<PAGE>
As filed with the Securities and Exchange Commission on February 4, 1999
Registration No. 333-_______
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INTERNET FINANCIAL SERVICES INC.
(Name of small business issuer in its charter)
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<S> <C> <C>
Delaware 6211 13-3911867
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
40 Wall Street
New York, New York 10005
(212) 422-1664
(Address and telephone number of principal executive offices and principal
place of business)
Steven Malin
Chairman and Chief Executive Officer
Internet Financial Services Inc.
40 Wall Street, New York, New York 10005
(212) 422-1664
(Name, address and telephone number of agent for service)
Copies to:
Edward I. Tishelman, Esq. Robert J. Mittman, Esq.
Hartman & Craven LLP Tenzer Greenblatt LLP
460 Park Avenue 405 Lexington Avenue
New York, New York 10022 New York, New York 10174
(212) 753-7500 (212) 885-5000
(212) 688-2870 (fax) (212) 885-5001 (fax)
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Approximate date of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective
---------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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CALCULATION OF REGISTRATION FEE
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Proposed
Maximum Proposed
Offering Price Maximum Amount of
Title of Each Class of Amount to Be Per Aggregate Registration
Securities to be Registered Registered Unit(1) Offering Price(1) Fee(1)
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<S> <C> <C> <C> <C>
Common Stock, $.001 par value ("Common
Stock") ............................. 1,955,000(2) $ 6.00 $11,730,000 $ 3,260.94
- ------------------------------------------------------------------------------------------------------------------
Underwriter's Warrants(3) ............ 170,000 $ .001 $ 100 $ --(4)
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Common Stock underlying Underwriter's
Warrants ............................ 170,000 $ 9.90 $ 1,683,000 $ 467.87
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Total .................................................................. $13,413,100
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Total Registration Fee ...................................................................... $ 3,728.81
=================================================================================================================
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(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) of the Securities Act.
(2) Includes 255,000 shares which the Underwriter has the option to purchase to
cover over-allotments, if any.
(3) Represents warrants to be issued to the Underwriter. Pursuant to Rule 416,
there is also being registered hereby such additional indeterminate number
of shares of Common Stock as may become issuable by reason of the
anti-dilution provisions set forth in the Underwriter's Warrants.
(4) None pursuant to Section 457(g).
ii
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Internet Financial Services Inc.
Cross Reference Sheet for Prospectus Under Form SB-2
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Front of Registration Statement and Outside Front
Cover of Prospectus ..................................... Front of Registration Statement and Outside Front
Cover Page of Prospectus
Inside Front and Outside Back Cover Pages of
Prospectus .............................................. Inside Front and Outside Back Cover
Summary Information and Risk Factors .................... Prospectus Summary; Risk Factors
Use of Proceeds ......................................... Use of Proceeds
Determination of Offering Price ......................... Outside Front Cover Page of Prospectus;
Underwriting
Dilution ................................................ Dilution
Selling Security Holders ................................ Inapplicable
Plan of Distribution .................................... Outside Front Cover Page of Prospectus;
Underwriting
Legal Proceedings ....................................... Litigation
Directors, Executive Officers, Promoters and
Control Persons ........................................ Management
Security Ownership of Certain Beneficial Owners
and Management ......................................... Principal Stockholders
Description of Securities ............................... Outside Front Cover Page of Prospectus; Prospectus
Summary; Capitalization; Description of Securities
Interests of Named Experts and Counsel .................. Legal Matters; Experts
Disclosure of Commission Position on
Indemnification for Securities Act Liabilities ......... Management
Organization within Last Five Years ..................... Certain Transactions
Description of Business ................................. Business
Management's Discussion and Analysis or Plan of
Operation .............................................. Management's Discussion and Analysis of Financial
Condition and Results of Operation
Description of Property ................................. Business
Certain Relationships and Related Transactions .......... Certain Transactions
Market for Common Equity and Related
Stockholder Matters .................................... Outside Front Cover Page of Prospectus; Risk
Factors; Management; Description of Securities
Executive Compensation .................................. Management
Financial Statements .................................... Financial Statements
Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure .................... Inapplicable
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iii
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION
DATED FEBRUARY 4, 1999
Internet Financial Services Inc.
1,700,000 Shares of Common Stock
$6.00 per Share
Internet Financial Services Inc. is offering 1,700,000 shares of its
common stock. This is our initial public offering and there currently is no
public market for our common stock. The offering price may not reflect the
market price of our shares after the offering.
We anticipate that our common stock will be listed on the Nasdaq SmallCap
Market under the symbol "IFSX."
---------------------
Investing in the common stock involves risks. See "Risk Factors beginning on
page 7."
---------------------
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Public Underwriting Proceeds
Offering Discounts and to
Price Commissions Company
- --------------------------------------------------------------------------------
Per Share ......... $ 6.00 $ .60 $ 5.40
- --------------------------------------------------------------------------------
Total ............. $10,200,000 $1,020,000 $9,180,000
================================================================================
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
We have granted the underwriter a 45-day option to purchase up to an
additional 255,000 shares of common stock to cover over-allotments. Whale
Securities Co., L.P. expects to deliver the shares of common stock to purchasers
on _____________, 1999.
---------------------
Whale Securities Co., L.P.
, 1999
<PAGE>
We provide real-time online financial brokerage services and comprehensive
information about the securities markets through our proprietary trading
systems, UltimateTrader and WatleyTrader.
[Picture of Watley home page]
Home page of A.B. Watley, Inc., our wholly-owned subsidiary and a registered
broker dealer and member of the NASD.
UltimateTrader
[Picture of UltimateTrader screen]
o UltimateTrader provides our clients comprehensive information on stocks,
markets, indices, mutual funds and options.
o UltimateTrader delivers and automatically updates a continuous, dynamic stream
of live market data to the client's screen.
o UltimateTrader clients are able to access bid and ask prices, charts, research
and over 170 other types of information for any listed or Nasdaq traded stock.
o UltimateTrader clients can track their portfolio of securities, cash and
margin positions on a real-time basis.
o UltimateTrader clients are able to route their orders directly to an exchange
(New York Stock Exchange, American Stock Exchange, Nasdaq Stock Market and
Chicago Board Options Exchange), the Nasdaq Market Maker System, a specified
market maker or an ECN.
UltimateTrader clients may arrange the display and configuration of the windows
on their computer screens, using a menu and tool bar, in order to suit their
personal requirements. Various windows are shown below.
The UltimateTrader order entry window offers multiple execution choices and
rapid on-screen confirmations. Nasdaq orders may be routed directly to the
Nasdaq Stock Market, a specific market maker or an ECN. Orders for exchange
listed securities go directly to the NYSE's DOT system or the American Stock
Exchange's electronic order system. Orders may also be placed through our Watley
trading desk.
[Picture of Order Entry window]
The Nasdaq Level II Market Maker window allows UltimateTrader clients to see the
market makers in a security, as well as the volume and price of their bid and
offer quotes in real-time. The Time and Sales window shows actual trades by
size, time of execution and exchange.
The Position Minder window acts as a portfolio monitor by showing all open
positions, pending order size and status.
[Picture of Level II Market Maker window]
The Charting feature allows UltimateTrader clients to view live, dynamically
updating, real-time intraday chart data and historical information. Charts may
be created for stocks, options or indices for virtually any time period and time
interval desired by the client.
The Dow Jones News window provides continuously updating real-time news in a
scrolling format, including breaking news, corporate announcements, interviews,
industry news, market reports, economic and political developments, "hot stock"
alerts, international events and other information that impacts the securities
markets.
[Picture of a Charts window]
2
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PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. It is not complete and may not contain all of the information that
is important to you. To understand this offering fully, you should read the
entire prospectus, including the risk factors and financial statements. Except
as otherwise indicated, the information in this Prospectus assumes no exercise
of the underwriter's over-allotment option to purchase up to 255,000 additional
shares of common stock. See "Underwriting" and Note 15 to Notes to the
Consolidated Financial Statements.
Our Company
Internet Financial Services Inc. provides real-time online financial
brokerage services and comprehensive information about the securities markets
through its proprietary trading systems, UltimateTrader(TM) and
WatleyTrader(TM). We designed UltimateTrader for use by self-directed active
traders. Active traders execute more trades per day than any other category of
investors and require real-time information and quick order execution to
effectuate their trading strategies.
UltimateTrader is a uniquely integrated trading system because it provides
active traders with the comprehensive information they need on a real-time basis
and the ability to execute trades in seconds. Since UltimateTrader is a
client-server application, it is not restricted by the "query-response"
limitation of HTML, the primary programming language of the worldwide web. As a
result, UltimateTrader delivers and automatically updates a continuous, dynamic
stream of live market data to the client's screen. With most other
Internet-based trading systems, displayed data remains static until the query is
repeated.
UltimateTrader provides our clients access to comprehensive information on
stocks, markets, indices, mutual funds, news and options. UltimateTrader clients
are able to access bid and ask prices, charts, research and over 170 other types
of information for any listed or Nasdaq traded stock, as well as the ability to
establish and track their securities, cash and margin positions on a real-time
basis. UltimateTrader clients have the ability to customize the screen layouts
they wish to have displayed. Our clients also have the option to receive the Dow
Jones News Service feed on a real-time basis.
UltimateTrader clients can execute trades with a few simple mouse-clicks or
keystrokes. UltimateTrader clients can route trades directly to the exchanges
(New York Stock Exchange, American Stock Exchange, Nasdaq and Chicago Board
Options Exchange), the Nasdaq Market Maker System, a specific market maker or an
electronic communications network. As a result, we believe that trades can be
executed more quickly than if the trade is routed through a third market firm or
an online brokerage firm's trading desk, as is the case with many other trading
systems.
WatleyTrader is our web-based Internet broker service which we designed for
active investors who execute trades on a frequent basis and use online services
to gather information about the securities markets. WatleyTrader provides
clients comprehensive information on stocks, markets, indices, mutual funds,
news and options in a totally live format for a fee, or a partially time delayed
format for free. WatleyTrader clients can place trades, obtain quotes, order
research and check account balances and portfolio valuations online or through
our automated touch-tone phone system, 24 hours a day. We introduced
WatleyTrader as an alternative to UltimateTrader for potential clients who do
not trade as frequently as active traders and as a means to market our services.
We also operate a third-market institutional sales desk which specializes
in executing and facilitating large-block transactions in approximately 300
thinly-traded equity securities. These services are provided to clients which
require that their purchases or liquidations of large positions remain
anonymous. We match buyers and sellers to execute "off-exchange transactions,"
to minimize the impact on the market and prevent our clients' positions from
being disclosed to competing firms. Our third-market institutional sales clients
include mutual and pension funds, insurance companies, banks, corporations and
independent fund managers.
3
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Online trading is the fastest growing segment of the brokerage industry and
is expected to continue to grow significantly. Forrester Research, Inc.
estimates that the online trading industry grew from approximately 1.5 million
accounts at the end of 1996 to approximately 5 million accounts at the end of
1998 and that the market will grow to 8.4 million accounts at the end of 1999
and 14.4 million accounts in 2002. In addition, industry experts project that
retail commissions generated by the online trading market will grow from
approximately $268 million, or 15% of the commissions generated by discount
brokerages in 1996, to as much as $2.2 billion, or 60% of total discount
brokerage commissions by 2001. We believe that UltimateTrader's features
uniquely position our company to satisfy the needs of this growing market.
Our strategy is to capitalize on perceived opportunities arising from this
expanding market by:
o Targeting active traders and other active investors. We believe that the
market for such clients is currently underserviced and that UltimateTrader
is positioned to satisfy their requirements.
o Expanding our marketing efforts for our online brokerage service. We intend
to aggressively market UltimateTrader by targeting active traders through
print, online and other advertisements.
o Expanding our network infrastructure and client support capabilities. We
intend to undertake such expansion to better service an expected increasing
client base.
o Converting to self-clearing operations. We believe that performing such
operations internally will reduce our operating costs and provide us the
opportunity to receive revenues from margin transactions with our clients.
o Improving our third-market institutional sales desk. We are continuously
seeking to improve our technical expertise and apply new technologies to
more effectively provide such services. Additionally, after this offering,
we intend to hire additional associates to expand the number of securities
we cover for this market. During the year ended September 30, 1998,
revenues generated by our third-market institutional sales desk accounted
for 30.6% of our revenues.
o Offering new services:
International Expansion. We are currently evaluating opportunities to
provide electronic execution services for foreign institutions and their
clients for transactions in the U.S. securities markets and to arrange for
foreign institutions to provide for such services for our clients in
foreign markets.
Fee-based asset management services. We are evaluating the possibility of
offering online a comprehensive range of financial advisory services,
including assessing risk profiles, asset allocation and fund placement.
Revenues from our UltimateTrader clients accounted for 67.4% of our
revenues during the year ended September 30, 1998, and are expected to account
for an increasing percentage of our revenues in the future as we focus our
efforts on increasing our UltimateTrader client base. We experienced an increase
in the number of online trading clients from approximately 300 at September 30,
1997 to approximately 900 at September 30, 1998. Our success will depend on our
ability to significantly increase our currently limited UltimateTrader client
base.
Our company was incorporated in May 1996 under the laws of the State of
Delaware. Our wholly-owned subsidiary, A.B. Watley, Inc. ("Watley"), was
organized in December 1958 under the laws of the state of New York to conduct
business as a licensed broker-dealer. In January 1997, we acquired all of the
outstanding capital stock of Watley. All references to "our company," "our" or
"we" in this prospectus include Watley.
Our principal executive offices are located at 40 Wall Street, New York,
New York 10005, and our telephone number is (212) 422-1664. We maintain a
website at www.abwatley.com. Information contained in our website does not
constitute a part of this prospectus.
4
<PAGE>
The Offering
Common stock offered..... 1,700,000 shares
Common stock to be
outstanding after the
offering(1)............. 7,337,696 shares
Use of proceeds.......... We intend to use the net proceeds of this offering
for sales and marketing; network expansion and
upgrade; expansion of client services; repayment of
indebtedness; and working capital and general
corporate purposes. See "Use of Proceeds."
Risk factors............. An investment in the common stock is speculative
and involves a high degree of risk. You should
purchase the shares only if you can afford a
complete loss of your investment. See "Risk Factors"
beginning on page 7 and "Dilution."
Proposed Nasdaq SmallCap
Market symbol........... IFSX
- -------------
(1) Does not include (i) 170,000 shares reserved for issuance upon exercise of
the underwriter's warrants; (ii) 825,150 shares reserved for issuance upon
exercise of options granted under our stock option plans; (iii) 174,850
shares reserved for issuance upon the exercise of options available for
future grant under our stock option plans; (iv) 351,250 shares reserved for
issuance upon exercise of non plan options and warrants; and (v)
255,000 shares reserved for issuance in this offering to cover over-
allotments, if any, by the underwriter. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
"Management--Employment Agreements," "--Stock Option Plans" and
"Underwriting."
Forward Looking Statements
Some of the statements in this prospectus discuss future expectations or
state other "forward- looking" information. Those statements are subject to
known and unknown risks, uncertainties and other factors that could cause our
actual results to differ materially from those contemplated by the statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors" and elsewhere in this prospectus.
5
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Summary Financial Information
The following summary financial information for our company's fiscal years
ended September 30, 1997 and September 30, 1998 should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements, including the notes thereto, included
in this prospectus.
Statement of Operations Data:
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<CAPTION>
Year Ended September 30,
-------------------------------
1997 1998
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<S> <C> <C>
Revenues .................................................. $ 4,532,532 $9,119,268
Net revenues .............................................. 4,320,173 8,859,946
Commissions, floor brokerage and clearing charges ......... 1,844,927 3,425,725
Employee compensation and related costs ................... 1,297,575 2,247,963
Other expenses ............................................ 2,234,868 3,805,903
Net loss .................................................. (1,059,973) (632,410)
Net loss per share ........................................ (.30) (.12)
Weighted average number of shares outstanding ............. 3,508,560 5,171,182
</TABLE>
Balance Sheet Data:
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September 30, 1998
-------------------------------------------------
Actual Pro Forma(1) As Adjusted(2)
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Working capital (deficit)(3) ......... $ (691,258) $1,226,727 $ 8,724,727
Total assets ......................... 5,539,457 7,639,135 14,941,150
Total liabilities .................... 3,785,038 4,648,568 3,796,568
Stockholders' equity ................. 1,754,419 2,990,567 11,144,582
</TABLE>
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(1) Gives effect to (i) the receipt of approximately $454,015 of net proceeds on
October 6, 1998 upon the issuance of a $500,000 principal amount promissory
note and warrants to purchase 191,250 shares of common stock, (ii) the
receipt of $2,500 upon the exercise of employee stock options to acquire
125,000 shares of common stock at $.02 per share, (iii) the issuance of
38,260 shares of common stock in connection with the acquisition of the
capital stock of Computer Strategies, Inc., (iv) the receipt of
approximately $1,050,000 of net proceeds in January 1999 upon the issuance
of 221,500 shares of common stock and (v) the receipt of $375,000 of net
proceeds in January 1999 upon the issuance of a $400,000 principal amount
promissory note and warrants to purchase 140,000 shares of common stock
(collectively the "Pro Forma Adjustments"). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
"Business--Computer Strategies, Inc. Acquisition" and "Certain
Transactions."
(2) Gives effect to the (i) sale of the shares of common stock offered hereby,
(ii) the anticipated application of a portion of the estimated net proceeds
therefrom for the repayment of $750,000 principal amount of indebtedness and
$27,000 accrued and unpaid interest thereon, (iii) the recognition of
approximately $75,000 of deferred offering costs, and (iv) the write-off of
non-cash deferred option and warrant costs related to the issuance of
options and warrants in connection with indebtedness being repaid with a
portion of the proceeds of this offering. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(3) Our Consolidated Financial Statements are not categorized between current
and non-current assets and liabilities. For purposes of calculating working
capital, we consider our cash and cash equivalents, securities owned,
receivables from clearing brokers and a portion of other assets to be
current assets, and securities sold, not yet purchased, the current portion
of notes payable and accounts payable and accrued liabilities to be current
liabilities. See Consolidated Financial Statements.
6
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RISK FACTORS
The shares offered hereby are speculative and involve a high degree of
risk. Each prospective investor should carefully consider the following risk
factors before making an investment decision.
Limited Relevant Operating History. Prior to our acquisition of Watley,
Watley was a retail securities brokerage firm. Since March 1997, our primary
business has been to operate as an Internet-based broker-dealer. In May 1997, we
discontinued our prior securities brokerage activities. Accordingly, we have a
limited relevant operating history upon which you can evaluate our prospects and
future performance. You should consider our prospects based on the risks,
expenses and difficulties frequently encountered in the operation of a new
business in a rapidly evolving industry characterized by intense competition.
See "Management's Discussion of Financial Condition and Results of Operations."
Losses. Since our inception, we have incurred losses, including losses of
$1,059,973 during the year ended September 30, 1997 and $632,410 during the year
ended September 30, 1998. We had an accumulated deficit of $1,903,761 at
September 30, 1998. Our operating expenses have increased and are expected to
continue to increase significantly in connection with our proposed expanded
activities. Accordingly, our future profitability will depend on our ability to
increase our client base and our revenues while controlling costs. We expect to
continue to incur losses until we are able to significantly increase our client
base and revenues. In addition, we will incur aggregate non-cash charges of
approximately $353,912 during the year ending September 30, 1999 relating to the
write-off of debt servicing fees relating to certain promissory notes being
repaid upon the closing of this offering and the issuance of 14,500 options to
certain non-employees conditional upon the effectiveness of this offering. We
may never achieve significantly increased revenues or profitable operations. See
"Management's Discussions and Analysis of Financial Condition and Results of
Operations" and Consolidated Financial Statements.
Early Stage and Rapidly Evolving Market. The market for electronic
brokerage services, particularly over the Internet, is rapidly evolving. As a
result, the level of demand for online brokerage services is uncertain. Our
offering of brokerage services over the Internet involves a relatively new
approach to securities trading. As a result, intensive marketing and sales
efforts may be necessary to educate prospective clients regarding the uses and
benefits of our brokerage services and products. For example, customers of
traditional full-commission brokerage firms or discount brokers may be reluctant
or slow to convert to Internet brokerage services. Moreover, security and
privacy concerns of existing and potential users of our services may deter
potential clients from using our trading systems. If the market for online
brokerage services does not develop as we expect, our business, financial
condition and operating results will be materially adversely affected. See
"Business -- Industry Overview."
Risks Relating to Our Focus on Active Traders. Our focus is to attract
active traders and active investors as clients. Approximately 67.4% of our
revenues during the year ended September 30, 1998 were derived from commissions
and other fees from the online trading activities of our clients. We expect that
a substantial portion of our revenues will continue to be derived from our
clients' active trading activities. Our business, financial condition and
results of operations would be materially adversely affected by any factor
resulting in reduced commissions or a decline in the demand for our online
services.
Potential Client Attrition; Limited Customer Base. Active traders can lose
a significant amount of money quickly and become unable to continue to actively
trade. Our company's client attrition rate has historically been 7% per month.
Our client base has expanded from approximately 300 online trading accounts at
September 30, 1997 to approximately 900 online trading accounts at September 30,
1998. However, we are still dependent on a limited customer base for a
substantial portion of our revenues. Any significant increase in our client
attrition rate could have a material adverse effect on our business and
operations.
Risks Relating to the Securities Business. The securities business is
subject to numerous risks including stringent regulation, litigation, client
inability to satisfy commitments (such as margin obligations), client fraud and
employee misconduct and errors. Our company, like other securities firms, is
directly affected by national and international economic and political
conditions, broad trends in business and finance, fluctuations in volume and
price levels of securities, the level and volatility of interest rates,
legislative and regulatory changes, tax law changes, inflation, and the
availability of credit. Historically, when the stock market suffers large
declines (i.e.,
7
<PAGE>
a "bear market") the level of individual investor activity declines. Our company
will likely be adversely affected during any long-term bear market. A general
decrease in trading activity in these markets could adversely affect the level
of trading by our clients. As a result, our company's business, financial
condition and operating results would be adversely affected because certain
expenses, consisting primarily of salaries and benefits, computer and networking
costs and rent remain relatively fixed. Moreover, our operating results may
fluctuate dramatically from period to period as a result of these factors.
Intense Competition. The market for electronic brokerage services is
intensely competitive, rapidly changing and has few barriers to entry. We
believe that we compete on the basis of speed and accuracy of order execution,
processing and confirmation, quality of client service, ease of use, amount and
timeliness of information provided and price and reliability of our trading
systems. We expect that our ability to compete will also be affected by our
ability to introduce new services and enhancements to existing services into the
market on a timely basis.
We compete directly with other firms which focus on active trading clients
as well as other discount brokerage firms offering online or touch-tone
brokerage services. We also face competition for clients from full commission
brokerage firms, financial institutions and mutual funds. Many of our
competitors have well-established reputations for providing brokerage and
financial services and have longer operating histories and significantly greater
financial, technical, marketing, personnel and other resources than we have. In
addition, many of our competitors offer a wider range of services and financial
products than we do. Such competitors may be able to undertake more extensive
promotional campaigns, adopt more aggressive pricing policies and even create
and withstand a pricing war in the electronic brokerage business. Many of our
clients also maintain accounts with one or more of our competitors.
The general financial success of companies in the securities industry over
the past several years has strengthened existing competition. We believe that
such success will continue to attract new competitors to the industry which
could adversely affect our ability to gain or even maintain market share. Such
potential competitors include depository institutions, insurance companies,
providers of online financial and information services and software development
companies. We cannot assure you that we will be able to compete successfully.
Competitive factors could materially adversely affect our business, financial
condition and operating results. See "Business -- Competition."
Need to Expand Network Infrastructure and Client Support Capabilities. We
will need to expand our network infrastructure and client support capabilities
in anticipation of an expanded client base. Such expansion will require us to
make significant up front expenditures for servers, routers and computer
equipment, to increase bandwidth for internet connectivity and to hire and train
additional client service personnel. Such expansion must be completed without
system disruptions, slower response times or degradation in speed of order
fulfillment and levels of client service. Failure to expand our network
infrastructure or client service capabilities would materially adversely affect
our company's business and operations. See "Business -- Strategy."
Risks of System Failures and Service Interruptions. Our clients rely on the
quick and accurate execution, processing and confirmation of transactions
executed on our trading systems. Our company receives and processes client trade
orders principally through the Internet, online services and touch-tone
telephone. This method of trading is heavily dependent on the integrity of the
electronic systems supporting it. Heavy stress placed on our company's trading
systems during peak trading times could cause our systems to operate at
unacceptably low speed or fail. Any significant degradation or failure of our
company's trading systems or any other systems in the trading process (e.g.,
online service providers, record keeping and data processing functions performed
by third parties and third-party software such as Internet browsers and trading
engines) could cause clients to suffer delays in trading. Such delays could
cause substantial losses for our clients and could adversely affect our company.
During a systems failure, our company may be able to take orders by
telephone. However, under applicable regulations, all company associates
accepting telephone orders must have securities brokers' licenses.
In the event of a sub-system, component or software failure, our network
structure may not operate properly. In the event of a natural disaster, power or
telecommunications failure or act of war, we may not be able to prevent an
extended systems failure. Moreover, computer viruses or unauthorized access to
or sabotage of our
8
<PAGE>
network by a third party could result in system failures or service
interruptions. Any system failures or service interruptions could result in
decreased commission revenues from client trading activities and could result
in loss of client accounts and harm to our reputation and the perception of our
trading system's reliability. See "Business -- Operations."
Possible Security Compromises. The secure transmission of confidential
information over public networks is a critical element of our company's
operations. Our trading systems rely on encryption, authentication and firewall
technology to provide the security and authentication necessary to effect secure
transmission of confidential information over the Internet. Our company has
never experienced any security breaches in the transmission of confidential
information. However, advances in computer capabilities, new discoveries in the
field of cryptography or other events or developments could result in a
compromise of the technology or other algorithms used by our company to protect
client transaction and other data. Any such compromise of our trading systems
security could materially adversely affect our business, financial condition and
operating results. See "Business -- Operations."
Significant Capital Requirements; Possible Need for Additional Financing.
Our business is capital intensive. Our cash requirements have exceeded our cash
flow from operations as we have been building our business. At September 30,
1998, we had a working capital deficit of $691,258. As a result, we have been
dependent upon sales of our common stock and borrowings from our officers,
directors and stockholders and third parties to finance our working capital
requirements. We need the proceeds of this offering to expand our operations and
finance our future working capital requirements. Based upon our current plans
and assumptions relating to our business plan, we anticipate that the net
proceeds of this offering will satisfy our capital requirements for at least
twelve months following the closing of this offering. If our plans change or our
assumptions prove to be inaccurate, we may need to seek additional financing
sooner than currently anticipated or curtail our operations. We cannot assure
you that the proceeds of this offering will be sufficient to fund our proposed
expansion or that additional financing will become available if needed. Our
company will be materially adversely affected if we do not obtain financing when
needed. We may seek additional debt or equity financing to fund the cost of
continued expansion. Any issuance of equity securities would dilute the interest
of our stockholders. Additionally, if we incur debt, our company will become
subject to risks that interest rates may fluctuate and cash flow may be
insufficient to pay the principal and interest on any such debt. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Dependence Upon Clearing Brokers. Pursuant to Watley's agreements with its
clearing brokers, the clearing brokers, on a fee basis, process all securities
transactions for Watley's account and the accounts of Watley's clients. Services
of the clearing brokers include billing and credit extension, control and
receipt, custody and delivery of securities, for which we pay a per ticket
charge. Watley has agreed to indemnify and hold the clearing brokers harmless
from certain liabilities or claims, including claims arising from the
transactions of its clients. Watley's clearing agreements may be terminated by
either party, upon 60 days written notice in the case of Penson Financial
Services, Inc., and 30 days prior written notice in the case of Weiss, Peck &
Greer, L.L.C. Watley is dependent on the operational capacity and the ability of
the clearing brokers for the orderly processing of transactions. By engaging the
processing services of clearing brokers, however, Watley is exempt from certain
capital reserve requirements imposed by federal securities laws. Termination or
material interruptions of services provided by either of the clearing brokers
would have a material adverse effect on our operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Operations."
Risks Relating to Possible Expansion or Acquisitions. We intend to use a
portion of this offering to expand our operations through internal growth and
possible acquisitions. Our proposed expansion will depend on, among other
factors, widespread consumer acceptance of UltimateTrader and WatleyTrader and
our ability to attract and retain clients, hire and retain additional skilled
management, marketing, industry, client service and other personnel and
successfully manage growth. We may seek to expand our operations by acquiring
companies in businesses which we believe will complement or enhance our
business. However, we are not currently involved in negotiations with respect to
any material acquisitions, and are not a party to any agreement, commitment,
arrangement or understanding relating to any such acquisitions. We have not
established any minimum criteria for any acquisition and, under certain
circumstances, our management will have complete discretion in
9
<PAGE>
determining the terms of any such acquisition. Consequently, there is no basis
for you to evaluate the specific merits or risks of any potential acquisitions
that our company may undertake. We cannot assure you that we will be able to
ultimately effect any acquisition, successfully integrate any acquired business
in our operations or otherwise successfully expand our operations. See "Use of
Proceeds" and "Business -- Strategy."
