash, in property or in shares of the capital stock,
pursuant to law.
Section 2. Before payment of any dividend, there may be set aside out of
any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation or for such other
purposes as the directors shall think conducive to the interests of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
ANNUAL STATEMENT
----------------
Section 3. The board of directors shall present at each annual meeting,
and at any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.
<PAGE>
CHECKS
------
Section 4. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons as
the board of directors may from time to time designate.
FISCAL YEAR
-----------
Section 5. The fiscal year of the corporation shall end on March 31 of
each year.
SEAL
----
Section 6. The corporate seal shall have inscribed thereon the name of the
corporation, the year of its organization and the words "Corporate Seal,
Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE VIII
AMENDMENTS
----------
Section 1. These by-laws may be altered, amended or repealed or new by-
laws may be adopted by the stockholders or by the board of directors, at any
meeting of the stockholders or of the board of directors if notice of such
alteration, amendment, repeal or adoption of new by-laws be contained in the
notice of such meeting. The by-laws may also be amended by the stockholders
pursuant to Section 11 of Article II without prior notice of alteration,
amendment or repeal of these by-laws or adoption of new by-laws. The power to
adopt, alter, amend or repeal by-laws by the board of directors shall not divest
or limit the power of the stockholders to adopt, alter, amend or repeal by-laws.
ARTICLE IX
INDEMNIFICATIONS
----------------
The officers and directors of the corporation shall be entitled to
indemnification to the maximum extent permitted by Delaware law.
<PAGE>
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
----------------------------------- ------------------------------------
DEC. 31, 1998 DEC. 31, 1997 DEC. 31, 1998 DEC. 31, 1997
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net loss................................... $(1,978,003) $(1,556,253) $(11,020,912) $(3,512,057)
Dividends paid on preferred stock.......... (129,471) --- (489,170) ---
Dividends in arrears on preferred stock.... (98,507) --- (312,467) ---
Recognition of beneficial conversion --- (926,282) (5,083,484) (926,282)
feature of preferred stock................
------------------------------------------------------------------------------
Net loss available to common stockholders.. $(2,202,981) $(2,482,535) $(16,906,033) $(4,438,339)
==============================================================================
Weighted average common share outstanding.. 10,907,910 7,562,500 10,350,524 7,562,500
Dilutive effect of common equivalent
shares(a)................................. --- --- --- ---
------------------------------------------------------------------------------
Weighted average common share outstanding.. 10,907,910 7,562,500 10,350,524 7,562,500
==============================================================================
Net loss per common share (b).............. $(.20) $(.33) $(1.63) $(.59)
==============================================================================
</TABLE>
(a) Calculates the dilutive effect of outstanding stock options based upon the
"Treasury Stock Method".
(b) As fully diluted earning per share and primary earnings per share are equal,
only fully diluted earnings per share will be disclosed in the Form 10-QSB.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1999
<PERIOD-START> OCT-1-1998 APR-1-1998
<PERIOD-END> DEC-31-1998 DEC-31-1998
<CASH> 513,750 513,750
<SECURITIES> 0 0
<RECEIVABLES> 715,909 715,909
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,330,335 1,330,335
<PP&E> 1,817,527 1,817,527
<DEPRECIATION> (764,025) (764,025)
<TOTAL-ASSETS> 3,487,746 3,487,746
<CURRENT-LIABILITIES> 343,670 343,670
<BONDS> 0 0
0 0
9,584,663 9,584,663
<COMMON> 150,464 150,464
<OTHER-SE> (6,591,051) (6,591,051)
<TOTAL-LIABILITY-AND-EQUITY> 3,847,746 3,847,746
<SALES> 427,884 1,079,836
<TOTAL-REVENUES> 427,884 1,079,836
<CGS> 56,250 168,750
<TOTAL-COSTS> 2,731,607 12,501,909
<OTHER-EXPENSES> (325,720) (401,161)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (1,978,003) (11,020,912)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,978,003) (11,020,912)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,978,003) (11,202,912)
<EPS-PRIMARY> (.18) (1.07)
<EPS-DILUTED> (.20) (1.63)
</TABLE>