Proposed Conversion to Self-Clearing Broker. We intend to expand Watley's
operations to include self-clearing operations during the year 2000. Watley's
membership agreement with the NASD currently requires Watley to clear all
transactions through its clearing firms and prohibits Watley from safekeeping
client securities. The NASD must agree to amend Watley's membership agreement
before Watley will be able to engage in self-clearing operations. We can not
assure you that the NASD will agree to so amend Watley's membership agreement.
Self-clearing securities firms are subject to substantially more regulatory
control and examination than we are currently subject. Errors in performing
clearing functions or reporting could lead to civil penalties imposed by the SEC
or the NASD. Self-clearing operations, especially where conducted by firms such
as Watley, without significant prior experience, involve substantial risks of
losses due to clerical errors relating to the handling of client funds and
securities. We cannot assure you that Watley will be able to perform such
operations as accurately and efficiently as such operations are being performed
by Watley's clearing brokers. Clearing process errors also may lead to civil
liability for actions in negligence brought by parties who are financially
harmed as a result of such errors. Any liability that arises as a result of
self-clearing operations could have a material adverse effect on our company's
business, financial condition and operating results. Watley's failure to perform
self-clearing operations accurately and cost-effectively could have a material
adverse effect on our business, financial condition and operating results.
If we convert to a self-clearing firm, we will have to pay for a portion of
the securities purchased by our clients, to the extent such purchases are made
on margin, which will increase our capital requirements substantially. We will
also have direct responsibility for the possession and control of client
securities and other assets and the clearance of client securities transactions.
This will require our company to record on our balance sheet the client
receivables and client payables to Watley that are a result of client margin
loans and client free credit balances (i.e., client cash balances maintained by
Watley) which could have a significant effect on our company's total assets and
total liabilities. In addition, to the extent that our client receivable
balances exceed client free credit balances, we could be liable for such
shortfall. We may not have the cash available at a given time to perform our
services. See "Business -- Operations."
Dependence Upon Sources of Financial Information; Integrity of Financial
Information. We receive financial information which is used by our clients from
Dow Jones News Retrieval, StockPoint (from Ethos Corporation), PC Quote, Inc.
and S&P Comstock. We depend upon information suppliers to accurately provide
and, in some cases, format such data, on a real-time basis. Failure by any
service provider to supply such information according to our company's
requirements could result in service interruptions, adverse client perception of
our trading system and loss of clients. In addition, we could be liable to a
client who downloads inaccurate information from our trading system for losses
resulting from the client's use of such information. We may also be subject to
claims for negligence, copyright or trademark infringement or other theories
based on the nature and content of information downloaded by clients from our
trading systems and subsequently distributed to others. We do not maintain
insurance to cover most of these types of liabilities. Any liability imposed on
our company or costs incurred in defending claims that are not covered by
insurance or are in excess of our insurance coverage could materially adversely
affect our business, financial condition and operating results.
Dependence on Online Commerce and the Internet. Acceptance of
UltimateTrader and WatleyTrader will depend upon the adoption of the Internet as
a widely used medium for commerce and communication. The Internet may not prove
to be a viable commercial marketplace because of inadequate development of the
necessary infrastructure, such as a reliable network backbone, or timely
development of complementary services and products, such as high speed modems
and high speed communication lines. The Internet has experienced, and is
expected to continue to experience, significant growth in the number of users
and amount of traffic. However, the Internet infrastructure may not be able to
support the demands placed on it by this continued growth. In addition, the
Internet could lose its viability due to delays in the development or adoption
of new standards and protocols to handle increased levels of Internet activity
or due to increased governmental regulation. Moreover,
10
<PAGE>
critical issues concerning the commercial use of the Internet, including
security, reliability, cost, ease of use, accessibility and quality of service,
remain unresolved. Such issues may negatively affect the growth of Internet use
or the attractiveness of commerce and communication on the Internet. Our
company's business, financial condition and operating results will be materially
adversely affected if critical issues concerning the commercial use of the
Internet are not favorably resolved, the necessary infrastructure is not
developed, or the Internet does not become a viable commercial marketplace. See
"Business -- Industry Overview."
Year 2000 Issues. Our review of our hardware and software has not revealed
any year 2000 issues that cannot be remediated in a timely manner. However, we
are highly dependent upon third-party financial information vendors,
telecommunications suppliers and our clearing brokers. We have sent letters to a
number of such vendors requesting assurances of their compliance. Such third
parties have generally advised us that their review of their operating systems
indicate that their operating systems are year 2000 compliant. We would be
materially adversely affected if there are any failures or interruptions in
service resulting from the inability of our computing system or any such
third-party's systems to recognize the year 2000. Moreover, since our evaluation
of these issues is continuing, we cannot assure you that additional issues will
not be discovered which could present a material risk of disruption to our
operations. See "Management's Discussion and Analysis of Financial Conditions
and Results of Operations -- Year 2000 Issues."
Rapid Technological Change. Electronic stock trading is characterized by
rapidly changing technology, changing client requirements, frequent new services
and trading system introductions and enhancements and evolving industry
standards in computer hardware, operating systems, database technology and
information delivery systems. Our company's success will depend upon our ability
to maintain and develop competitive technologies to continue to enhance our
trading system and to develop and introduce new services in a timely and
cost-effective manner. The development of these technologies, trading systems
and services may require substantial time and expense. We cannot assure you that
we will be able to respond quickly, cost-effectively or sufficiently to such
developments. Our company's business, financial condition and operating results
may be adversely affected if we are unable to anticipate or respond quickly to
such developments. See "Business -- Strategy."
Credit Risks. We are subject to the risks inherent in extending credit to
the extent that we permit our clients to purchase securities on a "margin"
basis. A portion of Watley's clients' securities activities are transacted on a
margin basis (through the clearing broker which Watley has agreed to indemnify),
pursuant to which credit is extended to the client and secured by cash and
securities in the client's account or "short sales" (i.e., the sale of
securities not yet purchased). Such risks are exacerbated during periods of
rapidly declining markets in which the value of the collateral held by Watley
could fall below the amount borrowed by the client. In the event that margin
requirements are not sufficient to cover losses, Watley may be required to sell
or buy securities at prevailing market prices and incur losses to satisfy client
obligations.
Securities Regulation. The securities industry in the United States is
subject to extensive regulation under both federal and state laws. In addition,
the SEC, NASD, other self regulatory organizations, such as the various stock
exchanges, and other regulatory bodies, such as state securities commissions,
require strict compliance with their rules and regulations. As a matter of
public policy, regulatory bodies are charged with safeguarding the integrity of
the securities and other financial markets and with protecting the interests of
clients participating in those markets, and not with protecting the interests of
our stockholders. Broker-dealers are subject to regulations covering all aspects
of the securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of clients' funds and securities, capital
structure, record keeping and the conduct of directors, officers and employees.
If we fail to comply with any of these laws, rules or regulations we could be
censured, fined, issued a cease-and-desist order or our company or our officers
and employees could be suspended or expelled, any of which could have a material
adverse effect on our business, financial condition and operating results.
To expand our services internationally, we would have to comply with
regulatory controls of each specific country in which we conduct business. The
brokerage industry in many foreign countries is heavily regulated. The varying
compliance requirements of these different regulatory jurisdictions and other
factors may limit our ability to expand internationally.
Following the closing of this offering, we intend to initiate a
comprehensive marketing campaign to bring greater brand name recognition to our
products and services. All marketing activities by Watley are regulated by
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<PAGE>
the NASD. The NASD can impose certain penalties, including censure, fine,
suspension of all advertising, the issuance of cease-and-desist orders or the
suspension or expulsion of a broker-dealer and certain of its officers or
employees for violations of the NASD's advertising regulations. See "Business
- -- Securities Regulation."
Effect of Net Capital Requirements. The SEC, NASD and various other
regulatory agencies have stringent rules with respect to the maintenance of
specific levels of net capital by securities brokers, including the SEC's
uniform net capital rule which governs Watley. If Watley fails to maintain the
required net capital Watley may be subject to suspension or revocation of
registration by the SEC and suspension or expulsion by the NASD and other
regulatory bodies and ultimately could require Watley's liquidation. In
addition, a change in the net capital rules, the imposition of new rules or any
unusually large charge against net capital could limit those operations of
Watley that require the intensive use of capital. Such rules also could restrict
our ability to withdraw capital from Watley, which in turn could limit our
ability to pay dividends, repay debt and repurchase shares of our outstanding
stock. A significant operating loss or any unusually large charge against net
capital could adversely affect our ability to expand or even maintain our
current levels of business, which could have a material adverse effect on our
business, financial condition and operating results. See "Business -- Net
Capital Requirements."
Governmental Regulation of the Internet and Online Commerce. Due to the
increasing popularity and use of the Internet and other online services, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet or other online services covering issues such as user privacy,
pricing, content copyrights, and quality of services. Furthermore, the growth
and development of the market for online commerce may prompt more stringent
consumer protection laws that may impose additional burdens on those companies
conducting business online. Moreover, the recent increase in the number of
complaints by online traders could lead to more stringent regulations of online
trading firms and their practices by the SEC, NASD and other regulatory
agencies. The adoption of any additional laws or regulations may decrease the
growth of the Internet or other online services, which could, in turn, decrease
the demand for our trading systems and services and increase our cost of doing
business. Moreover, the applicability to the Internet and other online services
of existing laws in various jurisdictions governing issues such as property
ownership, sales and other taxes and personal privacy is uncertain and may take
years to resolve. In addition, as our services are available over the Internet
in multiple states and foreign countries, and as we have numerous clients
residing in such states and foreign countries, such jurisdictions may claim that
our company is required to qualify to do business as a foreign corporation in
each such state and foreign country. While our company is registered as a
broker-dealer in 49 states, we are qualified to do business as a foreign
corporation in only a few states; failure by our company to qualify as a
broker-dealer in other jurisdictions or as an out-of-state or "foreign"
corporation in a jurisdiction where it is required to do so could subject our
company to taxes and penalties for the failure to qualify. Our business,
financial condition or operating results could be materially adversely affected
by any such new legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to our business
or the applications of existing laws and regulations to the Internet and other
online services.
Risks Associated with International Expansion. Part of our strategy is to
expand into international markets. This strategy depends on our ability to
provide international clients access to U.S. financial market data and to enter
into arrangements with foreign institutions to offer electronic execution
services for foreign markets. To date, we have only provided access to U.S.
financial markets to a limited number of international clients. We cannot assure
you that we will be able to successfully market or deliver our services in
international markets. Additionally, international expansion will subject our
company to certain risks inherent in doing business internationally, including
international economic, political and regulatory developments and increasing
client support and other staffing requirements.
Limited Intellectual Property Protection. We rely on a combination of
copyright, trademark and trade secrets laws and non-disclosure agreements to
protect our proprietary technologies, ideas, know-how and other proprietary
information. We have no patents or registered copyrights. Notwithstanding the
precautions we take, third parties may copy or otherwise obtain and use our
proprietary technologies, ideas, know-how and other proprietary information
without authorization or independently develop technologies similar or superior
to our technologies. In addition, the confidentiality and non-competition
agreements between our company and certain of our employees, distributors and
clients may not provide meaningful protection of our proprietary technologies or
12
<PAGE>
other intellectual property in the event of unauthorized use or disclosure.
Policing unauthorized use of our technologies and other intellectual property is
difficult, particularly because the global nature of the Internet makes it
difficult to control the ultimate destination or security of software or other
data transmitted. Furthermore, the laws of the other countries may afford little
or no effective protection of our intellectual property rights. Our business,
financial condition and operating results could be adversely affected if we are
unable to protect our intellectual property rights.
There has been substantial litigation in the software industry involving
intellectual property rights. We believe that our technologies and trading
systems have been developed independent of others. Third parties may assert
infringement claims against our company and our technologies and trading systems
may be determined to infringe on the intellectual property rights of others. We
could become liable for damages, be required to modify our technologies or
trading systems or obtain a license if our technologies or trading systems are
determined to infringe upon the intellectual property rights of third parties.
We cannot assure you that we will be able to modify our technologies or trading
systems or obtain a license in a timely manner, if required, or have the
financial or other resources necessary to defend an infringement action. We
would be materially adversely affected if we fail to do any of the foregoing.
See "Business -- Intellectual Property Rights."
Dependence Upon Key Personnel; Need for Qualified Personnel. Our success
will be largely dependent on the personal efforts of a few key officers, Steven
Malin, our Chairman of the Board and Chief Executive Officer, Robert Malin,
President of Watley, and Harry Simpson, our President. We have entered into
employment agreements with each of such officers. However, our business,
financial condition and operating results could be materially adversely affected
if the services of any of such officers becomes unavailable. The Company has
obtained "key-man" life insurance on the lives of Steven Malin and Harry Simpson
in excess of $2,000,000 and on the life of Robert Malin in the amount of
$1,000,000. Our success will also depend on our ability to hire and retain
additional qualified marketing, industry, technical and financial personnel.
Qualified personnel are in high demand. We face considerable competition from
other brokerage and financial service firms and other Internet and online
service companies for such personnel, many of which have significantly greater
resources than we have. We may not be able to attract and retain additional
qualified personnel. We will be materially adversely affected if we are unable
to attract such personnel. See "Management."
Control by Management. After the closing of this offering, officers and
directors (and their families), will beneficially own, in the aggregate,
approximately 51.7% of the outstanding common stock. Accordingly, such persons
will continue to control the outcome of all matters submitted to a vote of the
holders of common stock, including the election of directors, amendments to our
company's certificate of incorporation and approval of significant corporate
transactions. Such consolidation of voting power could also have the effect of
delaying, deterring or preventing a change in control of our company that might
be beneficial to other stockholders. See "Management" and "Principal
Stockholders."
Use of Proceeds to Repay Indebtedness; Benefits to Related Parties; Broad
Discretion in Application of Proceeds. We have allocated approximately $777,000
(9.5%) of the net proceeds of this offering to repay outstanding indebtedness,
including $100,000 to repay amounts owed to Mel Steinberg, the father of Eric
Steinberg, Executive Vice President of our company and approximately $500,000
will be used to repay a loan which is guaranteed by six persons who are
officers, directors and/or principal stockholders of our company. Such persons
will receive a benefit as a result of the release of their guarantees.
Accordingly, such proceeds will not be available for other corporate purposes.
In addition, we have allocated approximately $823,000 (10.0%) of the estimated
net proceeds of this offering to working capital and general corporate purposes.
We will have broad discretion as to the application of such proceeds. Moreover,
a portion of the proceeds allocated to working capital may be utilized to pay a
portion of the salary of our officers over the twelve months following the
closing of this offering if cash flow from operations is insufficient for such
purposes. See "Use of Proceeds" and "Certain Transactions."
Immediate and Substantial Dilution. Purchasers of the shares of common
stock in this offering will experience immediate and substantial dilution of
$4.49 per share (or 74.8%) between the net tangible book value per share of
common stock after this offering and the initial public offering price per
share. See "Dilution."
No Dividends. Our company has never declared or paid any dividends to our
holders of common stock and we do not anticipate paying cash dividends in the
foreseeable future. See "Dividend Policy" and "Description of Securities --
Common Stock."
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Shares Eligible for Future Sale; Registration Rights. All of the 5,637,696
currently outstanding shares of common stock are "restricted securities", as
that term is defined in Rule 144 promulgated under the Securities Act of 1933,
as amended. An aggregate of 4,000,000 of the restricted shares will be
immediately eligible for sale, without registration, under Rule 144, subject to
the contractual restrictions described below. Of the remaining restricted
shares, 1,120,000 shares will become eligible for sale under Rule 144 beginning
90 days following the date of this prospectus, subject to the contractual
restrictions described below. In addition, we have granted certain registration
rights to holders of 411,175 of such restricted shares (including 331,250 shares
issuable upon exercise of currently exercisable warrants), as well as demand and
piggyback registration rights to the underwriter with respect to the shares of
common stock issuable upon exercise of the underwriter's warrants. The holders
of substantially all of the restricted shares of common stock have agreed not to
sell or otherwise dispose of any shares of common stock (including pursuant to
Rule 144) or exercise any registration rights for a period of twelve months
following the date of this prospectus without the underwriter's prior written
consent. The possibility that a substantial number of shares of common stock may
be sold in the public market may adversely affect prevailing market prices for
the common stock and could impair our ability to raise capital through the sale
of equity securities. We cannot predict the effect, if any, that sales of such
securities or the availability of such securities for sale will have on the
market prices prevailing from time to time. See "Shares Eligible for Future
Sale" and "Underwriting."
No Assurance of Public Market; Arbitrary Determination of Offering Price.
Before this offering, there has been no public trading market for the common
stock. We cannot assure you that a regular trading market for the common stock
will develop after this offering or that, if developed, it will be sustained.
The initial public offering price of the common stock has been determined
arbitrarily by negotiation between us and the underwriter and is not necessarily
related to the assets, book value or potential earnings of our company or any
other recognized criteria of value. Additionally, the initial public offering
price of the common stock may not be indicative of the prices that may prevail
in the public market. See "Underwriting."
Possible Volatility of Market Price of Common Stock. The market price for
the common stock following this offering may be highly volatile as has been the
case with the securities of other companies in emerging businesses. Factors such
as our operating results, announcements by us or our competitors, introduction
of new products or technologies by us or our competitors and various factors
affecting the securities industry generally may have a significant impact on the
market price of the common stock. Additionally, in recent years, the stock
market has experienced a high level of price and volume volatility. Market
prices for the stock of many companies, particularly of small and emerging
growth companies, have experienced wide price fluctuations which have not
necessarily been related to the operating performance of such companies.
Possible Delisting of Securities from Nasdaq System; Risks Relating to
Low-Priced Stocks. We intend to list our common stock on Nasdaq after this
offering. If, at any time, we are unable to maintain the requirements for
continued listing on Nasdaq, our common stock will no longer be traded on Nasdaq
and trading in our common stock would thereafter be conducted in the non-Nasdaq
over-the-counter market. If the common stock is not listed on Nasdaq and the
trading price of the common stock were to fall below $5.00 per share, trading in
the common stock would become subject to the SEC's "penny stock" rules. The
penny stock rules require additional disclosure by broker-dealers in connection
with any trades involving a penny stock. The additional burdens imposed upon
broker-dealers by such requirements could, in the event the common stock were
deemed to be a penny stock, discourage broker-dealers from effecting
transactions in the common stock which could severely limit the market liquidity
of the common stock and the ability of purchasers in this offering to sell the
common stock in the secondary market.
Adverse Effect of the Authorization of Preferred Stock. Our certificate of
incorporation authorizes our board of directors to issue 1,000,000 shares of
"blank check" preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of these shares, without further
stockholder approval. The rights of the holders of common stock will be subject
to and may be adversely affected by the rights of holders of any preferred stock
that may be issued in the future. The ability to issue preferred stock without
stockholder approval could have the effect of making it more difficult for a
third party to acquire a majority of the voting stock of our company thereby
delaying, deferring or preventing a change in control of our company. See
"Description of Securities -- Preferred Stock."
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Significant Outstanding Options and Warrants; Potential Adverse Effect on
Market Price of Common Stock. Upon the closing of this offering, there will be
outstanding options and warrants to purchase an aggregate of 1,346,400 shares of
common stock (including 170,000 shares of common stock issuable upon exercise of
the underwriter's warrants) at exercise prices ranging from $2.00 to $9.90 per
share. To the extent that outstanding options and warrants are exercised,
dilution to the percentage ownership of our stockholders will occur and any
sales in the public market of the common stock underlying such options and
warrants may adversely affect prevailing market prices for the common stock.
Moreover, the terms upon which we will be able to obtain additional equity
capital may be adversely effected since the holders of outstanding options and
warrants can be expected to exercise them at a time when we would, in all
likelihood, be able to obtain any needed capital on terms more favorable to our
company than those provided in the outstanding options and warrants. See
"Management -- Stock Option Plans" and "Underwriting."
Anti-Takeover Provisions Affecting Stockholders. After this offering is
completed, our company will be subject to the State of Delaware's "business
combination" statute, which prohibits a publicly-traded Delaware corporation
from engaging in various business combination transactions in which a person
becomes an "interested stockholder," unless certain approvals are obtained or
other events occur. This statute could prohibit or delay mergers or other
attempted takeovers or changes in control with respect to our company and,
accordingly, may discourage attempts to acquire our company. See "Description of
Securities."
Limitations on Liability of Directors and Officers. Our company's
certificate of incorporation includes provisions to eliminate the personal
liability of directors of our company for monetary damages arising from a breach
of their fiduciary duties as directors to the extent permitted by applicable
law. As a result, stockholders may be unable to recover damages against our
directors for actions taken by them which constitute negligence or a violation
of certain of their fiduciary duties. See "Management -- Limitation of Liability
and Indemnification Matters."
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USE OF PROCEEDS
The net proceeds from the sale of the 1,700,000 shares of common stock
being offered hereby (after deducting underwriting discounts and other expenses
of this offering) are estimated to be $8,200,000 ($9,531,100 if the
underwriter's over-allotment option is exercised in full).
We expect to use the net proceeds (assuming no exercise of the
underwriter's over-allotment option) during the twelve months following the
consummation of this offering approximately as follows:
<TABLE>
<CAPTION>
Approximate
Approximate Percentage of
Application of Net Proceeds Dollar Amount Net Proceeds
- ---------------------------- --------------- --------------
<S> <C> <C>
Sales and marketing(1) .................................... $ 2,500,000 30.5%
Network expansion and upgrade(2) .......................... 2,300,000 28.0
Expansion of client services(3) ........................... 1,800,000 22.0
Repayment of indebtedness(4) .............................. 777,000 9.5
Working capital and general corporate purposes(5) ......... 823,000 10.0
----------- -----
Total ................................................... $ 8,200,000 100.0%
=========== =====
</TABLE>
- ------------
(1) Includes the costs to produce, create and place television advertising,
Internet and print commercials, as well as salaries of personnel engaged
in these activities. See "Business -- Marketing and Advertising."
(2) Represents expenses to expand our network infrastructure to support an
increasing client base and for additional computer and telephone
communications equipment to create an off-site back-up communications center
or "hot site." See "Business -- Operations."
(3) Represents a portion of the costs of additional personnel and systems to (i)
convert to self-clearing, (ii) engage in operations with international
financial institutions and clients, (iii) provide additional client support,
(iv) continue software and programming development, and (v) expand our
third-market institutional sales desk to increase the number of securities
we cover for this market. See "Business."
(4) Represents amounts to repay (i) the $500,000 principal amount promissory
note plus a $5,000 prepayment fee, to New York Small Business Venture Fund
LLC, and (ii) $250,000 principal amount of promissory notes (bearing
interest at the rate of 8% per annum), plus approximately $22,000 of accrued
interest thereon, including approximately $100,000 principal amount of
promissory notes held by Mel Steinberg, the father of Eric Steinberg,
Executive Vice President of our company. The $500,000 principal amount
promissory note bears interest at the rate of 12% and is due October 2003,
subject to prepayment. We used the proceeds of these loans for working
capital and general corporate purposes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Certain
Transactions."
(5) Represents amounts which may be used (i) for the relocation of our principal
offices and (ii) to pay a portion of trade payables incurred from time to
time and the salaries of our officers, if cash flow from operations is
insufficient for such purposes. See "Business -- Properties" and
"Management."
If the underwriter's over-allotment option is exercised in full, we will
realize additional net proceeds of $1,331,000, all of which will be allocated to
working capital and general corporate purposes.
The foregoing represents our best estimate of the allocation of the net
proceeds of this offering based upon the current status of our business. This
estimate is based on certain assumptions, including continued expansion of our
client base and corresponding increases in revenues and that our proposed
network expansion can be completed and new services can be introduced without
unanticipated delays or costs. If any of these factors change, we may find it
necessary to reallocate a portion of the proceeds within the above-described
categories or use portions thereof for other purposes. Our estimates may prove
to be inaccurate, new programs or activities may be undertaken which will
require considerable additional expenditures or unforeseen expenses may occur.
Based upon our current plans and assumptions relating to our business plan,
we anticipate that the net proceeds of this offering will satisfy our capital
requirements for at least twelve months following the closing of
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<PAGE>
this offering. If our plans change or our assumptions prove to be inaccurate, we
may need to seek additional financing sooner than currently anticipated or
curtail our operations. We cannot assure you that the proceeds of this offering
will be sufficient to fund our proposed expansion or that additional financing
will become available if needed.
Proceeds not immediately required for the purposes described above will be
invested principally in United States government securities, short term
certificates of deposit, money market funds or other short-term interest bearing
investments.
DILUTION
The difference between the initial public offering price per share and the
net tangible book value per share of common stock after this offering
constitutes the dilution to investors in this offering. Net tangible book value
per share is determined by dividing the net tangible book value of our company
(total tangible assets less total liabilities) by the number of outstanding
shares of common stock.
At September 30, 1998, our company had a net tangible book value of
$1,679,419 or $.33 per share ($.49 per share on a pro forma basis, after giving
effect to the Pro Forma Adjustments (see footnote 1 of Prospectus Summary --
Summary Financial Information)). After giving effect to the sale of the
1,700,000 shares of common stock offered hereby (after deducting estimated
underwriting discounts and expenses of this offering), the adjusted net tangible
book value of our company at September 30, 1998 would have been $11,059,582 or
$1.51 per share, representing an immediate increase in net tangible book value
of $1.02 per share to the existing stockholders and an immediate dilution of
$4.49 (74.8%) per share to new investors.
The following table illustrates the foregoing information with respect to
dilution to new investors on a per share basis:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price .............................. $ 6.00
Pro forma net tangible book value before offering ......... $ .49
Increase attributable to new investors .................... 1.02
-----
Adjusted net tangible book value after offering ............ 1.51
------
Dilution to new investors .................................. $ 4.49
======
</TABLE>
The following table sets forth as of the effective date of this offering,
with respect to our existing stockholders and new investors, a comparison of the
number of shares of common stock acquired from our company, the percentage
ownership of such shares, the total consideration paid, the percentage of total
consideration paid and the average price per share.
<TABLE>
<CAPTION>
Average Price
Shares Purchased Total Consideration per Share
----------------------- -------------------------- --------------
Number Percent Amount Percent
----------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders(1) ......... 5,637,696 76.1% $ 4,664,933 31.4% $ .83
New Investors .................... 1,700,000 23.9 10,200,000 68.6 6.00
--------- ----- ----------- -----
Total .......................... 7,337,696 100.0% $14,864,933 100.0%
========= ===== =========== =====
</TABLE>
- ------------
(1) Includes all shares of common stock issued and outstanding after giving
effect to (i) the Pro Forma Adjustments and (ii) the issuance of 115,436
shares of common stock for no or nominal consideration subsequent to
September 30, 1998 (including 41,665 shares estimated to be issued upon
exercise of certain options upon the closing of this offering).
The above table assumes no exercise of the underwriter's over-allotment
option. If such option is exercised in full, it is estimated that the new
investors will have paid $11,730,000 for the 1,955,000 shares of common stock
offered by our company, representing approximately 71.5% of the total
consideration for 25.7% of the total number of shares of common stock
outstanding. In addition, the above table does not give effect to the shares
issuable upon exercise of outstanding options and warrants. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Management -- Stock Option Plans" and "Underwriting."
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<PAGE>
DIVIDENDS
Our company has never declared or paid any dividends to the holders of our
common stock and we do not anticipate paying cash dividends in the foreseeable
future. We currently intend to retain all earnings for use in connection with
the expansion of our business and for general corporate purposes. The future
declaration and payment of dividends, if any, will be within the sole discretion
of our board of directors and will depend upon our profitability, financial
condition, cash requirements, future prospects and other factors deemed relevant
by our board of directors. In addition, the payment of cash dividends on our
common stock in the future could be limited or prohibited by applicable
regulatory requirements and the terms of financing agreements that we may enter
into or by the terms of any preferred stock that may be authorized and issued.
CAPITALIZATION
The following table sets forth the capitalization of our company as of
September 30, 1998 (i) on an actual basis, (ii) adjusted to give effect to the
Pro Forma Adjustments (see footnote 1 to Prospectus Summary -- Summary Financial
Information) and (iii) adjusted to give effect to the sale by our company of
1,700,000 shares of common stock offered hereby and the anticipated application
of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
September 30, 1998
--------------------------------------------------
Actual Pro Forma As Adjusted
--------------- --------------- --------------
<S> <C> <C> <C>
Short-term debt ....................................... $ 250,000 $ 335,587 $ 85,587
============ ============ ============
Long-term debt ........................................ $ 610,000 $ 1,510,000 $ 1,010,000
------------ ------------ ------------
Stockholders' equity:
Preferred stock, par value $.01 per share, 1,000,000
shares authorized; no shares issued or outstanding,
actual, pro forma or as adjusted .................. -- -- --
Common Stock, par value $.001 per share, 20,000,000
shares authorized; 5,137,500 shares issued and
outstanding, actual; 5,637,696 shares issued and
outstanding, pro forma; 7,337,696 shares issued
and outstanding, as adjusted(1) ................... 5,138 5,637 7,337
Additional paid-in capital ............................ 3,758,333 5,325,232 13,539,917
Subscriptions receivable .............................. (4,999) (4,999) (4,999)
Option costs .......................................... (100,292) (431,542) (140,000)
Accumulated deficit ................................... (1,903,761) (1,903,761) (2,257,673)
------------ ------------ ------------
Total stockholders' equity ......................... $ 1,754,419 $ 2,990,567 $ 11,144,582
------------ ------------ ------------
Total capitalization ............................ $ 2,364,419 $ 4,500,567 $ 12,154,582
============ ============ ============
</TABLE>
- ------------
(1) Includes 115,436 shares of common stock (pro forma and as adjusted) issued
for no or nominal consideration subsequent to September 30, 1998 (including
41,665 shares estimated to be issued upon exercise of certain options upon
the closing of this offering). Does not include (i) 170,000 shares reserved
for issuance upon exercise of the underwriter's warrants; (ii) 825,150
shares reserved for issuance upon exercise of options granted under our
stock option plans; (iii) 174,850 shares reserved for issuance upon the
exercise of options available for future grant under our stock option plans;
and (iv) 351,250 shares reserved for issuance upon exercise of non plan
options and warrants; and (v) 255,000 shares reserved for issuance in this
offering to cover over-allotments, if any, by the underwriter. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Management -- Employment Agreements," "-- Stock Option Plans"
and "Underwriting."
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Our company is a financial services company which owns A.B. Watley, Inc.
("Watley"), a registered securities broker-dealer and member of the National
Association of Securities Dealers, Inc. Our company acquired all of the capital
stock of Watley in January 1997. Our financial statements consolidate the
historical results of Watley.
We provide real-time online financial brokerage services and comprehensive
information about the securities markets through our proprietary trading
systems, UltimateTrader and WatleyTrader. We also operate a "third-market
institutional sales" desk which specializes in executing and facilitating
large-block transactions in approximately 300 thinly-traded equity securities.
We have experienced substantial changes to, and expansion of, our business
and operations since we began offering Internet brokerage services in March
1997. We expect to continue to expand our business and client base which will
require our company to increase our personnel, purchase additional equipment and
expand our network and client service capabilities which will result in
increasing expenses.
Results of Operations
Year ended September 30, 1998 ("Fiscal 98") compared to year ended September 30,
1997 ("Fiscal 97").
Revenues for Fiscal 98 were $9,119,268, an increase of 101.2%, as compared
to revenues of $4,532,532 for Fiscal 97. Revenues from commissions increased by
$3,385,272, or 84.3% from $4,017,787 for Fiscal 97 to $7,403,059 for Fiscal 98
due to the substantially increased volume of orders transacted by our online
brokerage clients, as well as through our third-market institutional sales desk.
We experienced an increase in the number of online trading clients from
approximately 300 at September 30, 1997 to approximately 900 at September 30,
1998. Data service revenues also increased by $512,883, or 345.7% from $148,353
for Fiscal 97 to $661,236 for Fiscal 98 due to the increased number of online
trading accounts. Revenues from principal transactions increased by $671,592, or
291.6%, from $230,297 for Fiscal 97 to $901,889 for Fiscal 98, largely as a
result of the increased volume of business conducted by our third-market
institutional sales desk. Interest and other income increased from $130,095 for
Fiscal 97 to $146,704 for Fiscal 98.
Interest expense increased from $212,359 for Fiscal 97 to $259,322 for
Fiscal 98 as a result of increased borrowings.
As a result of the foregoing, our net revenues increased by $4,539,773, or
105.1%, from $4,320,173 for Fiscal 97 to $8,859,946 for Fiscal 98. Substantially
all of our revenues were generated by clients in the United States and no client
or group of related clients accounted for 10% or more of our revenues.
Total expenses increased by $4,102,221 or 76.3%, from $5,377,370 for Fiscal
97 to $9,479,591 for Fiscal 98. Commissions, floor brokerage and clearing
charges represent payments to our clearing brokers and to certain employees who
facilitate our clients' transactions. As a result of the significant increase in
the volume of transactions by our clients, such expenses increased by
$1,580,798, or 85.7%, from $1,844,927 for Fiscal 97 to $3,425,725 for Fiscal 98.
Employment compensation and related costs increased by $950,388, or 73.2% from
$1,297,575 for Fiscal 97 to $2,247,963 for Fiscal 98 due to our hiring of 25
additional personnel to service our increased client base. Communications
expense increased by $419,807, or 124.4%, from $337,584 for Fiscal 97 to
$757,391 for Fiscal 98 as a result of our substantially increased base of online
clients. We expect that the foregoing expenses will continue to increase as we
seek to expand our client base.
Business development expenses consist of advertising costs to obtain new
clients, which costs have primarily been for print and media advertising. Such
expenses increased by $539,227, or 122.2%, from $441,424 for Fiscal 97 to
$980,651 for Fiscal 98 as a result of our expanded marketing efforts. We expect
such aggregate expenses to continue to increase as we expand our marketing
efforts. However, our new client acquisition costs decreased on a per client
basis.
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<PAGE>
Professional services increased from $894,920 for Fiscal 97 to $971,494 for
Fiscal 98. Occupancy and equipment costs increased by $294,589, or 196.9%, from
$149,580 for Fiscal 97 to $444,169 for Fiscal 98, primarily due to the
relocation of our offices to larger space and the purchase of additional
equipment in anticipation of our proposed expansion. Depreciation and
amortization increased by $164,227, or 82.5%, from $198,980 for Fiscal 97 to
$363,207 for Fiscal 98 for the same reasons. Other expenses increased by
$76,611, or 36.1%, from $212,380 for Fiscal 97 to $288,991 for Fiscal 98 for the
same reasons.
The income tax provision increased from $2,776 for Fiscal 97 to $12,765 for
Fiscal 98.
As a result of the foregoing, our operating results improved from a net
loss of $1,059,973 for Fiscal 97 to a net loss of $632,410 for Fiscal 98.
Liquidity and Capital Resources
Our business is capital intensive. Our capital requirements have exceeded
our cash flow from operations as we have been building our business. At
September 30, 1998, we had a working capital deficit of $691,258. As a result,
we have been substantially dependent upon sales of our common stock and
borrowings from officers, directors and stockholders and third parties to
finance our working capital requirements.
Watley has borrowed an aggregate of $530,000 in the form of subordinated
loans, pursuant to agreements approved by the NASD. Such loans are included by
Watley for purposes of computing its net capital under the SEC's net capital
rules. Such borrowings by Watley consist of (i) a $55,000 principal amount
non-interest bearing loan, and a $125,000 principal amount loan, bearing
interest at the rate of 12% per annum, from Steve Malin, our Chairman of the
Board, Chief Executive Officer and a principal stockholder of our company, and
(ii) a $200,000 principal amount loan, bearing interest at the rate of 15% per
annum and a $150,000 principal amount loan bearing interest at the rate of 13%
per annum from Mel Steinberg, father of Eric Steinberg, Executive Vice President
of our company. The loans mature in October 2000, except for the $125,000 loan
which matures in April 2000. During Fiscal 97, we paid an aggregate of $47,788
of interest on such loans and during Fiscal 98, we paid an aggregate of $49,500
of interest on such loans. See "Certain Transactions."
Watley is currently required to maintain net capital of $100,000 and a
ratio of aggregate indebtedness to net capital (the "net capital ratio") of 15
to 1 pursuant to the SEC's net capital rule. Such rule also prohibits "equity
capital" (which, pursuant to the net capital rule includes the subordinated
loans) from being withdrawn or cash dividends from being paid if Watley's net
capital ratio would exceed 10 to 1 or if Watley would have less than its minimum
required net capital. Accordingly, Watley's ability to repay the subordinated
loans may be restricted pursuant to the net capital rule. At September 30, 1998,
Watley had net capital of $161,128, which was $61,128 in excess of its minimum
required net capital, and Watley's net capital ratio was 7.4 to 1.
We received net proceeds of $2,045,000 from a private placement of equity
securities in Fiscal 97. We used approximately $1,180,000 of such proceeds to
acquire the systems and equipment utilized to test and launch our online trading
systems during that period. The balance of such proceeds were used for
advertising and working capital.
In Fiscal 98, we received net proceeds of $990,000 from a private placement
of equity securities and $250,000 from the issuance of $250,000 principal amount
notes and options to purchase an aggregate of 41,665 shares of common stock for
nominal consideration, of which $100,000 was furnished by Mel Steinberg. Such
proceeds were utilized to purchase a portion of the equipment acquired to expand
our online network. See "Certain Transactions."
We had cash and cash equivalents of $970,308 as of September 30, 1998. Our
operating activities provided $507,090 of net cash. We had a net loss of
$632,410 and a decrease in receivables from clearing brokers of $239,479, which
was more than offset by depreciation and amortization of $363,207, non-cash
amortization of option costs of $226,227, a non-cash compensation charge of
$115,000 and an increase in accounts payable and accrued liabilities of
$660,605. We used $1,440,345 of net cash in investing activities, consisting of
$2,244,313 of property and equipment purchases, which was partially offset by
deferred rent incentives of $803,968. Financing activities provided $1,200,870
of net cash, consisting of $990,870 of proceeds from sales of common stock and
$250,000 of proceeds from the issuance of notes payable, which were partially
offset by a $40,000 repayment of a loan to Bank of New York.
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<PAGE>
In October 1998, we obtained a $500,000 loan from New York Small Business
Venture Fund LLC, bearing interest at an annual rate of 12%, payable monthly. In
connection with such loan, we issued to the lender a $500,000 principal amount
promissory note and warrants to purchase 191,250 shares of our common stock at
an exercise price equal to the initial public offering price of our common stock
($6.00 per share). We granted the lender a security interest in substantially
all of our assets to secure our obligations under the loan, and six persons who
are officers, directors and/or principal stockholders of our company guaranteed
our obligations under such loan. We used these funds for the purchase of
additional equipment, marketing expenses and working capital. We intend to repay
the loan, plus a 1% prepayment fee, from the proceeds of this offering. See
"Certain Transactions."
In December 1998, we obtained a $500,000 line of financing from General
Electric Capital Corporation which is to be used from time to time primarily for
the purchase or leasing of additional equipment and software. We are required to
deliver to the lender a letter of credit in the amount of 50% of any amount
borrowed under this financing. As of December 31, 1998, we borrowed
approximately $311,208 under this line of financing, which we used to purchase
equipment. In connection with our company's borrowing under this financing, we
have granted the lender a security interest in certain of our company's existing
equipment as well as in all equipment purchased using funds obtained under this
financing.
In January 1999, we obtained a $400,000 loan from New York Community
Investment Company L.L.C., bearing interest at an annual rate of 12%, payable
monthly. In connection with such loan, we issued to the lender a $400,000
principal amount promissory note and warrants to purchase 140,000 shares of our
common stock at an exercise price equal to the initial public offering price of
our common stock ($6.00 per share). We granted the lender a security interest in
substantially all of our assets (other than our intangible assets) to secure our
obligations under the loan. We are using these funds for marketing expenses and
working capital.
In January 1999, we sold an aggregate of 221,500 shares of common stock to
12 investors in a private placement at a price of $4.80 per share for which we
received aggregate net proceeds of approximately $1,050,000. In connection with
such private placement, Anthony Huston, Executive Vice President of our company,
purchased 50,000 shares at a price of $240,000; Leon Ferguson, Senior Vice
President of our company, purchased 52,000 shares at a price of $249,600; and
Mark Chambre, who has agreed to serve as a director of our company upon the
closing of this offering, purchased 15,000 shares at a price of $72,000. All of
the purchasers of such shares agreed not to sell or otherwise dispose of any of
such shares for a period of twelve months from the date of this prospectus. See
"Certain Transactions."
We estimate that our capital expenditures will be approximately $3,300,000
during the twelve months following the closing of this offering. Such capital
expenditures are expected to be made to expand our network infrastructure,
create an off-site back-up communications center or "hot-site", purchase
additional systems to convert to self-clearing operations, provide additional
client support, expand our third-market institutional sales desk and continue
software and programming development.
We need the proceeds of this offering to expand our operations and finance
our future working capital requirements. Based upon our current plans and
assumptions relating to our business plan, we anticipate that the net proceeds
of this offering will satisfy our capital requirements for at least twelve
months following the closing of this offering. If our plans change or our
assumptions prove to be inaccurate, we may need to seek additional financing
sooner than currently anticipated or curtail our operations. We cannot assure
you that the proceeds of this offering will be sufficient to fund our proposed
expansion or that additional financing will become available if needed. Our
company will be materially adversely affected if we do not obtain financing when
needed. We may seek additional debt or equity financing to fund the cost of
continued expansion.
Net Operating Loss Carryforwards
Our company's net operating loss carryforwards ("NOLs") expire beginning in
the year 2012. Under Section 382 of the Internal Revenue Code of 1986, as
amended, utilization of prior NOLs is limited after an ownership change, as
defined in Section 382, to an annual amount equal to the value of the
corporation's outstanding stock immediately before the date of the ownership
change multiplied by the long-term tax exempt rate. The additional equity
financing obtained by our company in connection with its recent financings
21
<PAGE>
and this offering will result in an ownership change and, thus, will limit our
company's use of its prior NOLs. In the event we achieve profitable operations,
any significant limitation on the utilization of its NOLs would have the effect
of increasing our tax liability and reducing net income and available cash
reserves. We are unable to determine the availability of such NOLs since this
availability is dependent upon profitable operations, which our company has not
achieved in prior periods. See Note 12 to Notes to Consolidated Financial
Statements.
Relevant Accounting Standards
Our company generally grants stock options to certain employees and
consultants with an exercise price not less than the fair market value at the
date of grant. We account for stock option grants to employees in accordance
with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees," and, accordingly, recognize no compensation expense
related to such grants. In cases where we grant options below the fair market
value of the stock at the date of grant, the difference between the strike price
and the fair market value is treated as compensation expense and amortized over
the vesting period of the option, if any. Stock options granted to consultants
and others in lieu of cash compensation are recorded based upon management's
estimate of the fair value of the options or the related services provided and
expensed over the vesting period, if any.
Pro forma information regarding net income (loss) is required under
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," and has been determined as if we had accounted for
all the 1998 and 1997 stock option grants on the fair value method. See Notes 2
and 11 to Notes to Consolidated Financial Statements.
Our company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Our company recognizes the current and deferred tax consequences of all
transactions that have been recognized in the financial statements, using the
provisions of enacted tax laws. Deferred tax assets are recognized for temporary
differences that will result in deductible amounts in future years and for tax
loss carryforwards, if in the opinion of our management, it is more likely than
not that the deferred tax asset will be realized. SFAS No. 109 requires
companies to set up a valuation allowance for the component of net deferred tax
assets which does not meet the "more likely than not" criteria for realization.
The Company has established such valuation allowance for its deferred tax
assets.
In 1997, the Financial Accounting Standards board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share." The new rules are
effective for both interim and annual financial statements for the periods
ending after December 15, 1997. SFAS No. 128 supersedes APB No. 15 to conform
earnings per share with international standards as well as to simplify the
complexity of the computation under APB No. 15. The previous primary earnings
per share ("EPS") calculation is replaced with a basic EPS calculation. The
basic EPS differs from the primary EPS calculation in that the basic EPS does
not include any potentially dilutive securities. Fully dilutive EPS is replaced
with diluted EPS and should be disclosed regardless of dilutive impact to basic
EPS. Accordingly, our company has adopted SFAS 128 effective September 30, 1998.
Year 2000 Issues
We have devised a plan and have substantially completed a review and
assessment of all hardware and software and believe that such hardware and
software are substantially year 2000 compliant so that the computer programs do
not cease functioning because of an inability to process on a date occurring
from and after January 1, 2000. Our review has not revealed any year 2000 issues
that cannot be remediated in a timely manner. We do not believe that any such
remediation costs will be material.
We are highly dependent upon third-party financial information vendors,
telecommunications suppliers and our clearing brokers. We have sent letters to a
number of such vendors requesting assurances of their compliance. Such third
parties have generally advised us that their review of their operating systems
indicate that their operating systems are year 2000 compliant. We are currently
developing a contingency plan in the event that any third parties with which we
do business have any material year 2000 compliance problems.
We would be materially adversely affected if there are any failures or
interruptions in service resulting from the inability of our computing systems
or any such third-party's systems to recognize the year 2000. Moreover, since
our evaluation of these issues is continuing, we cannot assure you that
additional issues will not be discovered which could present a material risk of
disruption to our operations.
22
<PAGE>
BUSINESS
General
Internet Financial Services Inc. provides real-time online financial
brokerage services and comprehensive information about the securities markets
through its proprietary trading systems, UltimateTrader and WatleyTrader.
UltimateTrader is a uniquely integrated trading system because it provides
active traders with the comprehensive information they need on a real-time basis
and the ability to execute trades in seconds. WatleyTrader is our web-based
Internet broker service which we designed for active investors who execute
trades on a frequent basis and use online services to gather information about
the securities market. We also operate a third-market institutional sales desk
which specializes in executing and facilitating large-block transactions in
approximately 300 thinly-traded equity securities.
Watley is a broker-dealer registered with the SEC and NASD and is licensed
as a broker-dealer in 49 states.
Industry Overview
Our industry has recently experienced a series of changes, led by
electronic and online commerce, which has created market opportunities for our
company and other similarly situated brokerage firms. These favorable market
trends include:
The Emergence of Electronic and Online Commerce.
Internet and online services have provided organizations and individuals
with innovative ways of conducting business. With the emergence of the Internet
as a globally accessible, fully interactive and individually addressable
communications and computing medium, companies that have traditionally conducted
business in person, through the mail or over the telephone are increasingly
utilizing electronic commerce. Increased use of credit cards, automated teller
machines, the incidence of electronic funds transfers and online banking and
bill paying has automated, simplified and reduced the costs of financial
transactions for consumers, businesses and financial institutions.
Consumers have shown a strong preference for transacting certain types of
business electronically, such as paying bills, buying insurance, booking airline
tickets and trading securities, rather than in person or over the telephone.
These transactions are being streamlined through online commerce and can now be
performed directly by individuals virtually anywhere at any time. Consumers have
accepted and even welcomed self-directed online transactions because such
transactions can be faster, less expensive and more convenient than transactions
conducted through a human intermediary.
The Development of Online Brokerage Services.
In the past, individual investors could access the financial markets only
through a full-commission broker, who would offer investment advice and place
trades. With the deregulation of brokerage commissions in 1975 and the resulting
unbundling of brokerage services, investors began to realize that they could
separate financial advisory services from securities trading. This brought about
the advent of discount brokerage firms, which provide an alternative investment
approach by completing trades at a reduced cost.
With the emergence of electronic brokerage services, investors are being
given the ability to further unbundle the costs associated with the human
interaction required by full-commission and traditional discount brokerage
firms. By requiring personnel to handle each transaction, most traditional
brokerage firms restrict their clients' access to trading and information to the
availability of the person processing the transaction. In addition, although
full-commission and discount brokerage firms are able to offer electronic
trading services, their continued reliance on personnel, branch offices and the
associated infrastructure for a major part of their business prevents them from
reducing their cost structure to the lower price points achievable through
electronic trading.
We believe that the increased presence of automated teller machines, the
growth of discount brokerage firms and a variety of other indicators evidence a
shift in demographics that is fundamentally altering the way consumers manage
their personal financial assets. Based on consumer feedback and the rapid
acceptance by consumers of online transactions, we also believe that consumers
are increasingly taking direct control over their personal financial affairs,
not only because they are now able to do so, but also because they find it more
convenient and less expensive than relying on financial intermediaries.
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<PAGE>
As investors obtain even more access to investment information, we believe
they will desire greater control over their financial decisions and seek
alternative ways to invest more conveniently and cost-effectively and with less
interaction with brokers and other financial services professionals. We believe
that this trend has created a growing opportunity to provide online trading
services, such as UltimateTrader, that are easy to access, easy to use,
cost-effective and secure.
The Growing Market for Active Traders, Active Investors and Online Brokerage
Services.
Active trading is dependent upon liquidity, i.e., the ability to buy or
sell stock at any given time. Until recently, liquidity was primarily provided
by Nasdaq and an alternative trading system called Instinet. Both systems
display quoted bid and ask prices for stock and have automatic execution
capacity. However, the liquidity on Instinet is available only to institutional
clients and certain brokerage firms.
In 1996, the SEC adopted rules which brought about sweeping changes in the
structure of the over-the-counter market and were very beneficial for our
company and our clients, as well as to public companies and their shareholders.
These rules, known as the Order Handling Rules, permitted the creation and
operation of electronic communication networks ("ECNs"), open broadcasting
systems that allow anyone with a connection to the network to see all the bids
and offers posted into the system for any Nasdaq traded security. The Order
Handling Rules require market makers to display certain limit orders in their
quotations or to send those orders to an ECN for display. The increased
regulatory emphasis on enforcing compliance with the duty of brokers to obtain
the best execution for their clients has fostered the growing importance of
ECNs, which provide an ever-increasing source of liquidity (having a ready
market to buy or sell stock) in the over-the-counter market.
We believe that this regulatory environment and the increased availability
of information to individual investors on a real-time basis, together with
advances in Internet, networking and communications technologies, has created
investing opportunities for active traders and active investors and market
opportunities for online brokerage services.
Online trading is the fastest growing segment of the brokerage industry and
is expected to grow significantly. Forrester Research, Inc. projects that the
online trading industry grew from approximately 1.5 million accounts at the end
of 1996 to approximately 5 million accounts at the end of 1998, and that the
market will grow to 8.4 million accounts at the end of 1999 and 14.4 million
accounts in 2002. Another industry report indicates that the volume of
securities trades placed over the Internet increased by 34% during the fourth
calendar quarter of 1998, compared to the third quarter of 1998, and that the
number of online trades accounts for 25% to 30% of all individual investor stock
transactions and 14% of all equity transactions. Industry experts also project
that retail commissions generated by online trading market will grow from
approximately $268 million, or 15% of the commissions generated by discount
brokerages in 1996, to as much as $2.2 billion, or 60% of total discount
brokerage commissions by 2001.
Strategy
The online trading sector is the fastest growing segment in the brokerage
industry. Our strategy is to capitalize on perceived opportunities arising from
this expanding market by:
o Targeting active traders and other active investors. We believe that the
market for such clients is currently underserviced and that UltimateTrader
is positioned to satisfy their requirements.
o Expanding our marketing efforts for our online brokerage service. We intend
to aggressively market UltimateTrader by targeting active traders through
print, online and other advertisements. Our advertising efforts are
expected to include advertisements in financial publications and various
other regional and national publications that have a demographic similar to
our target market. We also intend to advertise and promote UltimateTrader
through Internet website and banner advertisements and television
commercials.
o Expanding our network infrastructure and client support capabilities. We
intend to expand our network infrastructure and client support
capabilities to better service an expected increasing client base. Our
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internal computing needs will require additional networking equipment. We
also intend to establish an off-site back-up communications center or "hot
site", in a different region of the country, to mirror the primary location
in order to ensure continued operations in the event of a systems failure
at our primary location.
o Converting to self-clearing operations. We believe that performing such
operations internally will reduce our operating costs and provide us the
opportunity to receive revenues from margin transactions with our clients.
We expect that such expansion will be accomplished by acquiring an existing
clearing firm or hiring the appropriate staff to build and manage our own
clearing department. We intend to develop and/or obtain the requisite
software systems and to acquire computer hardware, as well as the necessary
personnel, to convert to self-clearing operations during the year 2000.
o Improving our third-market institutional sales desk. We are continuously
seeking to improve our technical expertise and apply new technologies to
more effectively provide such services. Additionally, after this offering,
we intend to hire additional associates to expand the number of securities
we cover for this market.
o Offering new services.
International Expansion. We are currently evaluating opportunities to
provide electronic execution services for foreign institutions and their
clients for transactions in the U.S. securities markets and to arrange
for foreign institutions to provide for such services for our clients in
foreign markets.
Offer fee-based asset management services. We are evaluating the
possibility of offering a comprehensive range of financial advisory
services online, including assessing risk profiles, asset allocation and
fund placement.
UltimateTrader
UltimateTrader was designed for use by self-directed active traders. Active
traders execute more trades per day than any other category of investors and
require real-time information and quick order execution to effectuate their
trading strategies.
We designed UltimateTrader by uniquely integrating third-party market data
and order entry software with our proprietary networking systems to create a
proprietary trading system. UltimateTrader provides active traders with the
comprehensive information they need on a real-time basis and the ability to
execute trades in seconds.
Since UltimateTrader is a client-server application, it is not restricted
by the "query-response" limitation of HTML, the primary programming language of
the worldwide web. As a result, UltimateTrader delivers and automatically
updates a continuous, dynamic stream of live market data to the client's screen.
With most other trading systems, displayed data remains static until the query
is repeated.
UltimateTrader provides our clients access to comprehensive information on
stocks, markets, indices, mutual funds, news and options. UltimateTrader clients
are able to access bid and ask prices, charts, research and over 170 other types
of information for any listed or Nasdaq traded stock, as well as the ability to
establish and track their securities, cash and margin positions on a real-time
basis. Our clients can arrange the display and configuration of data on their
computer screens using a menu and tool bar, which are generally utilized in the
Windows(TM) operating system. Different computer screen arrays or pages can be
built to suit the user's personal requirements.
UltimateTrader clients can execute trades with a few simple mouse clicks or
keystrokes. UltimateTrader clients can route trades directly to the exchanges,
the Nasdaq Market Maker System, a specific market maker or an ECN. As a result,
we believe trades can be executed more quickly than if the trade is routed
through a third market firm or an online brokerage firm's trading desk, as is
the case within any other trading systems. The order entry section can be preset
for size and type of order. The client can use a mouse to click the bid or ask
price of a security and either close out an open position or add to an existing
one. If the user clicks the bid or ask price of the security, the order entry
screen will appear pre-configured to buy or sell.
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Once an order is entered, UltimateTrader sends the order to the exchange
selected in less than two seconds from virtually anywhere in the world. Such
significant savings in time have tremendous value to a client who is trying to
trade in markets characterized by rapidly changing prices.
Speed of order execution is also affected by how an order is routed.
UltimateTrader clients are able to route their orders directly to the exchanges
(such as the New York Stock Exchange, American Stock Exchange, Nasdaq Stock
Market, Inc. and Chicago Board Options Exchange). Most other retail online
trading systems route orders to a third-market firm (i.e., Knight, Trimark,
etc.) or to the online broker's trading desk or trading subsidiary, which in
turn routes the orders to the market. The Company believes that most internal
trading systems and those of third-market firms cannot match the order execution
speed and capacity of the exchanges.
Clients can also elect to route trades to our Watley trading desk for
efficient execution. Our Watley trading desk consists of registered
representatives who are available to assist our clients. There is no additional
cost for executing orders via the Watley trading desk button.
UltimateTrader clients may place bids or offers onto an ECN which will also
appear in the Nasdaq Market Maker Level 2 screen with the corresponding price
and size of the order. This gives our clients an advantage in attempting to
execute orders in between the current bid and asked prices of Nasdaq securities.
To direct an order to a specific market maker or ECN, our clients double
click on the market maker or ECN and mark their order entry screen with this
preference. The SelectNet preference button is useful when our clients wish to
execute orders for more than 1,000 shares of a security. Orders sent through
SelectNet are only shown to the market makers trading that particular security.
UltimateTrader Service Levels. UltimateTrader clients can select among four
different service levels, depending on the information desired and the cost and
fees which a client is willing to pay for information and service:
Service Level I System features include:
o Dynamic Updating Quotations -- displays real time changes in prices and
markets as they occur.
o Unlimited Customized Pages -- allows clients to creates computer screen
layouts to their preference with their data and to scroll freely among
these pages.
o Electronic Execution -- provides direct electronic access to various
exchanges and markets for rapid routing of execution of trades.
Service Level II System features includes Service Level I features plus:
o Board View Portfolio Minder -- used to create computer windows with
comprehensive price and other data relating to a number of different
securities.
o Position Minder -- serves as a portfolio monitor and displays existing
open positions as well as the status of pending orders.
o Scrolling Tickers -- displays price and trading volume information for
the symbols that a client chooses on a live basis. The quotes will move
through the ticker window as the server receives them.
o Alarms -- alerts clients by an audio or visual "pop-up" when target
criteria have been met for a specified security.
o Snap Quotes -- displays detailed information about individual symbols.
o Market Minder -- a fully configurable quote screen that can display
virtually any information the secur-ity selected by the client.
o Hot Keys -- the ability to execute/cancel trades with a simple keystroke.
o MultiQuotes -- displays prices and fundamentals for any symbol.
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Service Level III features includes Service Level II features plus:
o Charts with Technical Studies -- allows clients to view live, dynamically
updating, real-time intraday chart data and historical information for
stocks, options or indices.
Service Level IV features includes Service Level III features plus:
o Nasdaq Level II Data -- continuously updated display of market maker and
ECN current prices and changes.
o Color Coded Nasdaq Market Maker Screens -- designed to visually display
(by a special color on the screen) upward and downward trends in recent
trades in a security.
o Time and Sales -- reflects last and cumulative trades, prices and
aggregate daily volume in a security.
Our fee schedule for clients subscribing to Service Level I is as follows:
<TABLE>
<CAPTION>
Number of Trades Per Month Transaction Charges Monthly Fee for Real Time Data
- -------------------------- --------------------- -------------------------------
<S> <C> <C>
1-19 trades per month $ 16.95 $50 per month
20 or more trades per month $ 16.95 free
</TABLE>
Our fee schedule for clients subscribing to Service Levels II, III and IV
is as follows:
<TABLE>
<CAPTION>
Monthly Fee for Real Time Data*
----------------------------------------------
Number of Trades Per Month Transaction Charges Level II Level III Level IV
- -------------------------- --------------------- -------------- --------------- -----------
<S> <C> <C> <C> <C>
1-9 trades per month $ 23.95 $ 75 $ 150 $ 300
10-24 trades per month $ 22.95 $ 50 $ 125 $ 250
25-49 trades per month $ 20.95 free $ 75 $ 200
50-99 trades per month $ 19.95 free free free
100-199 trades per month $ 18.95 free free free
200 or more trades per month $ 17.95 free free free
</TABLE>
- ------------
*Dow Jones News Service is an optional service priced at $95.00 per month.
Orders for an exchange listed security in excess of 2,000 shares or a
Nasdaq listed security in excess of 10,000 shares incur a surcharge of $.01 per
share and a commission of $.01 per share on the entire order. We also charge an
additional fee for executing on an ECN or SelectNet, substantially all of which
is forwarded to the owner or operator of that system.
Optional Services. We offer a vast array of optional services to
UltimateTrader clients. Among these are the Dow Jones News Service and various
charting and market trading services. The Dow Jones News Screen provides
continuously updating real-time news in a scrolling format, including breaking
news, corporate announcements, interviews, industry news, market reports,
economic and political developments, "hot stock" alerts, international events
and other information that impacts the securities markets.
With Dow Jones News and a number of other services, we invoice the client
directly as part of their monthly bill and remit the special charges to the
vendor supplying these services, while retaining approximately 15% of the charge
as our fee.
Virtual Private Network Access. Watley has created a virtual private
network solution called the Dedicated Port Service for those clients who require
reliable non-Internet access to the equity markets. This service offers local
dial access from nearly anywhere in the country via modem, as well as ISDN
access in selected metropolitan areas. Users are charged a fixed monthly fee for
unlimited usage.
UltimateTrader has accounted for most of our retail customer account
revenues in the past year and we anticipate this to continue in the future.
During the year ended September 30, 1998, we derived approximately 67.4% of our
company's total revenues from UltimateTrader clients.
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WatleyTrader
WatleyTrader is our web-based Internet brokerage service which we designed
for active investors who execute trades on a frequent basis and use online
services to gather information about the securities markets. WatleyTrader
provides comprehensive information on stocks, markets, indices, mutual funds,
news and options in a live format for free. WatleyTrader clients can place
trades, obtain quotes, order research and check account balances and portfolio
valuations online or through our automated touch-tone phone system, 24 hours a
day. The electronic order system for the WatleyTrader directs orders to the
Watley Desk for execution. WatleyTrader client orders are entered, processed and
confirmed electronically.
WatleyTrader targets price sensitive investors and competes directly with
E-Trade, E-Schwab and other online brokerages. The basic fee schedule for the
WatleyTrader is a transaction charge of $9.95 per order (orders of more than
5,000 shares bear a commission of $.01 per share for the entire order) with an
additional $15.00 fee for trades made by telephone.
During our year ended September 30, 1998, approximately 1.4% of our
revenues originated from WatleyTrader clients.
Third-Market Institutional Sales Desk
Our third market institutional sales desk specializes in facilitating
and/or executing large-block transactions in approximately 300 thinly-traded
equity securities. These services are provided to clients who often require that
their purchase or sales of large positions remain anonymous. We match buyers and
sellers to execute "off-exchange transactions", to minimize the impact on the
market and prevent our client's positions from being disclosed to competing
firms. Our third-market institutional sales clients include mutual and pension
funds, insurance companies, banks, corporations and independent fund managers.
Approximately 30.7% of our revenues for the year ended September 30, 1998 were
derived from the institutional trading desk.
Client Services
Client services (trading, administrative, and technical support) for all
levels of online service are among our highest priorities. We believe that
providing an effective client service team to handle client needs is critical to
our success. Our client service organization helps clients get online, handles
product and service inquiries and addresses all brokerage and technical
questions. The client service team also makes welcome calls to verify the
satisfaction of our clients.
Live client support is available 10 hours a day from 8:00 AM to 6:00 PM EST
Monday through Friday. Our client services department operates on a 'one-stop
shopping' basis, meaning that clients do not have to be transferred between
departments in order to receive answers to their inquiries. We currently employ
ten client services associates, all of whom are registered representatives and
are available to accept and execute client orders, research past trades, discuss
account information, and provide detailed technical support. A separate
technical team helps clients with particularly serious or persistent technical
issues.
In order to provide professional and efficient client support, we have
purchased and implemented client management software. Databases are updated with
each client contact to track client service calls, trading patterns and
compliance issues, and to generate periodic (daily and weekly) reports for
management. Client services associates access the latest client account
information through their own searchable client services manual and solutions
database.
We recently launched online support and chat services for our clients. This
service currently offers an online, indexed UltimateTrader user manual and chat
area. The chat area offers clients the ability to query and 'chat' with client
services associates in real-time. Our goal with respect to the provision of
online support and chat services is to create a sense of 'virtual community'
among prospective and existing clients and between our company and our clients.
We plan to create a VIP client services team to service our most active
online clients. In addition to providing client support for all issues on an
account manager basis, we intend for the VIP team to offer face-to-face
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contact, individualized service and customized incentive packages. We believe
that providing highly personalized and professional client support, especially
for our niche market high volume clients, will further differentiate our
products and services from those of our competitors.
Operations
Clearing and Order Processing.
Watley does not hold any funds or securities of its clients nor does Watley
directly execute and process either its own or its clients' securities
transactions. Since October 1996, Watley has cleared all transactions for its
clients, on a fully disclosed basis, with Penson Financial Services, Inc. for
retail accounts and Weiss, Peck & Greer, L.L.C. for institutional accounts.
Pursuant to Watley's agreements with its clearing brokers, the clearing
brokers, process all securities transactions for Watley's account and the
accounts of Watley's clients for a fee. Services of the clearing brokers include
billing and credit control and receipt, custody and delivery of securities, for
which we pay a per ticket charge. Watley has agreed to indemnify and hold the
clearing brokers harmless from certain liabilities or claims, including claims
arising from the transactions of its clients. Watley's clearing agreements may
be terminated by either party, upon 60 days' written notice in the case of
Penson Financial Services, Inc., and 30 day's prior written notice in the case
of Weiss, Peck & Greer, L.L.C. Watley is dependent on the operational capacity
and the ability of the clearing brokers for the orderly processing of
transactions. By engaging the processing services of clearing brokers, however,
Watley is exempt from certain capital reserve requirements imposed by federal
securities laws.
Clients' securities transactions are effected on either a cash or margin
basis. In connection with margin transactions, credit is extended to a client,
collateralized by securities and cash in the client's account, for a portion of
the purchase price. The client is charged for such margin financing at interest
rates based on the brokers call rate (the prevailing interest rate charged by
banks on secured loans to broker-dealers), plus an additional amount of up to
1.75%.
Margin lending is subject to the margin rules of the Board of Governors of
the Federal Reserve system. Margin lending subjects us to the risk of a market
decline that would reduce the value of our collateral below the client's
indebtedness before the collateral can be sold. Under applicable rules, in the
event of a decline in the market value of the securities in a margin account,
the client is required to deposit additional securities or cash in the account
so that the loan is at all times no greater than 65% of the market value of
securities in the margin account.
We currently intend to convert to self-clearing operations since we believe
that performing such operations internally will reduce our operating costs and
provide us the opportunity to receive revenues from margin transactions with our
clients. If we were to implement self-clearing operations, our client's
securities typically will be held by our company in nominee name on deposit at
one or more of the recognized securities industry depository trust companies, to
facilitate ready transferability. We will collect dividends and interest on
securities held in nominee name and make the appropriate credits to our client's
account. We will also facilitate exercise of subscription rights on securities
held for our clients. We will arrange for the transmittal of proxy and tender
offer materials and issuer reports to our clients.
Self-clearing operations, especially where conducted by firms such as our
company, without significant prior experience, involve substantial risks of
losses due to clerical errors related to the handling of client funds and
securities. Errors in the clearing process also may lead to civil liability for
actions in negligence brought by parties who are financially harmed as a result
of such errors. Clearing operations have accounted for a significant portion of
our cost of services. The failure of our company to perform self-clearing
operations accurately and cost-effectively could have a material adverse effect
on our business, financial condition and operating results.
Network Infrastructure.
Our network consists of a series of servers, routing and Internet-
networking equipment, workstations, software support clusters, and firewall
management systems. This creates a global connection to our intranet, so that
any computer that can connect to the Internet can connect to our system.
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Any individual with a personal computer who has a connection to the
Internet and has Windows(TM) compatible software can subscribe to
UltimateTrader. Once an account is opened, the client downloads UltimateTrader
software and is given a unique user name and password. The client then logs onto
the UltimateTrader system and is connected to one of our order servers.
Our network is accessed by electronic messaging. A message is sent to
Watley's intranet via the client's Internet service provider. In order to access
Watley's network, this message first passes through a firewall and web shield.
The firewall allows appropriate Internet traffic into the network. The web
shield prevents virus infected files or messages from reaching the network. Once
the message has passed through the firewall and web shield, a permission server
qualifies the information. Once the client establishes a connection to the
UltimateTrader system, the connection between the client and server is
maintained until the client requests it be terminated.
Our technology is supported by an internal staff of programmers, developers
and operators 24 hours a day, seven days a week. The programming staff is
supplemented by a team of quality control analysts, web page developers,
technical writers and design specialists who ensure the final product is
user-friendly and dependable. In addition to supporting the systems, the staff
continually enhances software and hardware and develops new services. Software
is designed to be versatile and easily adaptable to new and emerging
technologies.
The order server accepts buy/sell or sell short messages from the client
application and qualifies the order for appropriate review. Once an order is
qualified, it is sent to the exchange of the client's choice and messages are
sent to update our data base. This update offers the client real-time account
positions, equity and profit and loss calculations. All transactions for the day
are processed for delivery to the clearing firm.
Account Security.
We use a combination of proprietary and industry standard security measures
to protect our clients' assets. Clients are assigned unique account numbers,
user identifications and passwords that must be used each time they log on to
the system. In accordance with standard industry practices, telephone orders
require authentication via personal identification number/password and/or other
personal information. In addition, our trade processing system is designed to
compare the Watley accounts database with the clearing firm's account
information on a daily basis in order to detect any discrepancies.
We rely on encryption and authentication technology, including public key
cryptography technology licensed from other parties, to provide the security and
authentication necessary to effect the secure exchange of information.
Firewalls and other software limit not only system access to the authorized
user(s), but also limit the authorized users to specifically approved
applications. This filter-software prevents unauthorized access to critical
areas of the system such as account information. Furthermore, public access
servers such as e-mail, chat services and FTP are in a network entirely separate
from the rest of our company's systems.
We have implemented special policies relating to the transfer or withdrawal
of funds by clients to prevent unauthorized withdrawals. All requests for fund
withdrawal or transfer require a signed letter from the account holder(s).
Checks will only be made out in the account holder's name and wire transfers
will only be sent to a bank account in the account holder's name.
Marketing and Advertising
We intend to market UltimateTrader by targeting active traders through
print, online and other advertisements. To date, we have engaged in limited
marketing and advertising efforts, consisting primarily of print advertising in
Investors Business Daily, a daily trade publication. We have also conducted
surveys of our existing client base to understand their media consuming habits
and demographic profiles in order to effectively target our advertising
campaign. We are developing a comprehensive marketing plan to attract potential
clients, as well as build market awareness, educate the investing public and
develop brand name recognition and loyalty within the most active trading
segment of the market. Our advertising efforts are
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expected to include advertisements in financial publications and various other
regional and national publications that have demographics similar to our target
markets. We also intend to advertise and promote UltimateTrader through Internet
website and banner advertisements and television commercials.
Our initial marketing efforts will be concentrated in the United States.
However, as part of our long-term goals, we plan to market our services to
trading communities interested in U.S. equities in Western Europe, Latin
America, and Asia.
Competition
The market for electronic brokerage services is intensely competitive,
rapidly changing and has few barriers to entry. We believe that we compete on
the basis of speed and accuracy of order execution, processing and confirmation,
quality of client service, ease of use, amount and timeliness of information
provided, price and reliability of our trading systems.
We believe our competition consists of large and small brokerage firms,
utilizing the Internet to transact retail brokerage business. Among such
competitors are E*Trade Group, Inc., Charles Schwab & Co., Inc., Quick & Reilly,
Inc., Waterhouse Securities, Inc., Fidelity Brokerage Services, Inc. and Datek
Securities Corp. We also face competition for clients from full commission
brokerage firms, including Morgan Stanley Dean Witter & Co., PaineWebber
Incorporated and Salomon Smith Barney, as well as financial institutions and
mutual funds.
Securities Regulation
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. In addition, the SEC, the NASD,
other self regulatory organizations, such as the various stock exchanges, and
other regulatory bodies, such as state securities commissions, require strict
compliance with their rules and regulations. Broker-dealers are subject to
regulations covering all aspects of the securities business, including sales
methods, trade practices among broker-dealers, use and safekeeping of clients'
funds and securities, capital structure, record keeping and the conduct of
directors, officers and employees. Certain changes in Watley's current business
or practices, including converting to self-clearing operations, require NASD and
other regulatory approval.
Net Capital Requirements
The SEC, NASD and various other regulatory agencies have stringent rules
with respect to the maintenance of specific levels of net capital by securities
brokers, including the SEC's uniform net capital rule which governs Watley. Net
capital is essentially defined as net worth (assets minus liabilities), plus
other allowable credits and qualifying subordinated borrowings less certain
mandatory deductions that result from excluding assets that are not readily
convertible into cash and from valuing certain other assets, such as a firm's
positions in securities, conservatively. Among these deductions are adjustments
(called "haircuts") in the market value of securities to reflect the possibility
of a market decline prior to disposition.
As of September 30, 1998, Watley was required to maintain minimum "net
capital," in accordance with SEC rules, of approximately $100,000 and had total
net capital (as so computed) of approximately $161,128 or approximately $61,128
in excess of minimum net capital requirements.
Intellectual Property Rights
We rely on a combination of copyright, trademark and trade secrets laws and
non-disclosure agreements to protect our proprietary technologies, ideas,
know-how and other proprietary information. We have no patents or registered
copyrights. Notwithstanding the precautions we take, third parties may copy or
otherwise obtain and use our proprietary technologies, ideas, know-how and other
proprietary information without authorization or independently develop
technologies similar or superior to our technologies. In addition, the
confidentiality and non-competition agreements between our company and certain
of our employees, distributors and clients may
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not provide meaningful protection of our proprietary technologies or other
intellectual property in the event of unauthorized use or disclosure. Policing
unauthorized use of our technologies and other intellectual property is
difficult, particularly because the global nature of the Internet makes it
difficult to control the ultimate destination or security of software or other
data transmitted.
In November 1998, our company filed with the United States Patent and
Trademark Office for a trademark registration on the supplemental register for
the UltimateTrader name. Although we are not aware of any challenges to our
right to use this trademark, we cannot assure you that a trademark registration
will be granted or, if granted, that the use of this mark would be upheld if
challenged.
There has been substantial litigation in the software industry involving
intellectual property rights. We believe that our technologies and trading
systems have been developed independent of others. Third parties may assert
infringement claims against our company and our technologies and trading systems
may be determined to infringe on the intellectual property rights of others.
Computer Strategies, Inc. Acquisition
Effective October 2, 1998, our company acquired all of the capital stock of
Computer Strategies, Inc. for 38,260 shares of common stock valued at $183,648.
Computer Strategies is a recently formed company providing computer software
consulting services. Leon Ferguson was the founder and sole stockholder of
Computer Strategies and became our Senior Vice President and Chief Information
Officer upon closing of the acquisition. See "Management -- Executive Officers
and Directors" and "Certain Transactions."
Personnel
As of November 24, 1998, we employed a total of 45 persons, of whom 10 are
engaged in executive management, 10 in trading activities, 10 in client service,
3 in sales and marketing, 5 clerical and back office personnel as well as 7
other employees. In addition, we retain a computer development and consulting
firm on an exclusive basis. We believe our relations with our employees are
generally good and we have no collective bargaining agreements with any labor
unions.
Our registered representatives are required to take examinations
administered by the NASD and state authorities in order to be qualified to
transact business, and are required to enter into agreements with Watley
obligating them to adhere to Watley's supervisory procedures and not to solicit
customers in the event of termination of employment. Watley's agreements with
registered representatives do not obligate such representatives to be associated
with Watley for any length of time.
Properties
Our principal offices are located at 40 Wall Street, New York, New York,
where we occupy approximately 15,000 square feet at an annual cost of
approximately $480,000, or $40,000 per month, plus escalations. Although the
lease began in January 1998, monthly rental payments will not commence until
June 1999. The initial term of the lease for the new office space expires in
June 2009.
Watley's operations are currently located at our offices at 33 West 17th
Street, New York, New York, where we occupy 7,400 square feet at an annual rent
of $131,000. These operations will be moved to our 40 Wall Street location over
the next several months. In addition, we occupy an additional 2,600 square feet
of space in New York, at an annual rental of $94,884 for our institutional
division. The lease for such space expires in 2004.
Legal Proceedings
Our business involves substantial risks of liability, including exposure to
liability under federal and state securities laws in connection with the
underwriting or distribution of securities and claims by dissatisfied clients
for fraud, unauthorized trading, churning, mismanagement and breach of fiduciary
duty. In recent years, there has been an increasing incidence of litigation
involving the securities industry, including class actions which generally seek
rescission and substantial damages.
In the ordinary course of business, we and our principals are, and may
become a party to legal or regulatory proceedings or arbitrations. We are not
currently involved in any legal or regulatory proceedings or, arbitrations, the
outcome of which is expected to have a material adverse effect on our business.
Because of the nature of our business, we may become party to legal or
regulatory proceedings or arbitrations.
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MANAGEMENT
Executive Officers and Directors
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
Name Age Positions
- ---- --- ---------
<S> <C> <C>
Steven Malin ................ 41 Chairman of the Board, Chief Executive Officer and Director
Harry Simpson ............... 32 President, Chief Operating Officer and Director
Robert Malin ................ 33 President of A.B. Watley, Inc. and Director
Anthony G. Huston ........... 35 Executive Vice President -- Strategic Planning
Eric Steinberg .............. 33 Executive Vice President -- Administration
Leon Ferguson ............... 36 Senior Vice President and Chief Information Officer
Jonathan Priddle ............ 36 Senior Vice President -- Sales
Brett Vernick ............... 30 Senior Vice President -- Management Information Services
Michael Fielman ............. 48 Vice President -- Finance
William Brawer .............. 42 Director
Elizabeth Chambers .......... 36 Director
Mark Chambre ................ 38 Director
Stanley Weinstein ........... 72 Director
</TABLE>
Steven Malin co-founded our company in May 1996 and has been our Chairman
of the Board and Chief Executive Officer since inception. From April 1993 to May
1996, Mr. Malin served as a consultant to Watley. From 1987 to 1993, he was a
Senior Foreign Exchange Options Broker for Tullett and Tokyo Forex, Inc., a
global inter-bank money brokering firm with its primary offices located in
London, New York and Tokyo. Mr. Malin attended The Fletcher School of Law and
Diplomacy from 1982 to 1984. He received a bachelor of arts degree from Vassar
College in 1980.
Harry Simpson has been our President and Chief Operating Officer since
March 1998 and was our Executive Vice President of Online Brokerage Services
from May 1996 until March 1998. From January 1993 to September 1995, he served
as Vice President of Tullett and Tokyo Forex, Inc., and Manager of its Foreign
Exchange Options Desk in New York. From January 1988 to December 1992, Mr.
Simpson worked as a Senior Foreign Exchange Options Broker for Exco
International, Inc., an international money broker in Hong Kong and Tokyo. Mr.
Simpson received a bachelor of science degree in finance from Indiana University
in 1987.
Robert Malin is a co-founder of our company. He has been associated with
Watley since August 1993, initially as General Securities Principal and director
of day-to-day operations and, most recently, serving as President. His prior
experience includes managing equity-trading, client services and brokerage
operations. Mr. Malin and Steven Malin are brothers.
Anthony G. Huston. Mr. Huston joined our company in May 1996 as Executive
Vice President. From September 1995 to May 1996, Mr. Huston served as a
consultant to Watley. From August 1988 to May 1995 he served as Vice President
and Manager in the Foreign Exchange Options Department in the New York, Tokyo,
and London offices of Tullett and Tokyo Forex, Inc. Mr. Huston received a
bachelor of arts degree in asian studies and international relations from the
University of Michigan in 1985. He attended New York University as a post
graduate student in economics.
Eric Steinberg. Mr. Steinberg has been Executive Vice President of
Administration of our company since March 1998. His responsibilities include
management of our company offices and negotiating all purchase and
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leasing arrangements for our company. From May 1996 to March 1998, Mr. Steinberg
served as an administrative consultant to our company. Prior thereto, from
August 1993 to May 1996 he served as a consultant to Watley. From 1991 to 1993,
he was a manager at Primary Financial Services, Inc., a financial consulting and
leasing company. From September 1986 to May 1991, Mr. Steinberg was employed as
an account manager by Manhattan Leasing, Inc., a New York based leasing company.
Leon Ferguson. Mr. Ferguson joined our company in October 1998 as Senior
Vice President and Chief Information Officer in connection with our acquisition
of Computer Strategies, Inc., a software consulting firm he formed in 1996 and
served as its President and Chief Executive Officer since inception. From May
1994 to January 1996, Mr. Ferguson served as Director of Information Technology
Strategies at Williams Telecommunications Group, a long-distance
telecommunications company that was acquired by WorldCom, Inc. in 1995. From
May 1990 to May 1994, Mr. Ferguson served as Chairman of Digital Communications
Associates, Inc. a software development company he founded which specializes in
high speed transaction solutions for the long distance telecommunications
industry. Mr. Ferguson received a bachelor of computer science degree from the
University of Oklahoma in 1988.
Jonathan Priddle. Mr. Priddle has served as our company's Senior Vice
President of Sales since December 1998. From March 1997 to November 1998, he
provided consulting services to our company. From August 1995 to March 1997, he
served as a senior broker at Eurobrokers, Inc., a global interbank money
brokering firm in New York. From January 1995 to August 1995, Mr. Priddle
served as a Senior Currency Broker in the New York office of Tullett and Tokyo
Forex, Inc. From April 1994 to January 1995, Mr. Priddle was the Manager of the
Currency/FRA Department at Cantor Fitzgerald Associates, a foreign exchange
brokerage firm. From March 1992 to April 1994 Mr. Priddle was a broker in the
Currency Arbitrage Department of Garvin Guybutler Corporation, a global
interbank money brokering firm. Mr. Priddle began his career with Tullett and
Tokyo, Inc. in June 1985 and served in the London, Tokyo and New York offices
until March 1992. Mr. Priddle attended Yeovil Tertiary College from September
1978 to March 1981 and Bristol Polytechnic from March 1981 to March 1986. Both
institutions are located in the United Kingdom.
Brett Vernick. Mr. Vernick has served as our company's Senior Vice
President for Management Information Services since May 1996. From March 1995
to April 1996, Mr. Vernick served as the Eastern U.S. Region Network Specialist
for PC Quote, Inc., an international data feed corporation. From August 1992 to
February 1995, he served as Director of Management Information Systems for Soil
Mechanics Environmental Services, Inc. Mr. Vernick received a bachelor of
science degree in political science and international relations from Stonybrook
in 1993.
Michael Fielman. Mr. Fielman joined our company in April 1998 as Vice
President -- Finance. From January 1996 to March 1998, he was Controller of Cord
Contracting Co., Inc., a hydrogeologic consulting drywall contractor. From 1991
to January 1996, he was Chief Financial Officer of Artkraft Strauss Sign
Corporation, a provider of advertising signs. He received a bachelor of science
degree from New York Institute of Technology in 1973.
William Brawer has agreed to serve as a director of our company upon the
closing of this offering. Since February 1996, he has served as Chairman and
Chief Executive Officer of Brawer Brothers, a producer of nylon and polyester
bi-products. Prior thereto he served in various other senior management
capacities with Brawer Brothers. Mr. Brawer received a bachelor of science
degree from Colorado University in 1978.
Elizabeth Chambers has agreed to serve as a director of our company upon
the closing of this offering. Since September 1998, she has been Vice President
of Business Design at Readers Digest, Inc. From June 1988 to August 1998, Ms.
Chambers served in the New York office of the business consulting firm, McKinsey
& Company, where she became a partner in 1997. Ms. Chambers is a member of Phi
Beta Kappa and received a bachelor of arts degree in economics and political
science from Stanford University in 1985. She received a Masters of Business
Administration from Harvard School of Business in 1989.
Mark Chambre has agreed to serve as a director of our company upon the
closing of this offering. Since June 1993, he has served as Senior Broker in
the Yen Swaps Division of the Tokyo Forex Co., Inc., in Tokyo, Japan. From
April 1988 to May 1993, Mr. Chambre served as Manager of the Tokyo Forex Co.'s
Financial Futures Division. Mr. Chambre joined its parent company, Tullett and
Tokyo, Inc., in New York in 1983. Mr. Chambre received a bachelor of arts
degree from Drew University in 1982.
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<PAGE>
Stanley Weinstein has agreed to serve as a director of our company upon the
closing of this offering. He has been an independent corporate financial
consultant since 1991. From 1960 to 1991 he served as a partner with Deloitte &
Touche, LLP, an international accounting firm. Mr. Weinstein served for fifteen
years as adjunct Associate Professor of Accounting at Pace University and
co-authored the widely recognized SEC Compliance -- Financial Reporting and
Forms handbook. He received a bachelor of business administration degree in
accounting from City College of New York in 1949. Since May 1995, he has served
as a director of York Research Corp., a company engaged in the production and
marketing of energy related projects.
Directors are elected at each annual meeting of stockholders and hold
office until the next annual meeting of stockholders and the election and
qualification of their successors. Executive officers are elected by and serve
at the discretion of the board of directors.
We have agreed, for a period of five years from the date of this
prospectus, if so requested by the underwriter, to nominate and use our best
efforts to elect a designee of the underwriter as a director of our company or,
at the underwriter's option, as a non-voting adviser to our board of directors.
Our officers, directors and principal stockholders have agreed to vote their
shares of common stock in favor of such designee. The underwriter has not yet
exercised its right to designate such a person.
Special Advisory Board
Effective as of the date of this prospectus, we have established a special
advisory board to the board of directors which will initially consist of Anthony
G. Huston and Eric Steinberg. The special advisory board will advise and assist
the board of directors in executive planning and decision making. Members of our
special advisory board will be invited to attend, observe and participate in all
meetings of the board of directors but will not have the right to cast a vote.
Board Committees
The board of directors has established a Compensation Committee which, upon
the consummation of this offering, will be comprised of Mark Chambre and William
Brawer. The Compensation Committee will review and determine the compensation
for all officers and directors of our company and will review general policy
matters relating to the compensation and benefits of all employees. The
Compensation Committee will also administer each of the stock option plans.
The board of directors has established an Audit Committee which, upon the
consummation of this offering, will be comprised of Elizabeth Chambers and
Stanley Weinstein. The Audit Committee will recommend to the board of directors
the annual engagement of a firm of independent accountants and will review with
the independent accountants the scope and results of audits, the internal
accounting controls of our company and audit practices and professional services
rendered to our company by such independent accountants.
Directors' Compensation
All directors are reimbursed for their reasonable expenses incurred in
attending meetings of the board of directors and its committees. Directors who
are employees of our company receive no additional compensation for service as
members of the board of directors or committees. Following this offering, all
non-employee directors of our company will be compensated annually for their
services at $2,000 and non-qualified options to acquire 1,500 shares of common
stock at the end of each year of service.
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<PAGE>
Executive Compensation
The following table shows compensation paid by our company for services
rendered during the fiscal year ended September 30, 1998 to Mr. Steven Malin,
our Chief Executive Officer. No other executive officer of our company received
salary and bonus compensation which exceeded $100,000 in such fiscal year.
Summary Compensation Table
Annual Compensation
Name and --------------------------- Other Annual
Principal Position Salary($)(1) Bonus($) Compensation(2)
- ------------------ -------------- ---------- ----------------
Steven Malin ........... $70,000 $-- $ --
Chief Executive Officer
- ------------
(1) Steve Malin's compensation during the year ended September 30, 1998 was
forgiven by him.
(2) No such compensation was paid by our company and there were no "long-term
compensation" payments made in any form.
There were no stock option grants to the named executive officer, during
the fiscal year ended September 30, 1998.
Employment Agreements
Our company has entered into a four-year employment agreement with Steven
Malin and three-year employment agreements with Harry Simpson, Robert Malin,
Anthony G. Huston and Eric Steinberg all of which are automatically renewable
for additional one-year terms and provide for annual base compensation of
$90,000, respectively, until the effectiveness of this offering, whereupon
annual base compensation under each agreement will be increased to $110,000.
Each agreement provides for a bonus equal to 20% of their salaries, payable
semi-annually, based upon certain revenue levels achieved by our company, as may
be approved by the board of directors or a committee thereof.
Each of the employment agreements requires the officer to devote his full
time and efforts to our company and contains non-competition and non-disclosure
covenants of the officer for the term of his employment and for a period of two
years thereafter. Each employment agreement provides that we may terminate the
agreement for cause. In addition, each employment agreement provides for
termination by either party without cause upon at least 180 days written notice
prior to the end of the original term or any renewal term.
Stock Option Plans
On January 27, 1997, the board of directors and stockholders adopted our
1997 stock option plan and on March 16, 1998, our board of directors and
stockholders adopted our 1998 stock option plan (which was amended in January
1999). We have reserved 400,000 shares of common stock for issuance upon
exercise of options granted from time to time under the 1997 stock option plan
and 600,000 shares of common stock for issuance upon exercise of options granted
from time to time under the 1998 stock option plan, as amended. The 1997 and
1998 stock option plans are intended to assist us in securing and retaining key
employees, directors and consultants by allowing them to participate in the
ownership and growth of our company through the grant of incentive and
non-qualified options.
Under each of the stock option plans we may grant incentive stock options
only to key employees (including officers) and employee directors, or we may
grant non-qualified options to our employees, officers, directors and
consultants. Incentive stock options granted under either of the stock option
plans are intended to be "Incentive Stock Options" as defined by Section 422 of
the Internal Revenue Code of 1986, as amended. The 1997 stock option plan shall
be administered by a committee, appointed by our board of directors, consisting
of from one to three directors. The 1998 stock option plan shall be administered
directly by our board of directors.
Subject to the provisions of each of the stock option plans, either the
board or the committee will determine who shall receive options, the number of
shares of common stock that may be purchased under the options,
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<PAGE>
the time and manner of exercise of options and exercise prices. The term of
options granted under each of the stock option plans may not exceed ten years
(five years in the case of an incentive stock option granted to an optionee
owning more than 10% of our voting stock). The exercise price for incentive
stock options shall be equal to or greater than 100% of the "fair market value"
of the shares of the common stock at the time the incentive stock option is
granted; provided, however, that incentive stock options granted to a 10% holder
of our voting stock shall be exercisable only at a price that is equal to or
greater than 110% of the fair market value of the common stock on the date of
the grant of the incentive stock option. The exercise price for non-qualified
options will be set by the board or the committee, in its discretion, but in no
event shall such exercise price be less than the fair market value of the shares
of common stock on the date of grant. Such exercise price may be payable in cash
or, with the approval of the board or the committee, by delivery of shares or by
a combination of cash and shares. Shares of common stock received upon exercise
of options granted under each of the plans will be subject to certain
restrictions on sale or transfer.
Under the 1998 stock option plan, grants of options (including both
incentive and non-qualified stock options) to any one optionee who is an
employee of our company, shall be limited to options to purchase 150,000 shares
of common stock in any calendar year. In addition, the board or the committee
determines the schedule of the time or times when an option may be exercised,
provided, however, that the aggregate fair market value of the shares of common
stock as to which an optionee may exercise incentive stock options may not
exceed $100,000 in any calendar year.
Each of the 1997 and 1998 stock option plans provide that the number of
options, including both issued and unissued options, and their exercise prices,
are to be appropriately adjusted for mergers, consolidations, recapitalizations,
stock dividends, stock splits or other share combinations. Shares allocated to
options and stock appreciation rights which have terminated for reasons other
than the exercise thereof may be reallocated to other options and/or stock
appreciation rights.
Each of the 1997 and 1998 stock option plans provide that if an optionee
dies, his options may be exercised by his executors or administrators, or by any
person who acquired the right to exercise such options, to the extent that the
optionee would have been entitled to do so at the date of death, at any time, or
from time to time, within one year after the date of optionee's death, but not
later than the expiration of the option. If an optionee's employment is
terminated, whether for cause or otherwise, an optionee may exercise such
option, to the extent that he would have been entitled to do so at the date of
termination, at any time, or from time to time, within ninety days of the date
of termination but not later than the expiration of the option.
As of the date of this prospectus, we have granted options to purchase
825,150 shares of common stock under our stock options plans at an exercise
price ranging from $2.00 to $6.00 per share. Of such options, options to
purchase 545,000 shares have been granted to our officers and directors. All of
the options granted to such officers and directors terminate on the ten year
anniversary of their vesting date.
401(k) Plan
Watley maintains a standardized 401(k) Plan known as the "A.B. Watley, Inc.
401(k) Savings Plan", a defined contribution pension plan with a cash or
deferred arrangement as described in Section 401(k) of the Internal Revenue Code
of 1986, as amended. The 401(k) plan is intended to qualify under Section 401(a)
of the code, so that contributions, and income earned thereon, are not taxable
to employees until withdrawn. All regular full-time employees over the age of 21
are eligible to participate in the 401(k) plan. The 401(k) plan provides that
each participant may make elective pre-tax salary deferrals up to 10% of his or
her annual compensation, subject to statutory limits. Our company also may make
discretionary annual matching contributions in amounts determined by the
compensation committee of the board of directors, subject to statutory limits.
Our policy is to base contributions on profitability. The trustee of the 401(k)
plan invests each employee's account at the direction of the employee, who may
choose among several investment alternatives, which do not include shares of our
company's common stock. Our company did not make any contributions to the 401(k)
plan during the last two fiscal years.
Limitation on Liability and Indemnification Matters
As authorized by the Delaware General Corporation Law, our certificate of
incorporation provides that no director of our company shall be personally
liable to our company or its stockholders for monetary damages for
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<PAGE>
breach of fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to our company or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for unlawful payments of dividends or unlawful
stock redemptions or repurchases or (iv) for any transaction from which the
director derived an improper personal benefit. This provision eliminates the
rights of our company and its stockholders (through stockholders' derivative
suits on behalf of our company) to recover monetary damages against a director
for breach of the fiduciary duty of care (including breaches resulting from
negligent or grossly negligent behavior) except in the situations described in
clauses (i) through (iv) above. This provision does not limit or eliminate the
rights of our company or any stockholder to seek injunctive relief or rescission
in the event of a breach of a director's duty of care. In addition, our
certificate of incorporation provides that if the Delaware General Corporation
Law is amended to further eliminate or limit the liability of a director, then
the liability of the directors shall be eliminated or limited to the fullest
extent permitted by such amendment. These provisions will not alter the
liability of directors under federal securities laws.
Our certificate of incorporation further provides for the indemnification
of any and all persons who serve as a director, officer, employee or agent of
our company to the fullest extent permitted under the Delaware General
Corporation Law.
Insofar as indemnification for liabilities arising under the securities act
may be permitted to directors, officers and controlling persons of our company
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable.
Prior to the closing of this offering, we will obtain and maintain a policy
of insurance under which directors and officers of our company will be insured,
subject to the limits of the policy, against certain losses arising from claims
made against such directors and officers by reason of any acts or omissions
covered under such policy in their respective capacities as directors or
officers, including liabilities under the Securities Act.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to our company, as
of the date of this prospectus and as adjusted to reflect the sale by our
company of the 1,700,000 shares of common stock offered hereby, relating to the
beneficial ownership of shares of common stock by: (i) each person who is known
by us to be the beneficial owner of more than five percent of the outstanding
shares of common stock; (ii) each director or person who has agreed to become a
director of our company; and (iii) all executive officers and directors of our
company as a group.
<TABLE>
<CAPTION>
Percentage of Shares Beneficially
Owned(2)
Number of Shares -----------------------------------
Name and Address of Beneficial Owner(1) Beneficially Owned(2) Before Offering After Offering
- ----------------------------------------- ----------------------- ----------------- ---------------
<S> <C> <C> <C>
Steven Malin(3) ......................... 1,600,000 29.5% 22.5%
Harry Simpson ........................... 541,667(4) 9.9 7.6
Anthony G. Huston ....................... 500,000 8.9 6.8
Robert Malin(3) ......................... 425,000 7.8 6.0
Linda Malin(3) .......................... 425,000 7.8 6.0
Eric Steinberg .......................... 425,000 7.8 6.0
Mark Chambre ........................... 52,500 * *
William Brawer .......................... 0 0 0
Elizabeth Chambers ...................... 0 0 0
Stanley Weinstein ....................... 0 0 0
All directors and executive officers as a
group (13 persons) ..................... 3,936,094(5) 66.6% 51.7%
</TABLE>
- ------------
* Less than 1%.
(1) Unless otherwise indicated, the address of each beneficial owner is care of
our company, 40 Wall Street, New York, New York 10005.
(2) Unless otherwise indicated, our company believes that all persons named in
the table have sole voting and investment power with respect to all shares
of common stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities that can be acquired by such person within 60
days from the date of this prospectus upon the exercise of options, warrants
or convertible securities. Each beneficial owner's percentage ownership is
determined by assuming that options, warrants or convertible securities that
are held by such person (but not those held by any other person) and which
are exercisable within 60 days of the date of this prospectus have been
exercised and converted. Assumes a base of 5,637,696 shares of common stock
outstanding prior to this offering and a base of 7,337,696 shares of common
stock outstanding immediately after this offering, before any consideration
is given to outstanding options, warrants or convertible securities.
(3) Steven Malin and Robert Malin are brothers and Linda Malin is their sister.
(4) Includes 41,667 shares of common stock issuable upon exercise of currently
exercisable options. Does not include 83,333 shares of common stock issuable
upon exercise of options which are not currently exercisable.
(5) Includes 268,334 shares of common stock issuable upon exercise of currently
exercisable options. Does not include 276,666 shares of common stock
issuable upon exercise of options which are not currently exercisable.
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<PAGE>
CERTAIN TRANSACTIONS
In October 1994, Steven Malin, Chief Executive Officer and principal
stockholder of our Company, loaned Watley $55,000 on an interest free basis. The
maturity date for this loan is October 31, 1999. Additionally, in April 1995,
Mr. Malin loaned Watley $125,000 at an interest rate of 12% per annum. The
maturity date for this loan is April 30, 2000. Each of such loans are
subordinate to the prior payment by Watley in full of all other present and
future creditors.
In October 1995, Mel Steinberg, the father of Eric Steinberg, an executive
officer and principal stockholder of our company, loaned Watley $200,000 at an
interest rate of 15% per annum. Additionally, effective October 30, 1996, Mr.
Steinberg loaned Watley $150,000 at an interest rate of 13% per annum. The
maturity date for each of the loans is October 31, 1999. Each of such loans are
subordinate to the prior payment by Watley in full of all other present and
future creditors.
On September 4, 1996, we loaned $100,000 to Robert Malin, President of
Watley and a director and principal stockholder of our company. The loan bears
interest at the rate of 6% per annum and is due upon demand.
In January 1997, we acquired all of the issued and outstanding shares of
Watley which were held by Steven Malin and Robert Malin. As consideration for
the acquisition, our company issued 425,000 shares of common stock to Robert
Malin and 6,538 shares of common stock to Steven Malin. The aggregate value of
the shares issued by our company was $80,000.
In April 1997, we completed a private placement of 1,050,000 shares of
common stock for which we received net proceeds of $2,045,000. In connection
with such private placement, Jonathan Priddle, an executive officer of our
company, purchased 25,000 shares at a price of $50,000 and Mark Chambre, who has
agreed to serve as a director of our company upon the closing of this offering,
purchased 37,500 shares at a price of $75,000. In addition, relatives of Anthony
Huston and Eric Steinberg, each an executive officer and principal stockholder
of our company, purchased an aggregate of 52,500 shares at an aggregate price of
$105,000. All of these purchases were on the same terms and at the same price as
the purchases made by the other investors in such private placement.
In May 1997, we sold certain computer hardware and related assets to
Centennial Ventures, Inc., a broker-dealer of which Linda Malin, a principal
stockholder of our company and the sister of Steven and Robert Malin, is an
executive officer. As consideration for such sale, Centennial Ventures, Inc.
delivered a promissory note in the principal amount of $39,860.75. The note is
due on May 1, 1999, bears interest at the rate of 8% per annum and is secured by
all of the assets sold to Centennial Ventures, Inc. by our company.
In February 1998, Mel Steinberg loaned our company $100,000 at an interest
rate of 8%. The loan is due in February 2001. As additional consideration for
the loan, we granted Mr. Steinberg an option to purchase 16,666 shares of common
stock for nominal consideration. Mr. Steinberg has notified our company that he
intends to exercise the option upon the completion of this offering. We have
agreed to repay the loan, including interest accrued thereon through the date of
this prospectus, from the proceeds of this offering.
On October 2, 1998, we entered into a loan agreement with New York Small
Business Venture Fund LLC pursuant to which we borrowed $500,000 at an interest
rate of 12% per annum, repayable over 36 months, with payments of interest only
in the first two years. We granted the lender a security interest in
substantially all of our assets to secure our obligations under the loan, and
six persons who are officers, directors and/or principal stockholders of our
company guaranteed our obligations under such loan. We intend to repay this loan
out of the proceeds of this offering, which will discharge the liability of such
guarantors. Stanley Weinstein, who has agreed to serve as a director of our
company on the date of this prospectus, received a $25,000 consulting fee from
our company in connection with the loan.
Effective October 2, 1998, we acquired all of the shares of capital stock
of Computer Strategies, Inc., for 38,260 shares of our company's common stock
valued at $183,660. Leon Ferguson was the founder and sole stockholder of
Computer Strategies, Inc., and became our Senior Vice President and Chief
Information Officer upon the closing of the acquisition.
In January 1999, we completed a private placement of 221,500 shares of
common stock to 12 investors for which we received net proceeds of approximately
$1,050,000. In connection with such private placement, Anthony Huston purchased
50,000 shares at a price of $240,000, a trust naming Leon Ferguson and his wife
as beneficiaries for which Mr. Ferguson is sole trustee purchased 52,000 shares
at a price of $249,600 and Mark Chambre purchased 15,000 shares at a price of
$72,000. All of the purchasers of such shares agreed not to sell or otherwise
dispose of such shares for a period of twelve months from the date of this
prospectus. All of these purchases were made on the same terms and at the same
price per share as the purchases made by the other investors in such private
placement.
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<PAGE>
DESCRIPTION OF SECURITIES
Our company's authorized capital stock consists of 20,000,000 shares of
common stock, $.001 par value per share and 1,000,000 shares of preferred stock
$.01 par value per share. As of the date of this prospectus, 5,637,696 shares of
common stock are currently issued and outstanding and no shares of preferred
stock are outstanding. Upon closing of this offering there will be 7,337,696
shares of common stock outstanding and no shares of preferred stock outstanding.
Common Stock
Holders of common stock are entitled to one vote for each share on all
matters submitted to a stockholder vote. Holders of common stock do not have
cumulative voting rights. Therefore, holders of a majority of the shares of
common stock voting for the election of directors can elect all of the
directors. Holders of common stock are entitled to share in all dividends that
the board of directors, in its discretion, declares from legally available
funds. In any liquidation, dissolution or winding up of our company, each
outstanding share entitles its holder to participate pro rata in all assets that
remain after payment of liabilities and after providing for each class of stock,
if any, having preference over the common stock.
Holders of common stock have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to the
common stock. The rights of the holders of common stock are subject to any
rights that may be fixed for holders of preferred stock, when and if any
preferred stock is issued. All outstanding shares of common stock are, and the
shares underlying all options and warrants will be, duly authorized, validly
issued, fully paid and non-assessable upon issuance of such shares by our
company.
Preferred Stock
Our board of directors is authorized, without further action by the
stockholders, to issue 1,000,000 shares of preferred stock from time to time in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including: the rights and terms relating to any new series
of preferred stock could adversely affect the voting power or other rights of
the holders of common stock. Additionally, such preferred stock may be used,
under certain circumstances, to discourage, delay or prevent a change in control
of our company.
Registration Rights
The holders of 411,175 shares of common stock (including 331,250 shares of
common stock issuable upon exercise of currently exercisable warrants) are
entitled to certain piggyback registration rights, under the Securities Act,
with respect to such shares. Whenever we propose to register any of our
securities under the Securities Act for our own account or for the account of
other security holders, we shall be required to promptly notify the holders of
each of the registerable shares of such proposed registration. We will be
required to include all registerable shares which such holders may request to be
included in such registration, subject to certain limitations. Such holders have
waived their registration rights in connection with this offering. Additionally,
holders of the registerable shares have agreed not to request registration or
sell or otherwise dispose of the registerable shares for a period of 12 months
following the date of this prospectus.
In connection with this offering, we have agreed to grant to the
underwriter certain demand and piggyback registration rights in connection with
the 170,000 shares of common stock issuable upon exercise of the underwriter's
warrants. See "Underwriting."
Delaware Anti-Takeover Law
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. That section provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or affiliate or associate of such person who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (i) the transaction resulting in a person's
becoming an interested stockholder, or the business combination, is approved by
the board of directors of the corporation before the person becomes an
interested stockholder, (ii) the interested stockholder acquires 85% or more of
the outstanding voting stock of the corporation in the same transaction that
41
<PAGE>
makes it an interested stockholder (excluding certain employee stock ownership
plans); or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 66 2/3% of the corporation's
outstanding voting stock at an annual or special meeting, excluding shares owned
by the interested stockholder. An "interested stockholder" is defined as any
person that is (i) the owner of 15% or more of the outstanding voting stock of
the corporation or (ii) an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within the three year period immediately prior to the date on which it is
sought to be determined whether such person is an interested stockholder.
Transfer Agent and Warrant Agent
The transfer agent for the common stock and the warrant agent for the
underwriter's warrants is American Stock Transfer & Trust Company, 40 Wall
Street, New York, New York 10005.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering, our company will have 7,337,696 shares
of common stock issued and outstanding of which the 1,700,000 shares offered
hereby will be freely tradeable without restriction or further registration
under the Securities Act, except for any shares purchased by an "affiliate of
our company" (in general, a person who has a controlling position with regard to
the company), which will be subject to the resale limitations of Rule 144
promulgated under the Securities Act.
All of the remaining 5,637,696 shares of common stock currently outstanding
are "restricted securities," as that term is defined under Rule 144. Of such
restricted shares, an aggregate of 4,000,000 shares will be immediately eligible
for sale, subject to the contractual restrictions described below. Of the
remaining restricted shares, 1,120,000 restricted shares will become eligible
for sale under Rule 144 beginning 90 days following the date of this prospectus,
and the balance of the restricted shares will become eligible for sale pursuant
to Rule 144 at various times beginning May 1999, subject to the contractual
provisions described below. In addition, we have granted certain registration
rights to holders of 411,175 of such restricted shares (including 331,250 shares
of common stock issuable upon exercise of currently exercisable warrants), as
well as demand and piggyback registration rights to the underwriter with respect
to the shares of common stock issuable upon exercise of the underwriter's
warrants. The holders (including all officers and directors) of substantially
all of the restricted shares of common stock have agreed not to sell or
otherwise dispose of any shares of common stock (including pursuant to Rule 144)
or exercise any registration rights for a period of twelve months following the
date of this prospectus without the underwriter's prior written consent.
In general, under Rule 144, as currently in effect, beginning 90 days after
the date of this prospectus, a person (or persons whose shares are aggregated),
who has beneficially owned restricted shares for at least one year (including
the holding period of any prior owner except an affiliate of our company) would
be entitled to sell, within any three month period, such number of shares that
does not exceed the greater of: (i) 1% of the then outstanding shares of our
company's common stock; or (ii) the average weekly trading volume of our
company's common stock during the four calendar weeks preceding such sale,
provided, that, certain public information about our company as required by Rule
144 is then available and the seller complies with certain manner of sale
provisions and notice requirements. A person who is not an affiliate of our
company, has not been an affiliate within three months prior to sale and has
beneficially owned the restricted securities for at least two years is entitled
to sell such shares under Rule 144 without regard to any of the limitations
described above.
Prior to this offering, there has been no public market for the common
stock and no prediction can be made as to the effect, if any, that market sales
of common stock or the availability of such shares for sale will have on the
market price prevailing from time to time. Nevertheless, the possibility that
substantial amounts of common stock may be sold in the public market may
adversely affect prevailing market prices for the common stock and could impair
our company's ability to raise capital through the sale of its equity
securities.
42
<PAGE>
UNDERWRITING
Whale Securities Co., L.P., as underwriter, has agreed, subject to the
terms and conditions contained in the underwriting agreement relating to this
offering, to purchase the 1,700,000 shares of common stock offered by our
company.
The underwriting agreement provides that the obligations of the underwriter
thereunder are subject to approval of certain legal matters by counsel and to
various other conditions. The nature of the underwriter's obligations is such
that they are committed to purchase and pay for all of the shares of common
stock if any are purchased.
The underwriter has advised us that it proposes to offer the shares of
common stock to the public at the public offering price set forth on the cover
page of this prospectus. The underwriter may allow certain dealers who are
members of the NASD concessions, not in excess of $. per share, of which not in
excess of $. per share may be reallowed to other dealers who are members of the
NASD.
We have granted to the underwriter an option, exercisable not later than 45
days after the date of this prospectus, to purchase up to 255,000 shares at the
public offering price set forth on the cover page of this prospectus, less
underwriting discounts and commissions. The underwriter may exercise this option
only to cover over-allotments, if any, made in connection with the sale of the
shares of common stock offered hereby. If the underwriter exercises its
over-allotment in full, the total price to public would be $11,730,000, the
total underwriting discounts and commissions would be $1,173,000 and the total
proceeds (before payment of the expenses of this offering) to our company would
be $10,557,000
We have agreed to pay to the underwriter a non-accountable expense
allowance equal to 3% of the gross proceeds derived from the sale of the shares
offered hereby, including any securities sold prior to the underwriter's
over-allotment option, $50,000 of which has been paid as of the date of this
prospectus. We have also agreed to pay all expenses in connection with
qualifying the shares offered under the laws of such states as the underwriter
may designate, including expenses of counsel retained for such purpose by the
underwriter. We estimated the expenses of this offering to be $930,000, or
$975,900 if the underwriter's over-allotment option is completely exercised.
At the closing of this offering, we will sell to the underwriter and its
designees, for an aggregate of $100, underwriter's warrants to purchase up to
170,000 shares of common stock. The underwriter's warrants are exercisable at
any time, in whole or in part, during the four-year period commencing one year
from the date of this prospectus, at an exercise price of $9.90 per share (165%
of the public offering price per share). The underwriter's warrants are only
assignable or transferable to the officers and partners of the underwriter and
members of the selling group for one year following the date of this prospectus.
During the exercise period, the holders of the underwriter's warrants will have
the opportunity to profit from a rise in the market price of the common stock,
which will dilute the interests of our stockholders. We expect that the
underwriter's warrants will be exercised when we would, in all likelihood, be
able to obtain any capital it needs on terms more favorable. Any profit realized
by the underwriter on the sale of the underwriter's warrants, the underlying
shares of common stock or the underlying warrants may be deemed additional
underwriting compensation. The underwriter's warrants contain a cashless
exercise provision. We have agreed that, upon the request of the holders of the
majority of the underwriter's warrants, we will (at our own expense), on one
occasion during the exercise period, register the underwriter's warrants and the
shares of common stock underlying the underwriter's warrants under the
Securities Act. We have also agreed to include the underwriter's warrants and
all such underlying shares of common stock in any appropriate registration
statement which is filed by us under the Securities Act during the seven years
following the date of this prospectus.
We will retain the underwriter as a financial consultant for a period of
two years following closing of the offering for a fee of $60,000, payable in
full in advance. The consulting agreement with the underwriter does not require
the underwriter to devote a specific amount of time to the performance of its
duties there-under. It is anticipated that these consulting services will be
provided by principals of the underwriter and/or members of the underwriter's
corporate department who, however, have not been designated as of the date
hereof. In the
43
<PAGE>
event that the underwriter originates a financing or a merger, acquisition,
joint venture or other transaction to which we are a party, the underwriter will
be entitled to receive a finder's fee in consideration of the origination of
such transaction.
We have agreed, for a period of five years from the date of this
prospectus, if so requested by the underwriter, to recommend and use our best
efforts to elect a designee of the underwriter as a director of our company. Our
officers, directors and principal stockholders have agreed to vote their shares
of common stock in favor of such designee. The underwriter has not yet exercised
and currently does not intend to exercise its right to designate such a person.
All of our officers, directors and securityholders have agreed not to sell
or otherwise dispose any of their securities in the public markets for a period
of twelve months from the date of this prospectus without the underwriter's
prior written consent.
The underwriter has informed us that it does not expect sales of the
securities offered to discretionary accounts to exceed 1% of the shares offered
hereby.
We have agreed to indemnify the underwriter against certain civil
liabilities, including liabilities under the Securities Act.
Prior to this offering there has been no public market for the common
stock. Accordingly, the initial public offering price of the common stock will
be determined by negotiation between us and the underwriter and may not
necessarily be related to our asset value, net worth or other established
criteria of value. Factors to be considered in determining such price include
our financial condition and prospects, an assessment of our management, market
prices of similar securities of comparable publicly-traded companies, certain
financial and operating information of companies engaged in activities similar
to those of our company and the general condition of the securities market.
In connection with this offering, the underwriter may engage in passive
market making transactions in the shares on Nasdaq in accordance with Rule 103
of Regulation M promulgated under the Securities Act.
In connection with this offering, the underwriter may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. These transactions may include stabilization transactions
permitted by Rule 104 of Regulation M, under which persons may bid for or
purchase shares to stabilize the market price. Specifically, the underwriter may
over-allot in connection with the offering, creating a short position in the
common stock for its own account. In addition, to cover over-allotments or to
stabilize the price of the common stock, the underwriter may bid for, and
purchase, shares of common stock in the open market. The underwriter may also
reclaim selling con-cessions allowed to a dealer for distributing the common
stock in the offering, if the underwriter repurchases previously distributed
common stock in transactions to cover short positions, in stabilization
transactions or otherwise. Any of these activities may stabilize or maintain the
market price of the common stock above independent market levels. The
underwriter is not required to engage in these activities, and may end any of
these activities at any time.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for our
company by Hartman & Craven LLP, New York, New York. Edward I. Tishelman, a
member of the firm of Hartman & Craven LLP, is the owner of 112,500 shares of
common stock. Certain legal matters in connection with this offering will be
passed upon for the underwriter by Tenzer Greenblatt LLP.
EXPERTS
The consolidated financial statements of our company as of September 30,
1997 and September 30, 1998, and for each of the two years in the period ended
September 30, 1998, appearing in this prospectus and registration statement have
been audited by Ernst & Young, LLP, independent auditors as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of said firm as experts in auditing and
accounting.
44
<PAGE>
ADDITIONAL INFORMATION
We have filed with the SEC the registration statement on form SB-2 under
the Securities Act with respect to the common stock offered hereby. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement and the
exhibits filed therewith, certain portions of which have been omitted as
permitted by the rules and regulations of the SEC. For further information with
respect to our company and the securities offered hereby, reference is hereby
made to the registration statement and to the exhibits filed as a part thereof.
Statements contained in this prospectus regarding the content of any contract or
other document referred to are not necessarily complete. In each instance, we
refer you to the copy of such contract or other document filed as an exhibit to
the registration statement, and each such statement is hereby qualified in its
entirety by such reference. The registration statement, including all exhibits
thereto, may be inspected without charge at the principal office of the SEC at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
commission's regional offices located at Seven World Trade Center, Suite 1300,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials may also be obtained
from the Public Reference Section of the commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, upon the payment of prescribed fees. In
addition, registration statements and certain other filings made with the
commission through its Electronic Data Gathering, Analysis and Retrieval systems
are publicly available through the commission's site on the World Wide Web
located at http://www.sec.gov. The registration statement, including all
exhibits and schedules thereto and amendments thereof, has been filed with the
commission through the Electronic Data Gathering, Analysis and Retrieval system.
Upon consummation of this offering, we will become subject to the reporting
requirements of the Securities Exchange Act and in accordance therewith, will
file reports, proxy statements and other information with the commission. We
intend to furnish our stockholders with annual reports containing audited
financial statements and such other periodic reports as we deem appropriate or
as may be required by law.
45
<PAGE>
Internet Financial Services Inc.
Consolidated Financial Statements
Years ended September 30, 1998 and 1997
Contents
Report of Independent Auditors ..................................... F-2
Consolidated Statements of Financial Condition ..................... F-3
Consolidated Statements of Operations .............................. F-4
Consolidated Statements of Changes in Stockholders' Equity ......... F-5
Consolidated Statements of Cash Flows .............................. F-6
Notes to Consolidated Financial Statements ......................... F-7
F-1
<PAGE>
Report of Independent Auditors
To the Board of Directors and Stockholders of
Internet Financial Services Inc.
We have audited the accompanying consolidated statements of financial
condition of Internet Financial Services Inc. (the "Company") as of September
30, 1998 and 1997, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Internet
Financial Services Inc. as of September 30, 1998 and 1997, and the consolidated
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
New York, New York Ernst & Young LLP
November 13, 1998
F-2
<PAGE>
Internet Financial Services Inc.
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
September 30
1998 1997
-------------- --------------
<S> <C> <C>
Assets
Cash and cash equivalents ............................................ $ 970,308 $ 702,693
Restricted cash ...................................................... -- 113,569
Securities owned, at market value .................................... 104,518 24,206
Receivables from clearing brokers .................................... 531,835 292,356
Property and equipment at cost, net of accumulated depreciation of
$530,892 and $167,774 in 1998 and 1997, respectively ................ 3,650,743 1,010,208
Loans receivable from related party .................................. 115,711 123,697
Deferred offering costs .............................................. 75,235 --
Other assets ......................................................... 91,107 119,902
------------ ------------
Total assets ......................................................... $ 5,539,457 $ 2,386,631
============ ============
Liabilities and stockholders' equity
Liabilities:
Subordinated borrowings ............................................. $ 350,000 $ 350,000
Subordinated borrowings from related party .......................... 180,000 180,000
Securities sold, not yet purchased, at market value ................. 19,137 --
Notes payable ....................................................... 250,000 --
Bank loan ........................................................... 80,000 120,000
Deferred rent incentives ............................................ 803,968 --
Accounts payable and accrued liabilities ............................ 2,101,933 681,899
------------ ------------
Total liabilities .................................................... 3,785,038 1,331,899
Stockholders' equity:
Common stock, $.001 par value, 10,000,000 shares authorized, 5,137,500
and 5,050,000 shares issued and outstanding in 1998 and
1997, respectively ................................................ 5,138 5,050
Additional paid-in capital .......................................... 3,758,333 2,441,902
Option costs, net ................................................... (100,292) -
Subscriptions receivable (250,011 and 3,568,462 shares in 1998 and
1997, respectively) ............................................... (4,999) (120,869)
Accumulated deficit ................................................. (1,903,761) (1,271,351)
------------ ------------
Total stockholders' equity ........................................... 1,754,419 1,054,732
------------ ------------
Total liabilities and stockholders' equity ........................... $ 5,539,457 $ 2,386,631
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
Internet Financial Services Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended September 30
1998 1997
-------------- -----------------
<S> <C> <C>
Revenues:
Commissions ................................................ $ 7,403,059 $ 4,017,787
Data service revenues ...................................... 661,236 148,353
Principal transactions ..................................... 901,889 230,297
Interest and other income .................................. 146,704 130,095
Interest income - related party ............................ 6,380 6,000
----------- -------------
Total revenues .............................................. 9,119,268 4,532,532
Interest expense ........................................... 244,322 197,359
Interest expense - related party ........................... 15,000 15,000
----------- -------------
Net revenues ................................................ 8,859,946 4,320,173
----------- -------------
Expenses:
Commissions, floor brokerage, and clearing charges ......... 3,425,725 1,844,927
Employee compensation and related costs .................... 2,247,963 1,297,575
Communications ............................................. 757,391 337,584
Business development ....................................... 980,651 441,424
Professional services ...................................... 971,494 894,920
Occupancy and equipment costs .............................. 444,169 149,580
Depreciation and amortization .............................. 363,207 198,980
Other ...................................................... 288,991 212,380
----------- -------------
Total expenses .............................................. 9,479,591 5,377,370
----------- -------------
Loss before income taxes .................................... (619,645) (1,057,197)
Income tax provision ........................................ 12,765 2,776
----------- -------------
Net loss .................................................... $ (632,410) $ (1,059,973)
=========== =============
Net loss per common share ................................... $ (.12) $ (.30)
=========== =============
Weighted average common shares outstanding .................. 5,171,182 3,508,560
=========== =============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
Internet Financial Services Inc.
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Issued Additional Unamortized
------------------------- Paid-in Option
Shares Par Value Capital Costs
------------ ----------- ------------ --------------
<S> <C> <C> <C> <C>
Balance at October 1, 1996 ......... 431,538 $ 432 $ 259,568 $ --
Issuance of common stock, net ..... 4,618,462 4,618 2,160,967 --
Issuance of non-employee stock
options (Note 11) ................ -- -- 21,367 --
Net loss .......................... -- -- -- --
--------- ------ ---------- ----------
Balance at September 30, 1997 ...... 5,050,000 5,050 2,441,902 --
Issuance of common stock, net ..... 87,500 88 874,912 --
Issuance of non-employee stock
options (Note 11) ................ -- -- 76,832 --
Other contributions (Note 9) ...... -- -- 115,000 --
Option costs, net ................. -- -- 249,687 (100,292)
Net loss .......................... -- -- -- --
--------- ------ ---------- ----------
Balance at September 30, 1998 ...... 5,137,500 $5,138 $3,758,333 $ (100,292)
========= ====== ========== ==========
Subscriptions Receivable
------------------------------ Accumulated
Shares Amount Deficit Total
--------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Balance at October 1, 1996 ......... -- $ -- $ (211,378) $ 48,622
Issuance of common stock, net ..... (3,568,462) (120,869) -- 2,044,716
Issuance of non-employee stock
options (Note 11) ................ -- -- -- 21,367
Net loss .......................... -- -- (1,059,973) (1,059,973)
---------- ----------- ------------ -------------
Balance at September 30, 1997 ...... (3,568,462) (120,869) (1,271,351) 1,054,732
Issuance of common stock, net ..... 3,318,451 115,870 -- 990,870
Issuance of non-employee stock
options (Note 11) ................ -- -- -- 76,832
Other contributions (Note 9) ...... -- -- -- 115,000
Option costs, net ................. -- -- -- 149,395
Net loss .......................... -- -- (632,410) (632,410)
---------- ----------- ------------ -------------
Balance at September 30, 1998 ...... (250,011) $ (4,999) $ (1,903,761) $ 1,754,419
========== =========== ============ =============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
Internet Financial Services Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended September 30
1998 1997
--------------- -----------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (632,410) $ (1,059,973)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Other contributions 115,000 --
Depreciation and amortization 363,207 198,980
Amortization of option costs 226,227 21,367
Loss on disposal of fixed assets -- 46,411
Changes in assets and liabilities:
(Increase) decrease in operating assets:
Restricted cash 113,569 (113,569)
Securities owned (80,312) 144,473
Receivables from clearing brokers (239,479) (219,122)
Loans from related party 7,986 (23,697)
Other assets (46,440) (57,184)
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased 19,137 (41,262)
Accounts payable and accrued liabilities 660,605 409,516
------------ -------------
Net cash provided by (used in) operating activities 507,090 (694,060)
------------ -------------
Cash flows used in investing activities
Purchases of property and equipment, net (2,244,313) (1,177,982)
Deferred rent incentives 803,968 --
------------ -------------
Net cash used in investing activities (1,440,345) (1,177,982)
------------ -------------
Cash flows from financing activities
Proceeds from sale of common stock, net 990,870 2,044,716
Proceeds from issuance of subordinated notes -- 150,000
Proceeds from notes payable 250,000 120,000
Repayment of bank loan (40,000) (125,000)
------------ -------------
Net cash provided by financing activities 1,200,870 2,189,716
------------ -------------
Net increase in cash and cash equivalents 267,615 317,674
Cash and cash equivalents at beginning of year 702,693 385,019
------------ -------------
Cash and cash equivalents at end of year $ 970,308 $ 702,693
============ =============
Supplemental non-cash financing activities
and disclosure of cash flow information
Note receivable from sale of property and equipment $ -- $ 39,951
Accounts payable for purchases of property and equipment 759,429 --
Other contributions 115,000 --
Cash paid for:
Interest $ 90,802 $ 193,733
Taxes 2,776 53,633
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
Internet Financial Services Inc.
Notes to Consolidated Financial Statements
Years ended September 30, 1998 and 1997
1. Organization and Basis of Presentation
Internet Financial Services Inc. ("IFSI" or the "Company") conducts
business primarily through its principal subsidiary, A.B. Watley, Inc. ("A.B.
Watley"). A.B Watley is a registered broker-dealer under the Securities
Exchange Act of 1934 and is a member of the National Association of Securities
Dealers, Inc.
A.B. Watley is an introducing broker-dealer which conducts business in
electronic trading, information and brokerage services, as well as
institutional block trading. A.B. Watley clears all transactions through two
clearing brokers on a fully disclosed basis. Accordingly, A.B. Watley is exempt
from the Securities and Exchange Commission's ("SEC") Rule 15c3-3.
IFSI is a Delaware corporation organized on May 15, 1996. During its fiscal
year ended September 30, 1997, all of the shares of capital stock of A.B. Watley
were acquired by IFSI. Since IFSI and A.B. Watley were under common control, the
acquisition has been accounted for under Accounting Interpretations of the
Accounting Principles Board Opinion No. 16, "Transfers and Exchanges Between
Companies Under Common Control," which requires the assets and liabilities so
transferred to be accounted for at historical cost in a manner similar to that
used in pooling of interests accounting. IFSI issued 431,538 shares of its
common stock in consideration for the 99 shares of A.B. Watley; additionally,
the operating results of IFSI reflect the operating results of A.B. Watley for
the years presented.
2. Summary of Significant Accounting Policies
Basis of Presentation:
The consolidated financial statements include the accounts of IFSI and its
wholly-owned subsidiary, A.B. Watley. All significant intercompany balances and
transactions have been eliminated. Certain prior year amounts reflect
reclassifications to conform to current year's presentations.
Securities Transactions, Revenues, and Related Expenses:
Securities transactions and related revenues and expenses, including
commissions revenues and expenses, are recorded on a trade date basis. Data
service revenues represent fees charged to customers for real-time access to
various financial data. These fees are recorded as earned.
Securities Owned and Sold, Not Yet Purchased:
Securities owned and securities sold, not yet purchased are stated at
market or fair values, with resulting unrealized gains and losses reflected in
the consolidated statements of operations. Market value is generally based on
listed market prices. If listed market prices are unattainable, fair value is
determined based on other relevant factors including broker or dealer price
quotes.
Property and Equipment:
Computer equipment, furniture and fixtures, and leasehold improvements are
carried at cost and depreciated on the straight-line basis over their estimated
useful lives, generally three to five years.
Construction-in-progress, upon occupancy, will be amortized on a
straight-line basis over the shorter of the useful life of the leasehold
improvement or the term of the lease, generally ten years upon occupancy.
Deferred rent incentives, which represent construction costs reimbursed by the
lessor of the Company's office space, will be amortized on a straight-line basis
over the term of the lease, which is ten years.
Computer software is amortized on the straight-line basis over a period of
three years. The cost of internally developed computer software is capitalized
when management commits to funding a project it believes will be completed and
used to perform the functions intended. The capitalized software is not
amortized until the projects are complete. Pilot projects and projects where
expected future economic benefits are less than probable are not eligible for
capitalization.
F-7
<PAGE>
Internet Financial Services Inc.
Notes to Consolidated Financial Statements -- (Continued)
Years ended September 30, 1998 and 1997
2. Summary of Significant Accounting Policies -- (Continued)
Use of Estimates:
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities in
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Stock Options:
The Company accounts for stock option grants to employees in accordance
with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees," and, accordingly, recognizes no compensation expense
related to such grants. In cases where the Company grants options below the fair
market value of the stock at the date of grant, the difference between the
strike price and the fair market value is treated as compensation expense and
amortized over the vesting period of the option. Stock options granted to
consultants and others in lieu of cash compensation are recorded based upon
management's estimate of fair value of the options or the related services
provided and expensed over the vesting period, if any.
Fair Value of Financial Instruments:
Substantially all of the Company's financial instruments are carried at
fair value or amounts approximating fair value.
Business Development:
The Company expenses all promotional costs as incurred and advertising
costs upon first exhibition of the advertisement.
Income Taxes:
Income taxes have been provided using the liability method under Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes."
Earnings Per Share:
Per share data is determined based on the weighted average number of common
shares outstanding each year.
Statement of Cash Flows:
The Company defines cash equivalents as highly liquid investments with
original maturities of three months or less, other than those held for sale in
the ordinary course of business.
3. Net Capital Requirement
A.B. Watley is subject to the SEC's Uniform Net Capital Rule 15c3-1 (the
"Net Capital Rule") which requires A.B. Watley to maintain minimum net capital
such that the ratio of aggregate indebtedness to net capital, both as defined,
shall not exceed 15 to 1. The Net Capital Rule also requires that equity capital
may not be withdrawn or cash dividends paid if A.B. Watley's resulting net
capital ratio would exceed 10 to 1. At September 30, 1998, A.B. Watley had net
capital, as defined, of $161,128 which was $61,128 in excess of its required net
capital of $100,000. The aggregate indebtedness to net capital ratio was 7.4
to 1.
4. Financial Instruments with Off-Balance Sheet Risk or Concentrations of
Credit Risk
Pursuant to clearing agreements, the clearing and depository operations for
A.B. Watley's and customers' securities transactions are provided by two
clearing broker-dealers. A.B. Watley has agreed to indemnify its clearing
brokers for losses that the clearing brokers may sustain from the customer
accounts introduced by A.B.
F-8
<PAGE>
Internet Financial Services Inc.
Notes to Consolidated Financial Statements -- (Continued)
Years ended September 30, 1998 and 1997
4. Financial Instruments with Off-Balance Sheet Risk or Concentrations of
Credit Risk -- (Continued)
Watley. A.B. Watley, through its clearing brokers, seeks to control the risks
associated with these activities by requiring customers to maintain margin
collateral in compliance with various regulatory and internal guidelines. The
clearing brokers monitor required margin levels daily and, pursuant to such
guidelines, request customers to deposit additional collateral or reduce
securities positions when necessary. All customer transactions pending as of
September 30, 1998 settled without material adverse effect to the Company.
Also, in the normal course of business, customers may sell securities
short. Subsequent market fluctuations may require the clearing firms to obtain
additional collateral from A.B. Watley's customers. It is the policy of the
clearing firms to value the short positions and to obtain additional deposits
where deemed appropriate.
The Company may at times maintain inventories in equity securities on both
a long and short basis. While long positions represent the Company's ownership
of securities, short positions represent obligations of the Company.
Accordingly, both long and short positions may result in gains or losses to the
Company as market values of securities fluctuate. To manage the risk of losses,
the Company marks long and short positions to market daily and continuously
monitors the market fluctuations.
5. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
September 30
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Computer equipment ...................................... $ 1,961,113 $ 1,115,626
Software ................................................ 697,377 62,356
Construction-in-progress ................................ 1,503,338 --
Furniture, fixtures, and leasehold improvements ......... 19,807 --
----------- -----------
4,181,635 1,177,982
Less accumulated depreciation and amortization .......... 530,892 167,774
----------- -----------
$ 3,650,743 $ 1,010,208
=========== ===========
</TABLE>
At September 30, 1998, software includes $602,363 of software under
development. (See Note 2). Construction-in-progress represents amounts related
to leasehold improvements being made on the Company's office space. The Company
expects to occupy such space in early fiscal 1999. (See Note 2).
6. Subordinated Borrowings
Borrowings of $530,000 at September 30, 1998 and 1997 are subordinated to
the claims of general creditors, and mature in the amounts of $200,000, $150,000
and $55,000 on October 31, 1999 and $125,000 on April 30, 2000. The subordinated
borrowings bear interest at annual rates of 15%, 13%, 0% and 12%, respectively.
The loans are covered by agreements approved by the National Association of
Securities Dealers, Inc. and are included by A.B. Watley for purposes of
computing net capital under the Net Capital Rule. To the extent that such
borrowings are required for A.B. Watley's continued compliance with minimum net
capital requirements, they may not be repaid. Of the total subordinated
borrowings, $180,000 is from an officer and shareholder of the Company. For the
years ended September 30, 1998 and 1997, interest expense on the subordinated
loans amounted to $64,500 and $62,000, respectively.
7. Notes Payable
Effective February 13, 1998 and April 16, 1998, the Company issued
promissory notes in the amount of $200,000 and $50,000, respectively, to three
individuals, two of whom are minority stockholders of the Company. The notes
bear interest at 8% per annum. The principal plus accrued interest on the notes
is payable on
F-9
<PAGE>
Internet Financial Services Inc.
Notes to Consolidated Financial Statements -- (Continued)
Years ended September 30, 1998 and 1997
7. Notes Payable -- (Continued)
the earlier of (a) the consummation of an initial public offering ("IPO") of the
Company's equity securities, or (b) if such IPO does not occur on or before the
first anniversary of the issue date of the notes, the principal plus accrued
interest shall be payable in twelve equal monthly installments, unless the
holders agree to extend such maturity date. For the year ended September 30,
1998, interest expense on the notes amounted to $11,833.
Upon execution of these promissory notes, the holders were granted options
on the common stock of the Company for a total price of $250. Pursuant to the
Option Agreements, the options become exerciseable upon consummation of an IPO,
and the number of shares to be issued will be determined by dividing the initial
principal amount of the promissory notes by the IPO price. The fair value of the
options is accounted for as a debt servicing fee, and is being amortized over a
one year period. The unamortized amount of the debt service fee is included as
"Option costs, net" in Stockholders' Equity. Amortization expense related to the
debt servicing fee for the year ended September 30, 1998 amounted to $149,395.
8. Bank Loan
The bank loans at September 30, 1998 and 1997 consist of an unsecured term
loan, with the full principal amount due September 29, 2000, and an interest
rate of 8.5% per annum.
9. Related Party Transactions
Included in loans from related party on the consolidated statement of
financial condition are notes of $103,000, plus accrued interest of $12,711, due
from a shareholder and officer of the Company. The notes generally bear interest
at an annual rate of 6% and are payable on demand.
Other contributions of $115,000 on the consolidated statement of changes in
stockholders' equity represent compensation forgiven by two significant
stockholders and officers of the Company. For consolidated financial statement
purposes, the unpaid compensation is considered an expense and a contribution of
capital.
10. Commitments and Contingencies
The Company has entered into two lease agreements for office space which
expire on June 23, 2009 and September 15, 1999, respectively. Both lease
agreements are noncancellable and contain escalation provisions. As of September
30, 1998, the aggregate minimum future rental payments required were as follows:
Year Ended September 30
-----------------------
1999 ................................ $ 158,538
2000 ................................ 454,279
2001 ................................ 463,947
2002 ................................ 492,940
2003 ................................ 492,940
Thereafter .......................... 2,235,945
-----------
$ 4,298,589
===========
Rent expense for the years ended September 30, 1998 and 1997 was $170,101
and $98,934, respectively.
In the ordinary course of business, the Company is party to several legal
proceedings, the outcome of which, either singularly or in the aggregate, is not
expected to have a material impact on the Company's financial position.
11. Stock Options
Under the Company's 1998 and 1997 Stock Option Plans (the "Plans"),
employees, nonemployee directors and officers, and consultants are generally
granted options (both incentive stock options and nonqualified stock
F-10
<PAGE>
Internet Financial Services Inc.
Notes to Consolidated Financial Statements -- (Continued)
Years ended September 30, 1998 and 1997
11. Stock Options -- (Continued)
options) to purchase shares of common stock at prices not less than the
estimated fair market value of the common stock on the date the option is
granted. The options are exercisable at either the date of grant, in ratable
installments or otherwise, generally over a period of one to three years from
the date of grant. The options generally expire within ten years after the date
of grant. The number of shares delivered in the aggregate under the 1998 and
1997 Plans cannot exceed 600,000 and 400,000 shares, respectively, (1,000,000
shares in total). No option shall be granted under the 1998 Plan after March 16,
2008 or under the 1997 Plan after January 26, 2007.
A summary of the Company's stock option activity (exclusive of the options
discussed in Note 7 and the information discussed in Note 15) and related
information for the years ended September 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Number Weighted Average
of Shares Exercise Price
----------- -----------------
<S> <C> <C>
Outstanding at October 1, 1996 .................. -- $ --
Granted, year ended September 30, 1997 ......... 375,000 1.90
------- -------
Outstanding at September 30, 1997 ............... 375,000 1.90
Granted, year ended September 30, 1998 ......... 45,100 8.89
------- -------
Outstanding at September 30, 1998 ............... 420,100 $ 2.34
======= =======
Exercisable at September 30, 1997 ............... 50,000 $ 2.00
======= =======
Exercisable at September 30, 1998 ............... 312,500 $ 1.88
======= =======
</TABLE>
Included in the table above are non-employee option grants of 20,000 and
85,000 shares, respectively, for the years ended September 30, 1998 and 1997.
The estimated fair values of the grants to non-employees are amortized over the
vesting period of the grants, if any. For the years ended September 30, 1998 and
1997 the amount charged to expense for non-employee options was $76,832 and
$21,367, respectively, and is included in professional services.
The weighted average fair value of options granted during the years ended
September 30, 1998 and 1997 was $1.13 and $0.57, respectively. The fair value of
each option grant was estimated at the date of grant using the Black-Scholes
option valuation model. The Black-Scholes option valuation model was developed
for use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. Because the Company's stock options
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options. In calculating the fair values of the stock options, the following
weighted average assumptions were used:
1998 Grants 1997 Grants
------------- ------------
Dividend yield ................... 0% 0%
Average expected life:
Employees ....................... 5.4 years 5.4 years
Nonemployees .................... 0.5 years 5.5 years
Risk-free interest rate .......... 5.4% 6.6%
Expected volatility .............. 0% 0%
Pro forma information regarding net income is required under Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," and has been determined as if the Company
F-11
<PAGE>
Internet Financial Services Inc.
Notes to Consolidated Financial Statements -- (Continued)
Years ended September 30, 1998 and 1997
11. Stock Options -- (Continued)
had accounted for all the 1998 and 1997 stock option grants on the fair value
method. For purposes of the pro forma information, the fair values of the 1998
and 1997 option grants to employees are amortized over the vesting period. The
pro forma information for the years ended September 30, 1998 and 1997 is as
follows:
Year ended September 30
---------------------------------
1998 1997
-------------- ----------------
Net loss as reported ................... $ (632,410) $ (1,059,973)
Net loss pro forma ..................... $ (674,499) (1,082,707)
Net loss per share as reported ......... $ (.12) $ (.30)
Net loss per share pro forma ........... $ (.13) $ (.31)
Additional information regarding options outstanding as of September 30,
1998 (exclusive of the options discussed in Note 7 and the information discussed
in Note 15) is as follows:
Weighted Average
Remaining
Exercise Number Number Contractual Life
Price Outstanding Exercisable (Years)
--------------- ------------- ------------- -----------------
$ .02 125,000 125,000 8.33
2.00 180,500 130,500 9.52
5.00 69,500 19,500 10.93
8.00 25,100 17,500 9.99
10.00 20,000 20,000 0.58
------- -------
Total 420,100 312,500
======= =======
12. Income Taxes
The Company files a consolidated federal income tax return with A.B.
Watley. For all periods presented, the Company provides for income taxes as
required under SFAS No. 109. The Company records income taxes using a liability
approach for financial accounting and reporting which results in the recognition
and measurement of deferred tax assets based upon the likelihood of realization
of tax benefits in future years.
The provision for income taxes for the years ending September 30, 1998 and
1997 is comprised of New York State and New York City taxes in the amount of
$12,765 and $2,776, respectively. No benefit has been provided for the Company's
net operating losses.
The difference between the U.S. federal tax rate and the Company's
effective tax rate for the years ending September 30, 1998 and 1997 follows:
Year ended September 30
---------------------------
1998 1997
------------ ------------
Tax benefit at federal statutory rate .......... (34.0%) (34.0%)
State taxes, net of federal tax effect ......... 2.9% 0.3%
Valuation allowance ............................ 33.9% 34.8%
Other .......................................... (0.3%) (0.8%)
----- -----
Effective tax rate ............................. 2.5% 0.3%
===== =====
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Components of the
Company's deferred tax assets and liabilities as of September 30, 1998 and 1997
are as follows:
F-12
<PAGE>
Internet Financial Services Inc.
Notes to Consolidated Financial Statements -- (Continued)
Years ended September 30, 1998 and 1997
12. Income Taxes -- (Continued)
Year ended September 30
---------------------------
1998 1997
------------ ------------
Net operating loss ....................... $ 638,238 $ 369,197
Mark-to-market loss on inventory ......... 10,932 10,931
Depreciation ............................. (82,221) (33,441)
Other .................................... 6,927 9,867
---------- ----------
Total deferred tax assets ................ 573,876 356,554
Valuation reserve ........................ (573,876) (356,554)
---------- ----------
Net deferred tax asset ................... $ -- $ --
========== ==========
At September 30, 1998, the Company had a net operating loss carryforward
for federal tax purposes of $1,382,065 that will expire no sooner than September
30, 2013.
13. Capital Stock
Effective January 24, 1997, the Company's certificate of incorporation was
amended to reflect the total number of shares authorized to issue as 10,000,000
shares with a par value of $.001 per share.
14. Earnings Per Share
The weighted average number of shares outstanding for the years ended
September 30, 1998 and 1997 reflect the 70,771 shares discussed in Note 15 below
as though the shares were outstanding as of the beginning of each year. Since
the Company recognized a net loss in both years, diluted earnings per common
share is the same as earnings per common share for both years.
15. Subsequent Events (Unaudited)
On October 1, 1998 and as subsequently modified, the Company's Board of
Directors authorized the sale of up to 1,700,000 shares of common stock, plus a
15% over-allotment option to the underwriter, in an underwritten public offering
(the "IPO") of the Company's common stock at an estimated gross offering price
of $6.00 per share. The Board of Directors approved the following, conditional
on the effectiveness of the IPO: (1) the issuance of 3,000 shares of common
stock with a three year lock-up provision for no consideration to certain
employees of the Company, and (2) grants of 519,350 and 14,500 stock options
with an exercise price of $6.00 per share to certain employees and
non-employees, respectively, of the Company. The non-employee options have an
estimated fair value of approximately $16,000 which will be expensed upon the
effectiveness of the IPO.
Effective October 2, 1998, the Company borrowed $500,000 from New York
Small Business Venture Fund, LLC ("NYSB") under the condition that the proceeds
of the loan be used as working capital to further the corporate purposes of the
Company and not to repay any debt or redeem any equity interests. The loan
accrues interest at 12% per annum which is payable first in 24 monthly
installments of $5,000 beginning December 1, 1998. Commencing December 1, 2000,
the principal amount of the loan is payable in 35 monthly installments of $8,333
plus interest on the unpaid balance, except for the last installment which shall
be in the amount of $208,345 plus interest on the unpaid balance.
As collateral for the loan, NYSB received a security interest in the
Company's assets, and certain officers and directors of the Company have
personally guaranteed all amounts due. Under the terms and conditions of the
loan agreement, NYSB received warrants expiring October 2, 2003 to acquire
191,250 shares of the Company's common stock at an exercise price equal to the
IPO price. In the event there has been no IPO within five years from the closing
of the loan, the number of shares to be acquired under the terms of the warrant
are reduced to 100,000 and NYSB shall have the right to put its ownership
interest at a price as defined in the warrant agreement and cause the Company to
repurchase all or part of such interest at any time thereafter. The fair value
of the warrants (approximately $191,250) will be accounted for as a debt
servicing fee and amortized over the life of the loan. The unamortized amount of
the debt servicing fee will be included as "Option costs, net" in Stockholders'
Equity.
F-13
<PAGE>
Internet Financial Services Inc.
Notes to Consolidated Financial Statements -- (Continued)
Years ended September 30, 1998 and 1997
15. Subsequent Events (Unaudited) -- (Continued)
Effective October 2, 1998 and as subsequently modified, the Board of
Directors approved the issuance of 38,260 shares of the Company's common stock
for all the shares of capital stock of Computer Strategies, Inc. ("CSI"). CSI
provided software support, research and development to the Company with the
Company serving as CSI's primary customer. The acquisition will be accounted for
as a purchase. The Company expects to record approximately $60,000 in goodwill
from the acquisition which will be amortized over 3 years, and approximately
$59,000 in capitalized software attributable to costs incurred in the
application development stage of the Company's software development.
During October and November 1998, three employees exercised stock options
which were granted during 1997 at a strike price of two cents per share, and
were issued 125,000 shares of the Company's common stock.
Effective November 19, 1998, the Board of Directors agreed to (1) grant
for no additional consideration 16,200 additional options at a strike price of
$5.00 per share to two employees who were granted $5.00 options in September
1997; and (2) amend the option grants to all option holders who were granted
$8.00 options in November 1997 to reflect a strike price of $6.00 per share.
Effective November 20, 1998, the Board of Directors agreed to amend the
option grants to all option holders who were granted $10.00 options in April
1998 to reflect a strike price of $6.00 per share.
In December 1998, the Company obtained a $500,000 line of financing from
General Electric Capital Corporation ("GECC") which is to be used for the
purchase or leasing of additional equipment and software. The Company is
required to deliver to GECC a letter of credit in the amount of 50% of any
amount borrowed under this financing. In addition, the Company has granted the
lender a security interest in certain of the Company's existing equipment as
well as in all equipment purchased using funds under this financing.
On January 14, 1999, the Board of Directors agreed to amend the Company's
certificate of incorporation to increase the authorized number of shares of
common stock to 20,000,000, and to authorize and delineate the terms under which
preferred stock may be issued. In addition, the Board agreed to issue, subject
to the effectiveness of the IPO, 70,771 additional shares of common stock for
nominal additional consideration to certain stockholders who purchased private
placement shares during the year ended September 30, 1998.
During January 1999, the Board of Directors approved the issuance of
221,500 shares of the Company's common stock in a private placement offering.
The common stock was issued at a price of $4.80 per share (total gross proceeds
of $1,063,200) and was restricted with regard to sale or disposition for a
period of one year. Two employees of the Company purchased an aggregate of
102,000 shares as part of this offering.
Effective January 28, 1999, the Company borrowed $400,000 from New York
Community Investment Company, L.L.C. ("NYCIC"), an affiliate of NYSB, under the
conditions that the proceeds of the loan be used as working capital to further
the corporate purposes of the Company and not to repay any debt or redeem any
equity interests. The loan accrues interest at 12% per annum which is payable
first in 24 monthly installments of $4,000 beginning March 1, 1999. Commencing
March 1, 2001, the principal amount of the loan is payable in 35 monthly
installments of $6,667 plus interest on the unpaid balance, except for the last
installment which shall be in the amount of $166,665 plus interest on the unpaid
balance.
As collateral for the loan, NYCIC received a security interest in the
Company's assets. Under the terms and conditions of the loan agreement, NYCIC
received warrants expiring January 28, 2004 to acquire 140,000 shares of the
Company's common stock at an exercise price equal to the IPO price. In the event
there has been no IPO within five years from the closing of the loan, the number
of shares to be acquired under the terms of the warrant are reduced to 80,000
and NYCIC shall have the right to put its ownership interest at a price defined
in the warrant agreement and cause the Company to repurchase all or part of such
interest at any time thereafter. The fair value of the warrants (approximately
$140,000) will be accounted for as a debt servicing fee and amortized over the
life of the loan. The unamortized amount of the debt servicing fee will be
included as "Option costs, net" in Stockholders' Equity.
F-14
<PAGE>
IFS [LOGO]
Internet Financial Services Inc.
[Picture]
<PAGE>
================================================================================
We have not authorized any dealer, salesperson or any other person to
give any information or to represent anything not contained in this prospectus.
You must not rely on any unauthorized information. This prospectus does not
offer to sell or buy any shares in any jurisdiction where it is unlawful.
-----------------------------------
TABLE OF CONTENTS
Page
Prospectus Summary ....................... 3
Risk Factors ............................. 7
Use of Proceeds .......................... 16
Dilution ................................. 17
Dividends ................................ 18
Capitalization ........................... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations ......................... 19
Business ................................. 23
Management ............................... 33
Principal Stockholders ................... 39
Certain Transactions ..................... 40
Description of Securities ................ 41
Shares Eligible for Future Sale .......... 42
Underwriting ............................. 43
Legal Matters ............................ 44
Experts .................................. 44
Additional Information ................... 45
Index to Financial Statements ............ F-1
-----------------------------------
Until ___________, 1999, all dealers effecting transactions in the
registered securities, whether or not participating in this offering, may be
required to deliver a prospectus. This is in addition to the dealers' obligation
to deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
================================================================================
<PAGE>
================================================================================
1,700,000 Shares
INTERNET FINANCIAL
SERVICES INC.
Common Stock
----------------
PROSPECTUS
----------------
Whale Securities Co., L.P.
_______________, 1999
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 145 of the General Corporation Law of the State of Delaware
provides for the indemnification of officers and directors under certain
circumstances against expenses incurred in successfully defending against a
claim and authorizes Delaware corporation to indemnify their officers and
directors under certain circumstances against expenses and liabilities incurred
in legal proceedings involving such persons because of their being or having
been an officer or director.
Section 102(b) of the Delaware General Corporation Law permits a
corporation, by so providing in its certificate of incorporation, to eliminate
or limit a director's liability to the corporation and its stockholders for
monetary damages arising out of certain alleged breaches of their fiduciary
duty. Section 102(b)(7) provides that no such limitation of liability may affect
a director's liability with respect to any of the following: (i) breaches of the
director's duty of loyalty to the corporation or its stockholders; (ii) acts or
omissions not made in good faith or which involve intentional misconduct of
knowing violations of law; (iii) liability for dividends paid or stock
repurchased or redeemed in violation of the Delaware General Corporation law; or
(iv) any transaction from which the director derived an improper personal
benefit. Section 102(b)(7) does not authorize any limitation on the ability of
the company or its stockholders to obtain injunctive relief, specific
performance or other equitable relief against directors.
Article Eighth of the Registrant's Certificate of Incorporation provides
that the personal liability of the directors of the Registrant be eliminated to
the fullest extent permitted under Section 102(b) of the Delaware General
Corporation law.
Article Ninth of the Registrant's Certificate of Incorporation and the
Registrant's By-laws provides that all persons who the Registrant is empowered
to indemnify pursuant to the provisions of Section 145 of the Delaware General
Corporation Law (or any similar provision or provisions of applicable law at the
time in effect), shall be indemnified by the Registrant to the full extent
permitted thereby. The foregoing right of indemnification shall not be deemed to
be exclusive of any other rights to which those seeking indemnification may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors, or otherwise.
Insofar as indemnification for liabilities under the Securities Act of
1933, as amended (the "Securities Act") may be permitted to directors, officers
or persons controlling the Registrant pursuant to the foregoing provisions, the
Registrant has been informed that in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act and
is therefor unenforceable.
Reference is made to the Underwriting Agreement, the proposed form of which
is filed as Exhibit 1.1, pursuant to which the underwriter agrees to indemnify
the directors and certain officers of the Registrant and certain other persons
against certain civil liabilities.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses (other than the underwriting
discounts and commissions and the Underwriter's Non-Accountable Expense
Allowance) expected to be incurred in connection with the issuance and
distribution of the securities being registered.
<TABLE>
<CAPTION>
<S> <C>
SEC Registration .................................................... $ 3,728.81
NASD Filing Fee ..................................................... $ 1,841.13
Legal Fees and Expenses* ............................................ $ 110,000.00
Printing and Engraving Costs* ....................................... $ 90,000.00
Accounting Fees* .................................................... $ 180,000.00
Blue Sky Expenses and Counsel Fees .................................. $ **
Boston Stock Exchange and NASDAQ Listing Fees and Related Expenses* . $ 40,000.00
Consulting Fee ...................................................... $ 60,000.00
Miscellaneous* ...................................................... $ **
------------
Total ............................................................. $ 674,000.00
============
</TABLE>
- ------------
* Estimated
** To be provided by amendment.
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities.
Since January 1997, the Registrant has issued securities without
registration under the Securities Act in the following transactions:
1. In January 1997, the Registrant issued an aggregate of 431,538 shares of
Common Stock, $.001 par value ("Common Stock"), valued at $80,000, to two
persons in exchange for all of the issued and outstanding shares of A.B.
Watley, Inc.
2. In January 1997, the Registrant issued an aggregate of 3,568,462 shares
of Common Stock to nine investors for aggregate proceeds of $71,369.
3. In April 1997, the Registrant issued an aggregate of 1,050,000 shares of
Common Stock to forty-two investors for aggregate proceeds of $2,100,000.
4. In April 1997, the Registrant issued options to purchase an aggregate of
180,500 shares of Common Stock, exercisable at $2.00 per share, to ten employees
under the Registrant's stock option plans.
5. In September 1997, the Registrant issued options to purchase an
aggregate of 87,700 shares of Common Stock, exercisable at $5.00 per share, to
seven employees under the Registrant's stock option plans.
6. In November 1997, the Registrant issued options to purchase an aggregate
of 20,600 shares of Common Stock, exercisable at $6.00 per share, to six
employees under the Registrant's stock option plans.
7. In January 1998, the Registrant issued 50,000 shares of Common Stock to
one investor for $500,000.
8. In March 1998, the Registrant issued 20,000 shares of Common Stock and
warrants to purchase 20,000 shares of Common Stock to one investor for $200,000.
9. In May 1998, the Registrant issued 17,500 shares of Common Stock to one
investor for $175,000.
10. In October 1998, the Registrant issued 38,260 shares of Common Stock,
valued at $183,648, to one person in exchange for all the shares of a business.
11. In October 1998, the Registrant issued warrants to purchase 191,250
shares of Common Stock to one entity as partial consideration for making a loan
to the Registrant.
12. In October 1998, the Registrant issued 25,000 shares of Common Stock to
an executive officer upon exercise of options, for proceeds of $500.
13. In November 1998, the Registrant issued an aggregate of 100,000 shares
of Common Stock to two executive officers upon exercise of options, for
aggregate proceeds of $2,000.
14. In December 1998, the Registrant issued an aggregate of 3,000 shares of
Common Stock to five employees for aggregate proceeds of $1,500.
15. In January 1999, the Registrant issued an aggregate of 70,771 shares of
Common Stock to three stockholders for no or nominal consideration.
16. In January 1999, the Registrant issued an aggregate of 221,500 shares
of Common Stock to twelve investors for aggregate net proceeds of $1,050,000.
17. In January 1999, the Registrant issued warrants to purchase 140,000
shares of Common Stock to one entity as partial consideration for making a loan
to the Registrant.
The sales and issuances of the Common Stock, options and warrants described
above were deemed to be exempt from registration under the Securities Act in
reliance upon Section 4(2) and Regulation 506 thereof as transactions not
involving a public offering. The Registrant made a determination that each of
the purchasers was a sophisticated investor. The purchasers in such private
offerings represented their intention to acquire the
II-2
<PAGE>
securities for investment only and not with a view to the distribution thereof.
Appropriate legends were affixed to the stock certificates and warrants issued
in such transactions. All purchasers had adequate access, through their
employment or other relationships, to sufficient information about the
Registrant to make an informed investment decision. None of the securities were
sold through an underwriter and, accordingly, there were no underwriting
discounts or commissions involved.
Item 27. Exhibits.
<TABLE>
<CAPTION>
Exhibit
No. Description
- ---------- -----------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Company and form of amendment thereto.
3.2 By-Laws of the Company.
4.1 Specimen Common Stock Certificate.*
4.2 Form of Underwriter's Warrant Agreement, including Form of Warrant Certificate.
5.1 Form of Opinion of Hartman & Craven LLP on legality of securities being registered.*
10.1 1997 Stock Option Plan.
10.2 Amended and Restated 1998 Stock Option Plan.
10.3 Employment Agreement dated as of May 1, 1997 between the Company and Steven Malin and
Amendment to Employment Agreement dated as of October 1, 1998 between the Company and
Steven Malin.
10.4 Employment Agreement dated as of June 1, 1997 between the Company and Harry Simpson and
Amendment to Employment Agreement dated October 1, 1998 between the Company and Harry
Simpson.
10.5 Employment Agreement dated as of January 1, 1999 between the Company and Robert Malin.
10.6 Employment Agreement dated as of June 1, 1997 between the Company and Anthony G. Huston
and Amendment to Employment Agreement dated as of October 1, 1998 between the Company
and Anthony G. Huston.
10.7 Employment Agreement dated as of March 1, 1998 between the Company and Eric Steinberg.
10.8 Office lease dated as of June 20, 1997 between 40 Wall Development Associates, LLC, as
Landlord and the Company as Tenant for premises located at 40 Wall Street, New York,
New York.*
10.9 Office lease dated as of October 1, 1996 between 800 Third Avenue Associates as
Landlord and the Company as Tenant for premises located at 800 Third Avenue, New York,
New York.*
10.10 Office Lease Agreement dated as of September 15, 1998 between Robert A. Diamond as
Landlord and the Company as Tenant for premises known as Suite 110 at 100 Allentown
Parkway, Allen, Texas.*
10.11 Co-Branding Agreement dated October 11, 1996 between PC Quote, Inc. and A.B. Watley, Inc., as
amended.**
10.12 Computer Software License Agreement dated December 8, 1996 between Townsend Analytics, Ltd.
and A.B. Watley, Inc., as amended.**
10.13 Fully Disclosed Clearing Agreement dated October 3, 1996 and Amendment dated June 8, 1998
between Penson Financial Services, Inc. and A.B. Watley, Inc.
10.14 Fully Disclosed Correspondent Agreement dated November 18, 1996 between Weiss, Peck &
Greer, L.L.C. and A.B. Watley, Inc.
10.15 License Agreement dated as of October 1, 1998 between Ethos Corporation and A.B.
Watley, Inc.**
10.16 Service Marketing Representative Agreement dated as of January 29, 1998 between S&P
Com-Stock, Inc. and A.B. Watley, Inc.**
10.17 Master Lease Agreement dated December 17, 1998 between General Electric Capital
Corporation and the Company.*
10.18 Security Agreement dated December 17, 1998 between General Electric Capital Corporation
and the Company.*
10.19 Letter of Credit Agreement dated December 17, 1998 between General Electric Capital
Corporation and the Company.*
10.20 Loan Agreement dated January 28, 1999 between New York Community Investment Company
L.L.C., the Company and A.B. Watley, Inc.
10.21 Promissory Note of the Company and A.B. Watley, Inc. dated January 28, 1999 issued to
the New York Community Investment Company L.L.C.
10.22 Security Agreement dated January 28, 1999 between New York Community Investment Company
L.L.C. and A.B. Watley, Inc.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
- ----------- -----------
<S> <C>
10.23 Security Agreement dated January 28, 1999 between New York Community Investment Company
L.L.C. and the Company.
23.1 Consent of Hartman & Craven LLP (contained in, and incorporated herein by reference to
Exhibit 5.1 of this Registration Statement).*
23.2 Consent of Ernst & Young LLP, independent auditors.
23.3 Consent of William Brawer.
23.4 Consent of Elizabeth Chambers.
23.5 Consent of Mark Chambre.
23.6 Consent of Stanley Weinstein.
24.1 Power of Attorney (contained in, and incorporated herein by reference to the signature
pages of this Registration Statement).
27.1 Financial Data Schedule.
</TABLE>
- ------------
* To be filed by amendment
** Filed in redacted form pursuant to Rule 406 promulgated under the Securities
Act. Filed separately in unredacted form subject to a request for
confidential treatment pursuant to Rule 406 under the Securities Act.
Item 28. Undertakings.
The undersigned Registrant hereby undertakes to:
(1) file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information set
forth in the Registration Statement;
(iii) include any additional or changed material information on the plan
of distribution;
(2) for determining liability under the Securities Act, treat each such
post-effective amendment as a new registration of the securities offered,
and the offering of such securities at that time to be initial bona fide
offering; and
(3) file a post-effective amendment to remove from registration any of the
securities that remain unsold at the termination of this offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser; (2) that for the
purpose of determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this Registration Statement as of the time
the Securities and Exchange Commission declares it effective; and (3) that for
the purpose of determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement
herein, and treat the offering of the securities at that time as the initial
bona fide offering of those securities.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned in the City of New York,
State of New York, on January 31, 1999.
INTERNET FINANCIAL SERVICES INC.
By: /s/ Steven Malin
-------------------------------------
Steven Malin,
Chairman and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Steven
Malin, Harry Simpson and Robert Malin, and each of them, his or her true and
lawful attorney-in-fact and agent, acting alone, with full powers of
substitution and resubstitution, for his or her and in his or her name, place
and stead, in any and all capacities, this Registration Statement, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, acting alone, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Steven Malin Chairman of the Board, Chief Executive January 31, 1999
- ---------------------------- Officer and Director (Principal Executive
Steven Malin Officer and Principal Financial Officer)
/s/ Michael Fielman Vice President -- Finance January 31, 1999
- ---------------------------- (Principal Accounting Officer)
Michael Fielman
/s/ Harry Simpson President, Chief Operating Officer January 31, 1999
- ---------------------------- and Director
Harry Simpson
/s/ Robert Malin Director January 31, 1999
- ----------------------------
Robert Malin
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit
No. Description
- ---------- -----------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Company and form of amendment thereto.
3.2 By-Laws of the Company.
4.1 Specimen Common Stock Certificate.*
4.2 Form of Underwriter's Warrant Agreement, including Form of Warrant Certificate.
5.1 Form of Opinion of Hartman & Craven LLP on legality of securities being registered.*
10.1 1997 Stock Option Plan.
10.2 Amended and Restated 1998 Stock Option Plan.
10.3 Employment Agreement dated as of May 1, 1997 between the Company and Steven Malin and
Amendment to Employment Agreement dated as of October 1, 1998 between the Company and
Steven Malin.
10.4 Employment Agreement dated as of June 1, 1997 between the Company and Harry Simpson and
Amendment to Employment Agreement dated October 1, 1998 between the Company and Harry
Simpson.
10.5 Employment Agreement dated as of January 1, 1999 between the Company and Robert Malin.
10.6 Employment Agreement dated as of June 1, 1997 between the Company and Anthony G. Huston
and Amendment to Employment Agreement dated as of October 1, 1998 between the Company
and Anthony G. Huston.
10.7 Employment Agreement dated as of March 1, 1998 between the Company and Eric Steinberg.
10.8 Office lease dated as of June 20, 1997 between 40 Wall Development Associates, LLC, as
Landlord and the Company as Tenant for premises located at 40 Wall Street, New York,
New York.*
10.9 Office lease dated as of October 1, 1996 between 800 Third Avenue Associates as
Landlord and the Company as Tenant for premises located at 800 Third Avenue, New York,
New York.*
10.10 Office Lease Agreement dated as of September 15, 1998 between Robert A. Diamond as
Landlord and the Company as Tenant for premises known as Suite 110 at 100 Allentown
Parkway, Allen, Texas.*
10.11 Co-Branding Agreement dated October 11, 1996 between PC Quote, Inc. and A.B. Watley, Inc., as
amended.**
10.12 Computer Software License Agreement dated December 8, 1996 between Townsend Analytics, Ltd.
and A.B. Watley, Inc., as amended.**
10.13 Fully Disclosed Clearing Agreement dated October 3, 1996 and Amendment dated June 8, 1998
between Penson Financial Services, Inc. and A.B. Watley, Inc.
10.14 Fully Disclosed Correspondent Agreement dated November 18, 1996 between Weiss, Peck &
Greer, L.L.C. and A.B. Watley, Inc.
10.15 License Agreement dated as of October 1, 1998 between Ethos Corporation and A.B.
Watley, Inc.**
10.16 Service Marketing Representative Agreement dated as of January 29, 1998 between S&P
Com-Stock, Inc. and A.B. Watley, Inc.**
10.17 Master Lease Agreement dated December 17, 1998 between General Electric Capital
Corporation and the Company.*
10.18 Security Agreement dated December 17, 1998 between General Electric Capital Corporation
and the Company.*
10.19 Letter of Credit Agreement dated December 17, 1998 between General Electric Capital
Corporation and the Company.*
10.20 Loan Agreement dated January 28, 1999 between New York Community Investment Company
L.L.C., the Company and A.B. Watley, Inc.
10.21 Promissory Note of the Company and A.B. Watley, Inc. dated January 28, 1999 issued to
the New York Community Investment Company L.L.C.
10.22 Security Agreement dated January 28, 1999 between New York Community Investment Company
L.L.C. and A.B. Watley, Inc.
10.23 Security Agreement dated January 28, 1999 between New York Community Investment Company
L.L.C. and the Company.
23.1 Consent of Hartman & Craven LLP (contained in, and incorporated herein by reference to
Exhibit 5.1 of this Registration Statement).*
23.2 Consent of Ernst & Young LLP, independent auditors.
23.3 Consent of William Brawer.
23.4 Consent of Elizabeth Chambers.
23.5 Consent of Mark Chambre.
23.6 Consent of Stanley Weinstein.
24.1 Power of Attorney (contained in, and incorporated herein by reference to the signature
pages of this Registration Statement).
27.1 Financial Data Schedule.
</TABLE>
- ------------
* To be filed by amendment
** Filed in redacted form pursuant to Rule 406 promulgated under the Securities
Act. Filed separately in unredacted form subject to a request for
confidential treatment pursuant to Rule 406 under the Securities Act.
<PAGE>
Internet Financial Services Inc.
1,700,000 Shares of Common Stock
(Par Value $___ Per Share)
UNDERWRITING AGREEMENT
Whale Securities Co., L.P. New York, New York
650 Fifth Avenue ___________, 1999
New York, New York 10019
Dear Sirs:
Internet Financial Services Inc., a Delaware corporation
(the "Company"), proposes to issue and sell to Whale Securities Co., L.P. (the
"Underwriter") One Million Seven Hundred Thousand (1,700,000) shares (the
"Offered Shares") of the common stock, par value $____ per share, which Offered
Shares are presently authorized but unissued shares of the common stock par
value $____ per share (individually, a "Common Share" and collectively the
"Common Shares"), of the Company. In addition, the Underwriter, in order to
cover over-allotments in the sale of the Offered Shares, may purchase up to an
aggregate of Two Hundred Fifty Five Thousand (255,000) Common Shares (the
"Optional Shares"; the Offered Shares and the Optional Shares are hereinafter
sometimes collectively referred to as the "Shares"). The Shares are described in
the Registration Statement and the Prospectus, as defined below. The Company
also proposes to issue and sell to the Underwriter for its own account and the
accounts of its designees, warrants to purchase up to an aggregate of One
Hundred Seventy Thousand (170,000) Common Shares at an exercise price of $9.90
per share (the "Underwriter's Warrants"), which sale will be consummated in
accordance with the terms and conditions of the form of Underwriter's Warrant
filed as an exhibit to the Registration Statement (as hereinafter defined).
The Company hereby confirms its agreement with the Underwriter
as follows:
1. Purchase and Sale of Offered Shares. On the basis of the
representations and warranties herein contained, but subject to the terms and
conditions herein set forth, the Company hereby agrees to sell the Offered
Shares to the Underwriter, and the Underwriter agrees to purchase the Offered
Shares from the Company, at a purchase price of $5.40 per share. The Underwriter
plans to offer the Shares to the public at a public offering price of $6.00 per
Offered Share.
<PAGE>
2. Payment and Delivery.
(a) Payment for the Offered Shares will be made to the
Company by wire transfer or certified or official bank check or checks payable
to its order in New York Clearing House funds, at the offices of the
Underwriter, 650 Fifth Avenue, New York, New York 10019, against delivery of the
Offered Shares to the Underwriter. Such payment and delivery will be made at
10:00 A.M., New York City time, on the third business day following the
Effective Date (the fourth business day following the Effective Date in the
event that trading of the Offered Shares commences on the day following the
Effective Date), the date and time of such payment and delivery being herein
called the "Closing Date." The certificates representing the Offered Shares to
be delivered will be in such denominations and registered in such names as the
Underwriter may request not less than two full business days prior to the
Closing Date, and will be made available to the Underwriter for inspection,
checking and packaging at the office of the Company's transfer agent or
correspondent in New York City, American Stock Transfer & Trust Company, 40 Wall
Street, New York, New York 10005 not less than one full business day prior to
the Closing Date.
(b) On the Closing Date, the Company will sell the
Underwriter's Warrants to the Underwriter or to the Underwriter's designees
limited to officers and partners of the Underwriter, members of the selling
group and/or their officers or partners (collectively, the "Underwriter's
Designees"). The Underwriter's Warrants will be in the form of, and in
accordance with, the provisions of the Underwriter's Warrant attached as an
exhibit to the Registration Statement. The aggregate purchase price for the
Underwriter's Warrants is One Hundred Dollars ($100.00). The Underwriter's
Warrants will be restricted from sale, transfer, assignment or hypothecation for
a period of one (1) year from the Effective Date, except to the Underwriter's
Designees. Payment for the Underwriter's Warrants will be made to the Company by
check or checks payable to its order on the Closing Date against delivery of the
certificates representing the Underwriter's Warrants. The certificates
representing the Underwriter's Warrants will be in such denominations and such
names as the Underwriter may request prior to the Closing Date.
3. Option to Purchase Optional Shares.
(a) For the purposes of covering any over-allotments in
connection with the distribution and sale of the Offered Shares as contemplated
by the Prospectus, the Underwriter is hereby granted an option to purchase all
or any part of the Optional Shares from the Company. The purchase price to be
paid for the Optional Shares will be the same price per Optional Share as the
price per Offered Share set forth in Section 1 hereof. The option granted hereby
may be exercised by the Underwriter as to all or any part of the Optional Shares
at any time within 45 days after the Effective Date. The Underwriter will not be
under any obligation to purchase any Optional Shares prior to the exercise of
such option.
-2-
<PAGE>
(b) The option granted hereby may be exercised by the
Underwriter by giving oral notice to the Company, which must be confirmed by a
letter, telex or telegraph setting forth the number of Optional Shares to be
purchased, the date and time for delivery of and payment for the Optional Shares
to be purchased and stating that the Optional Shares referred to therein are to
be used for the purpose of covering over-allotments in connection with the
distribution and sale of the Offered Shares. If such notice is given prior to
the Closing Date, the date set forth therein for such delivery and payment will
not be earlier than either two full business days thereafter or the Closing
Date, whichever occurs later. If such notice is given on or after the Closing
Date, the date set forth therein for such delivery and payment will not be
earlier than two full business days thereafter. In either event, the date so set
forth will not be more than 15 full business days after the date of such notice.
The date and time set forth in such notice is herein called the "Option Closing
Date." Upon exercise of such option, through the Underwriter's delivery of the
aforementioned notice, the Company will become obligated to convey to the
Underwriter, and, subject to the terms and conditions set forth in Section 3(d)
hereof, the Underwriter will become obligated to purchase, the number of
Optional Shares specified in such notice.
(c) Payment for any Optional Shares purchased will be made
to the Company by wire transfer or certified or official bank check or checks
payable to its order in New York Clearing House funds, at the office of the
Underwriter, against delivery of the Optional Shares purchased to the
Underwriter. The certificates representing the Optional Shares to be delivered
will be in such denominations and registered in such names as the Underwriter
requests not less than two full business days prior to the Option Closing Date,
and will be made available to the Underwriter for inspection, checking and
packaging at the aforesaid office of the Company's transfer agent or
correspondent not less than one full business day prior to the Option Closing
Date.
-3-
<PAGE>
(d) The obligation of the Underwriter to purchase and pay
for any of the Optional Shares is subject to the accuracy and completeness (as
of the date hereof and as of the Option Closing Date) of and compliance in all
material respects with the representations and warranties of the Company herein,
to the accuracy and completeness of the statements of the Company or its
officers made in any certificate or other document to be delivered by the
Company pursuant to this Agreement, to the performance in all material respects
by the Company of its obligations hereunder, to the satisfaction by the Company
of the conditions, as of the date hereof and as of the Option Closing Date, set
forth in Section 3(b) hereof, and to the delivery to the Underwriter of
opinions, certificates and letters dated the Option Closing Date substantially
similar in scope to those specified in Section 5, 6(b), (c), (d) and (e) hereof,
but with each reference to "Offered Shares" and "Closing Date" to be,
respectively, to the Optional Shares and the Option Closing Date.
4. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the Underwriter that:
(a) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, with full
power and authority, corporate and other, to own or lease, as the case may be,
and operate its properties, whether tangible or intangible, and to conduct its
business as described in the Registration Statement and to execute, deliver and
perform this Agreement and the Underwriter's Warrant Agreement and to consummate
the transactions contemplated hereby and thereby. The Company has no
subsidiaries other than the Subsidiary, a corporation duly organized, validly
existing and in good standing under the laws of the State of New York (the
"Subsidiary"). The Company owns all of the issued and outstanding shares of
capital stock of the Subsidiary, free and clear of any security interests,
liens, encumbrances, claims and charges, and all of such shares have been duly
authorized and validly issued and are fully paid and nonassessable. There are no
options or warrants for the purchase of, or other rights to purchase or acquire,
or outstanding securities convertible into or exchangeable for, any capital
stock or other securities of the Subsidiary.
Other than the Subsidiary, the Company has no equity interests in any
entity. Unless the context otherwise requires, all references to the "Company"
in this Agreement shall include the Subsidiary. Each of the Company and the
Subsidiary is duly qualified to do business as a foreign corporation and is in
good standing in all jurisdictions wherein such qualification is necessary and
where failure so to qualify could have a material adverse effect on the
financial condition, results of operations, business or properties of the
Company or the Subsidiary. The Subsidiary has full corporate power and authority
to own or lease, as the case may be, and operate its properties, whether
tangible or intangible, and to conduct its business as described in the
Registration Statement.
-4-
<PAGE>
(b) This Agreement has been duly executed and delivered by
the Company and constitutes the valid and binding obligation of the Company, and
each of the Underwriter's Warrant Agreement and the Consulting Agreement
described in Section 5(r) hereof (the "Consulting Agreement"), when executed and
delivered by the Company on the Closing Date, will be the valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms. The execution, delivery and performance of this
Agreement, the Underwriter's Warrant Agreement and the Consulting Agreement by
the Company, the consummation by the Company of the transactions herein and
therein contemplated and the compliance by the Company with the terms of this
Agreement, the Consulting Agreement and the Underwriter's Warrant Agreement have
been duly authorized by all necessary corporate action and do not and will not,
with or without the giving of notice or the lapse of time, or both, (i) result
in any violation of the Certificate of Incorporation or By-Laws, each as
amended, of the Company or the Subsidiary; (ii) result in a breach of or
conflict with any of the terms or provisions of, or constitute a default under,
or result in the modification or termination of, or result in the creation or
imposition of any lien, security interest, charge or encumbrance upon any of the
properties or assets of the Company or the Subsidiary pursuant to any indenture,
mortgage, note, contract, commitment or other agreement or instrument to which
the Company or the Subsidiary is a party or by which the Company or the
Subsidiary or any of their respective properties or assets is or may be bound or
affected; (iii) violate any existing applicable law, rule, regulation, judgment,
order or decree of any governmental agency or court, domestic or foreign, having
jurisdiction over the Company or the Subsidiary or any of their respective
properties or businesses; or (iv) have any effect on any permit, certification,
registration, approval, consent order, license, franchise or other authorization
(collectively, the "Permits") necessary for the Company or the Subsidiary to own
or lease and operate their respective properties and to conduct their respective
businesses or the ability of the Company to make use thereof.
(c) No Permits of any court or governmental agency or body,
other than under the Securities Act of 1933, as amended (the "Act"), the
Regulations (as hereinafter defined) and applicable state securities or Blue Sky
laws, are required (i) for the valid authorization, issuance, sale and delivery
of the Shares to the Underwriter, and (ii) the consummation by the Company of
the transactions contemplated by this Agreement, the Consulting Agreement or the
Underwriter's Warrant Agreement.
-5-
<PAGE>
(d) The conditions for use of a registration statement on
Form SB-2 set forth in the General Instructions to Form SB-2 have been satisfied
with respect to the Company, the transactions contemplated herein and in the
Registration Statement. The Company has prepared in conformity with the
requirements of the Act and the rules and regulations (the "Regulations") of the
Securities and Exchange Commission (the "Commission") and filed with the
Commission a registration statement (File No. 333-__________ ) on Form SB-2 and
has filed one or more amendments thereto, covering the registration of the
Shares under the Act, including the related preliminary prospectus or
preliminary prospectuses (each thereof being herein called a "Preliminary
Prospectus") and a proposed final prospectus. Each Preliminary Prospectus was
endorsed with the legend required by Item 501(a)(5) of Regulation S-B of the
Regulations and, if applicable, Rule 430A of the Regulations. Such registration
statement including any documents incorporated by reference therein and all
financial schedules and exhibits thereto, as amended at the time it becomes
effective, and the final prospectus included therein are herein, respectively,
called the "Registration Statement" and the "Prospectus," except that, (i) if
the prospectus filed by the Company pursuant to Rule 424(b) of the Regulations
differs from the Prospectus, the term "Prospectus" will also include the
prospectus filed pursuant to Rule 424(b), and (ii) if the Registration Statement
is amended or such Prospectus is supplemented after the date the Registration
Statement is declared effective by the Commission (the "Effective Date") and
prior to the Option Closing Date, the terms "Registration Statement" and
"Prospectus" shall include the Registration Statement as amended or
supplemented.
(e) Neither the Commission nor, to the best of the
Company's knowledge after due investigation, any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary Prospectus
or has instituted or, to the best of the Company's knowledge after due
investigation, threatened to institute any proceedings with respect to such an
order.
(f) The Registration Statement when it becomes effective,
the Prospectus (and any amendment or supplement thereto) when it is filed with
the Commission pursuant to Rule 424(b), and both documents as of the Closing
Date and the Option Closing Date, referred to below, will contain all statements
which are required to be stated therein in accordance with the Act and the
Regulations and will in all material respects conform to the requirements of the
-6-
<PAGE>
Act and the Regulations, and neither the Registration Statement nor the
Prospectus, nor any amendment or supplement thereto, on such dates, will contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, except
that this representation and warranty does not apply to statements or omissions
made in reliance upon and in conformity with information furnished in writing to
the Company in connection with the Registration Statement or Prospectus or any
amendment or supplement thereto by the Underwriter expressly for use therein.
(g) The Company had at the date or dates indicated in the
Prospectus a duly authorized and outstanding capitalization as set forth in the
Registration Statement and the Prospectus. Based on the assumptions stated in
the Registration Statement and the Prospectus, the Company will have on the
Closing Date the adjusted stock capitalization set forth therein. Except as set
forth in the Registration Statement or the Prospectus, on the Effective Date and
on the Closing Date, there will be no options to purchase, warrants or other
rights to subscribe for, or any securities or obligations convertible into, or
any contracts or commitments to issue or sell shares of the Company's capital
stock or any such warrants, convertible securities or obligations. Except as set
forth in the Prospectus, no holders of any of the Company's securities has any
rights, "demand," "piggyback" or otherwise, to have such securities registered
under the Act.
(h) The descriptions in the Registration Statement and the
Prospectus of contracts and other documents are accurate and present fairly the
information required to be disclosed, and there are no contracts or other
documents required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement under the
Act or the Regulations which have not been so described or filed as required.
(i) Ernst & Young LLP, the accountants who have certified
certain of the consolidated financial statements filed and to be filed with the
Commission as part of the Registration Statement and the Prospectus, are
independent public accountants within the meaning of the Act and Regulations.
The consolidated financial statements and schedules and the notes thereto filed
as part of the Registration Statement and included in the Prospectus are
complete, correct and present fairly the financial position of the Company as of
the dates thereof, and the results of operations and changes in financial
position of the Company for the periods indicated therein, all in conformity
with generally accepted accounting principles applied on a consistent basis
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throughout the periods involved except as otherwise stated in the Registration
Statement and the Prospectus. The selected financial data set forth in the
Registration Statement and the Prospectus present fairly the information shown
therein and have been compiled on a basis consistent with that of the audited
and unaudited financial statements included in the Registration Statement and
the Prospectus.
(j) Each of the Company and the Subsidiary has filed with
the appropriate federal, state and local governmental agencies, and all
appropriate foreign countries and political subdivisions thereof, all tax
returns, including franchise tax returns, which are required to be filed or have
duly obtained extensions of time for the filing thereof and have paid all taxes
shown on such returns and all assessments received by them to the extent that
the same have become due; and the provisions for income taxes payable, if any,
shown on the consolidated financial statements filed with or as part of the
Registration Statement are sufficient for all accrued and unpaid foreign and
domestic taxes, whether or not disputed, and for all periods to and including
the dates of such consolidated financial statements. Except as disclosed in
writing to the Underwriter, neither the Company nor the Subsidiary has executed
or filed with any taxing authority, foreign or domestic, any agreement extending
the period for assessment or collection of any income taxes and is not a party
to any pending action or proceeding by any foreign or domestic governmental
agency for assessment or collection of taxes; and no claims for assessment or
collection of taxes have been asserted against the Company or the Subsidiary.
(k) The outstanding Common Shares and outstanding options
and warrants to purchase Common Shares have been duly authorized and validly
issued. The outstanding Common Shares are fully paid and nonassessable. The
outstanding options and warrants to purchase Common Shares constitute the valid
and binding obligations of the Company, enforceable in accordance with their
terms. The Company has duly reserved a sufficient number of Common Shares from
its authorized but unissued Common Shares for issuance upon exercise of the
outstanding options and warrants. None of the outstanding Common Shares or
options or warrants to purchase Common Shares has been issued in violation of
the preemptive rights of any shareholder of the Company. None of the holders of
the outstanding Common Shares is subject to personal liability solely by reason
of being such a holder. The offers and sales of the outstanding Common Shares
and outstanding options and warrants to purchase Common Shares were at all
relevant times either registered under the Act and the applicable state
securities or Blue Sky laws or exempt from such registration requirements. The
authorized Common Shares and outstanding options and warrants to purchase Common
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Shares conform to the descriptions thereof contained in the Registration
Statement and Prospectus. Except as set forth in the Registration Statement and
the Prospectus, on the Effective Date and the Closing Date, there will be no
outstanding options or warrants for the purchase of, or other outstanding rights
to purchase or acquire, Common Shares or securities convertible into Common
Shares.
(l) No securities of the Company have been sold by the
Company or by or on behalf of, or for the benefit of, any person or persons
controlling, controlled by, or under common control with the Company within the
three years prior to the date hereof, except as disclosed in the Registration
Statement.
(m) The issuance and sale of the Shares have been duly
authorized and, when the Shares have been issued and duly delivered against
payment therefor as contemplated by this Agreement, the Shares will be validly
issued, fully paid and nonassessable, and the holders thereof will not be
subject to personal liability solely by reason of being such holders. The Shares
will not be subject to preemptive rights of any shareholder of the Company.
(n) The issuance and sale of the Common Shares issuable
upon exercise of the Underwriter's Warrants have been duly authorized and, when
such Common Shares have been duly delivered against payment therefor, as
contemplated by the Underwriter's Warrant Agreement, such Common Shares will be
validly issued, fully paid and nonassessable. Holders of Common Shares issuable
upon the exercise of the Underwriter's Warrants will not be subject to personal
liability solely by reason of being such holders. Neither the Underwriter's
Warrants nor the Common Shares issuable upon exercise thereof will be subject to
preemptive rights of any shareholder of the Company. The Company has reserved a
sufficient number of Common Shares from its authorized but unissued Common
Shares for issuance upon exercise of the Underwriter's Warrants in accordance
with the provisions of the Underwriter's Warrant Agreement. The Underwriter's
Warrants conform to the descriptions thereof contained in the Registration
Statement and the Prospectus.
(o) Neither The Company nor the Subsidiary is in violation
of, or in default under, (i) any term or provision of its Certificate of
Incorporation or By-Laws, each as amended; (ii) any material term or provision
or any financial covenants of any indenture, mortgage, contract, commitment or
other agreement or instrument to which it is a party or by which it or any of
its property or business is or may be bound or affected; or (iii) any existing
applicable law, rule, regulation, judgment, order or decree of any governmental
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agency or court, domestic or foreign, or self regulatory organization, including
the National Association of Securities Dealers, Inc. (the "NASD"), the New York
Stock Exchange ("NYSE") or the American Stock Exchange ("AMEX"), having
jurisdiction over the Company or the Subsidiary or any of the Company's or the
Subsidiary's properties or businesses. Each of the Company and the Subsidiary
owns, possesses or have obtained all governmental and other (including those
obtainable from third parties) Permits, necessary to own or lease, as the case
may be, and to operate their properties, whether tangible or intangible, and to
conduct the business and operations of the Company and the Subsidiary as
presently conducted and all such Permits are outstanding and in good standing,
and there are no proceedings pending or, to the best of the Company's knowledge
after due investigation, threatened, or any basis therefor, seeking to cancel,
terminate or limit such Permits.
(p) Except as set forth in the Prospectus, there are no
claims, actions, suits, proceedings, arbitrations, investigations or inquiries
before any governmental agency, court or tribunal, domestic or foreign, or
before any private arbitration tribunal, pending, or, to the best of the
Company's knowledge after due investigation, threatened against the Company or
the Subsidiary or involving the Company's or the Subsidiary's properties or
business which, if determined adversely to the Company or the Subsidiary, would,
individually or in the aggregate, result in any material adverse change in the
financial position, stockholders' equity, results of operations, properties,
business, management or affairs or business prospects of the Company or the
Subsidiary or which question the validity of the capital stock of the Company or
this Agreement or of any action taken or to be taken by the Company pursuant to,
or in connection with, this Agreement; nor, to the best of the Company's
knowledge after due investigation, is there any basis for any such claim,
action, suit, proceeding, arbitration, investigation or inquiry. There are no
outstanding orders, judgments or decrees of any court, governmental agency or
other tribunal naming the Company or the Subsidiary and enjoining the Company or
the Subsidiary from taking, or requiring the Company or the Subsidiary to take,
any action, or to which the Company or the Subsidiary, or the Company's or the
Subsidiary's properties or business is bound or subject.
(q) Neither the Company nor any of its affiliates has
incurred any liability for any finder's fees or similar payments in connection
with the transactions herein contemplated.
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(r) Each of the Company and the Subsidiary owns or
possesses adequate and enforceable rights to use all patents, patent
applications, trademarks, service marks, copyrights, rights, trade secrets,
confidential information, processes and formulations used or proposed to be used
in the conduct of their businesses as described in the Prospectus (collectively
the "Intangibles"); to the best of the Company's knowledge, neither the Company
nor the Subsidiary has infringed nor is infringing upon the rights of others
with respect to the Intangibles; and neither the Company nor the Subsidiary has
received any notice of conflict with the asserted rights of others with respect
to the Intangibles which could, singly or in the aggregate, materially adversely
affect its business as presently conducted or the prospects, financial condition
or results of operations of the Company or the Subsidiary, and the Company knows
of no basis therefor; and, to the best of the Company's knowledge, no others
have infringed upon the Intangibles of the Company or the Subsidiary.
(s) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus and the Company's latest
consolidated financial statements, neither the Company nor the Subsidiary has
incurred any material liability or obligation, direct or contingent, or entered
into any material transaction, whether or not incurred in the ordinary course of
business, and has not sustained any material loss or interference with its
business from fire, storm, explosion, flood or other casualty, whether or not
covered by insurance, or from any labor dispute or court or governmental action,
order or decree; and since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there have not been, and prior
to the Closing Date referred to below there will not be, any changes in the
capital stock or any material increases in the long-term debt of the Company or
any material adverse change in or affecting the general affairs, management,
financial condition, stockholders' equity, results of operations or prospects of
the Company or the Subsidiary, otherwise than as set forth or contemplated in
the Prospectus.
(t) The Company does not own any real property. The Company
and the Subsidiary each has good title to all personal property (tangible and
intangible) owned by it, free and clear of all security interests, charges,
mortgages, liens, encumbrances and defects, except such as are described in the
Registration Statement and Prospectus or such as do not materially affect the
value or transferability of such property and do not interfere with the use of
such property made, or proposed to be made, by the Company or the Subsidiary.
The leases, licenses or other contracts or instruments under which the Company
and the Subsidiary lease, hold or are entitled to use any property, real or
personal, are valid, subsisting and enforceable only with such exceptions as are
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not material and do not interfere with the use of such property made, or
proposed to be made, by the Company or the Subsidiary, and all rentals,
royalties or other payments accruing thereunder which became due prior to the
date of this Agreement have been duly paid, and neither the Company nor the
Subsidiary, nor, to the best of the Company's knowledge after due investigation,
any other party is in default thereunder and, to the best of the Company's
knowledge after due investigation, no event has occurred which, with the passage
of time or the giving of notice, or both, would constitute a default thereunder.
Neither the Company nor the Subsidiary has received notice of any violation of
any applicable law, ordinance, regulation, order or requirement relating to its
owned or leased properties. Each of the Company and the Subsidiary has
adequately insured their properties against loss or damage by fire or other
casualty and maintain, in adequate amounts, such other insurance as is usually
maintained by companies engaged in the same or similar businesses located in
their geographic area.
(u) Each contract or other instrument (however
characterized or described) to which the Company or the Subsidiary is a party or
by which their properties or businesses is or may be bound or affected and to
which reference is made in the Prospectus has been duly and validly executed, is
in full force and effect in all material respects and is enforceable against the
parties thereto in accordance with its terms, and none of such contracts or
instruments has been assigned by the Company or the Subsidiary, and neither the
Company nor the Subsidiary, nor, to the best of the Company's knowledge after
due investigation, any other party, is in default thereunder and, to the best of
the Company's knowledge after due investigation, no event has occurred which,
with the lapse of time or the giving of notice, or both, would constitute a
default thereunder.
None of the material provisions of such contracts or
instruments violates any existing applicable law, rule, regulation, judgment,
order or decree of any governmental agency or court or self regulatory
organization, including, without limitation, the NASD, NYSE and AMEX, having
jurisdiction over the Company or the Subsidiary or any of their respective
assets or businesses, including, without limitation, those promulgated by the
Commission, and comparable state and local regulatory authorities.
(v) The employment, consulting, confidentiality and
non-competition agreements between the Company and between the Subsidiary and
its officers, employees and consultants, described in the Registration
Statement, are binding and enforceable obligations upon the respective parties
thereto in accordance with their respective terms, except as such
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<PAGE>
enforceability may be limited by applicable bankruptcy, insolvency, moratorium
or other similar laws or arrangements affecting creditors' rights generally and
subject to principles of equity.
(w) Except as set forth in the Prospectus, the Company has
no employee benefit plans (including, without limitation, profit sharing and
welfare benefit plans) or deferred compensation arrangements that are subject to
the provisions of the Employee Retirement Income Security Act of 1974.
(x) To the best of the Company's knowledge after due
investigation, no labor problem exists with any of the Company's or the
Subsidiary's employees or is imminent which could adversely affect the Company
or the Subsidiary.
(y) The Company has not, directly or indirectly, at any
time (i) made any contributions to any candidate for political office, or failed
to disclose fully any such contribution in violation of law or (ii) made any
payment to any state, federal or foreign governmental officer or official, or
other person charged with similar public or quasi-public duties, other than
payments or contributions required or allowed by applicable law. The Company's
internal accounting controls and procedures are sufficient to cause the Company
to comply in all material respects with the Foreign Corrupt Practices Act of
1977, as amended.
(z) Shares have been approved for listing on the Nasdaq
SmallCap Market and the Boston Stock Exchange or Pacific Stock Exchange.
(aa) The software and hardware operated by the Company and
the Subsidiary are capable of providing or are being adapted to provide
uninterrupted millennium functionality to record, store, process and present
calendar dates falling on or after January 1, 2000 and date-dependent data in
substantially the same manner and with the same functionality as such software
records, stores, processes and presents such calendar dates and date-dependent
data as of the date hereof, except as would not have a material adverse effect
on the Company.
(ab) The Company has provided to Tenzer Greenblatt LLP,
counsel to the Underwriter ("Underwriter's Counsel"), all agreements,
certificates, correspondence and other items, documents and information
requested by such counsel's Corporate Review Memorandum dated ____________, 1998
and supplemented diligence request dated _____________, 1998.
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Any certificate signed by an officer of the Company or of
the Subsidiary and delivered to the Underwriter or to Underwriter's Counsel
shall be deemed to be a representation and warranty by the Company to the
Underwriter as to the matters covered thereby.
5. Certain Covenants of the Company. The Company covenants
with the Underwriter as follows:
(a) The Company will not at any time, whether before the
Effective Date or thereafter during such period as the Prospectus is required by
law to be delivered in connection with the sales of the Shares by the
Underwriter or a dealer, file or publish any amendment or supplement to the
Registration Statement or Prospectus of which the Underwriter has not been
previously advised and furnished a copy, or to which the Underwriter shall
object in writing.
(b) The Company will use its best efforts to cause the
Registration Statement to become effective and will advise the Underwriter
immediately, and, if requested by the Underwriter, confirm such advice in
writing, (i) when the Registration Statement, or any post-effective amendment to
the Registration Statement or any supplemented Prospectus is filed with the
Commission; (ii) of the receipt of any comments from the Commission; (iii) of
any request of the Commission for amendment or supplementation of the
Registration Statement or Prospectus or for additional information; and (iv) of
the issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or of any order preventing or suspending the use of
any Preliminary Prospectus, or of the suspension of the qualification of the
Shares for offering or sale in any jurisdiction, or of the initiation of any
proceedings for any of such purposes. The Company will use its best efforts to
prevent the issuance of any such stop order or of any order preventing or
suspending such use and to obtain as soon as possible the lifting thereof, if
any such order is issued.
(c) The Company will deliver to the Underwriter, without
charge, from time to time until the Effective Date, as many copies of each
Preliminary Prospectus as the Underwriter may reasonably request, and the
Company hereby consents to the use of such copies for purposes permitted by the
Act. The Company will deliver to the Underwriter, without charge, as soon as the
Registration Statement becomes effective, and thereafter from time to time as
requested, such number of copies of the Prospectus (as supplemented, if the
Company makes any supplements to the Prospectus) as the Underwriter may
reasonably request. The Company has furnished or will furnish to the Underwriter
two signed copies of the Registration Statement as originally filed and of all
amendments thereto, whether filed before or after the Registration Statement
becomes effective, two copies of all exhibits filed therewith and two signed
copies of all consents and certificates of experts.
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<PAGE>
(d) The Company will comply with the Act, the Regulations,
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules and regulations thereunder so as to permit the continuance of sales of and
dealings in the Offered Shares and in any Optional Shares which may be issued
and sold. If, at any time when a prospectus relating to the Shares is required
to be delivered under the Act, any event occurs as a result of which the
Registration Statement and Prospectus as then amended or supplemented would
include an untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or if it shall be necessary to amend or
supplement the Registration Statement and Prospectus to comply with the Act or
the regulations thereunder, the Company will promptly file with the Commission,
subject to Section 5(a) hereof, an amendment or supplement which will correct
such statement or omission or which will effect such compliance.
(e) The Company will furnish such proper information as may
be required and otherwise cooperate in qualifying the Shares for offering and
sale under the securities or Blue Sky laws relating to the offering in such
jurisdictions as the Underwriter may reasonably designate, provided that no such
qualification will be required in any jurisdiction where, solely as a result
thereof, the Company would be subject to service of general process or to
taxation or qualification as a foreign corporation doing business in such
jurisdiction.
(f) The Company will make generally available to its
securityholders, in the manner specified in Rule 158(b) under the Act, and
deliver to the Underwriter and Underwriter's Counsel as soon as practicable and
in any event not later than 45 days after the end of its fiscal quarter in which
the first anniversary date of the effective date of the Registration Statement
occurs, an earning statement meeting the requirements of Rule 158(a) under the
Act covering a period of at least 12 consecutive months beginning after the
effective date of the Registration Statement.
(g) For a period of five years from the Effective Date, the
Company will deliver to the Underwriter and to Underwriter's Counsel on a timely
basis (i) a copy of each report or document, including, without limitation,
reports on Forms 8-K, 10-C, 10-K (or 10-KSB), 10-Q (or 10-QSB) and 10-C and
exhibits thereto, filed or furnished to the Commission, any securities
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<PAGE>
exchange or the National Association of Securities Dealers, Inc. (the "NASD") on
the date each such report or document is so filed or furnished; (ii) as soon as
practicable, copies of any reports or communications (financial or other) of the
Company mailed to its securityholders; (iii) as soon as practicable, a copy of
any Schedule 13D, 13G, 14D-1 or 13E-3 received or prepared by the Company from
time to time; (iv) monthly statements setting forth such information regarding
the Company's results of operations and financial position (including balance
sheet, profit and loss statements and data regarding outstanding purchase
orders) as is regularly prepared by management of the Company; and (v) such
additional information concerning the business and financial condition of the
Company as the Underwriter may from time to time reasonably request and which
can be prepared or obtained by the Company without unreasonable effort or
expense. The Company will furnish to its stockholders annual reports containing
audited financial statements and such other periodic reports as it may determine
to be appropriate or as may be required by law.
(h) Neither the Company nor any person that controls, is
controlled by or is under common control with the Company will take any action
designed to or which might be reasonably expected to cause or result in the
stabilization or manipulation of the price of the Common Shares.
(i) If the transactions contemplated by this Agreement are
consummated, the Underwriter shall retain the $50,000 previously paid to it, and
the Company will pay or cause to be paid the following: all costs and expenses
incident to the performance of the obligations of the Company under this
Agreement, including, but not limited to, the fees and expenses of accountants
and counsel for the Company; the preparation, printing, mailing and filing of
the Registration Statement (including financial statements and exhibits),
Preliminary Prospectuses and the Prospectus, and any amendments or supplements
thereto; the printing and mailing of the Selected Dealer Agreement, the issuance
and delivery of the Shares to the Underwriter; all taxes, if any, on the
issuance of the Shares; the fees, expenses and other costs of qualifying the
Shares for sale under the Blue Sky or securities laws of those states in which
the Shares are to be offered or sold, including fees and disbursements of
counsel in connection therewith, and including those of such local counsel as
may have been retained for such purpose; the filing fees incident to securing
any required review by the NASD and either the Boston Stock Exchange or Pacific
Stock Exchange; the cost of printing and mailing the "Blue Sky Survey" the cost
of furnishing to the Underwriter copies of the Registration Statement,
Preliminary Prospectuses and the Prospectus as herein provided; the costs of
placing "tombstone advertisements" in any publications which may be selected by
the Underwriter; and all other costs and expenses incident to the performance of
the Company's obligations hereunder which are not otherwise specifically
provided for in this Section 5(i).
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<PAGE>
In addition, at the Closing Date or the Option Closing
Date, as the case may be, the Underwriter will deduct from the payment for the
Offered Shares or any Optional Shares three percent (3%) of the gross proceeds
of the offering (less the sum of $50,000 previously paid to the Underwriter), as
payment for the Underwriter's nonaccountable expense allowance relating to the
transactions contemplated hereby, which amount will include the fees and
expenses of Underwriter's Counsel (other than the fees and expenses of
Underwriter's Counsel relating to Blue Sky qualifications and registrations,
which, as provided for above, shall be in addition to the three percent (3%)
nonaccountable expense allowance and shall be payable directly by the Company to
Underwriter's Counsel on or prior to the Closing Date).
(j) If the transactions contemplated by this Agreement or
related hereto are not consummated because the Company decides not to proceed
with the offering for any reason or because the Underwriter decides not to
proceed with the offering as a result of a breach by the Company of its
representations, warranties or covenants in the Agreement or as a result of
adverse changes in the affairs of the Company, then the Company will be
obligated to reimburse the Underwriter for its accountable expenses up to the
sum of $75,000, inclusive of the $50,000 previously paid to the Underwriter by
the Company. In all cases other than those set forth in the preceding sentence,
if the Company or the Underwriter decide not to proceed with the offering, the
Company will only be obligated to reimburse the Underwriter for its accountable
expenses up to $50,000, and inclusive of $50,000 previously paid to the
Underwriter by the Company. In no event, however, will the Underwriter, in the
event the offering is terminated, be entitled to retain or receive more than an
amount equal to its actual accountable out-of-pocket expenses.
(k) The Company intends to apply the net proceeds from the
sale of the Shares for the purposes set forth in the Prospectus. Except as set
forth in the Prospectus, no portion of the net proceeds from the sale of the
Shares will be used to repay any indebtedness.
(l) During the period of twelve (12) months from the
Effective Date hereof, neither the Company nor any of its officers, directors or
securityholders will offer for sale or sell or otherwise dispose of, directly or
indirectly, any securities of the Company, in any manner whatsoever, whether
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pursuant to Rule 144 of the Regulations or otherwise (except that,
notwithstanding the foregoing, a group of securityholders beneficially owning up
to five percent (5%) of the outstanding Common Shares in the aggregate may be
excluded from the prohibitions of this Section 5(l) provided no securityholder
owning .25% or more of the Common Shares is included in such group), and no
holder of registration rights relating to buy securities of the Company will
exercise any such registration rights, in either case, without the prior written
consent of the Underwriter. During the 12 month period commencing one year from
the date hereof, no officer, director or securityholder who beneficially owns or
holds 5% or more of the outstanding Common Shares (calculated in accordance with
Rule 13d-3(d)(i) under the Exchange Act) may sell any Common Shares in excess of
the amount that they would be allowed to sell if they were deemed "affiliates"
of the Company and their shares were deemed "restricted," as those terms are
defined in Rule 144 promulgated under the Securities Act, without the prior
written consent of the Underwriter.
(m) The Company will not file any registration statement
relating to the offer or sale of any of the Company's securities, including any
registration statement on Form S-8, during the twelve (12) months from the
Effective Date, without the Underwriter's prior written consent.
(n) The Company maintains and will continue to maintain a
system of internal accounting controls sufficient to provide reasonable
assurances that: (i) transactions are executed in accordance with management's
general or specific authorization; (ii) transactions are recorded as necessary
in order to permit preparation of financial statements in accordance with
generally accepted accounting principles and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets is compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(o) The Company will use its best efforts to maintain the
listing of the Shares on the Nasdaq SmallCap Market and will, if so qualified,
list the Shares, and maintain such listing for so long as qualified, on the
Nasdaq National Market System.
(p) The Company will, concurrently with the Effective Date,
register the class of equity securities of which the Shares are a part under
Section 12(g) of the Exchange Act and the Company will maintain such
registration for a minimum of five (5) years from the Effective Date.
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(q) Subject to the sale of the Offered Shares, the
Underwriter and its successors will have the right to designate a nominee for
election, at its or their option, either as a member of or a non-voting advisor
to the Board of Directors of the Company (which board, during such period, shall
be comprised of a minimum of five (5) persons and a majority of which, during
such period, shall be persons not otherwise affiliated with the Company, its
management or its founders), and the Company will use its best efforts to cause
such nominee to be elected and continued in office as a director of the Company
or as such advisor until the expiration of five (5) years from the Effective
Date. Each of the Company's current officers, directors and shareholders agree
to vote all of the Common Shares owned by such person or entity so as to elect
and continue in office such nominee of the Underwriter. Following the election
of such nominee as a director or advisor, such person shall receive no more or
less compensation than is paid to other non-officer directors of the Company for
attendance at meetings of the Board of Directors of the Company and shall be
entitled to receive reimbursement for all reasonable costs incurred in attending
such meetings including, but not limited to, food, lodging and transportation.
The Company agrees to indemnify and hold such director or advisor harmless, to
the maximum extent permitted by law, against any and all claims, actions, awards
and judgments arising out of his service as a director or advisor and, in the
event the Company maintains a liability insurance policy affording coverage for
the acts of its officers and directors, to include such director or advisor as
an insured under such policy. The rights and benefits of such indemnification
and the benefits of such insurance shall, to the extent possible, extend to the
Underwriter insofar as it may be or may be alleged to be responsible for such
director or advisor.
If the Underwriter does not exercise its option to
designate a member of or advisor to the Company's Board of Directors, the
Underwriter shall nonetheless have the right to send a representative (who need
not be the same individual from meeting to meeting) to observe each meeting of
the Board of Directors. The Company agrees to give the Underwriter notice of
each such meeting and to provide the Underwriter with an agenda and minutes of
the meeting no later than it gives such notice and provides such items to the
directors.
(r) The Company agrees to employ the Underwriter or a
designee of the Underwriter as a financial consultant on a non-exclusive basis
for a period of two (2) years from the Closing Date, pursuant to a separate
written consulting agreement between the Company and the Underwriter and/or such
designee (the "Consulting Agreement"), at an annual rate of Thirty Thousand
Dollars ($30,000) (exclusive of any accountable out-of-pocket expenses) payable
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in full, in advance on the Closing Date. In addition, the Consulting Agreement
shall provide that the Company will pay the Underwriter a finder's fee in the
event that the Underwriter originates a merger, acquisition, joint venture or
other transaction to which the Company is a party. The Company further agrees to
deliver a duly and validly executed copy of said Consulting Agreement, in form
and substance acceptable to the Underwriter, on the Closing Date.
(s) The Company shall retain a transfer agent for the
Common Shares, reasonably acceptable to the Underwriter, for a period of five
(5) years from the Effective Date. In addition, for a period of five (5) years
from the Effective Date, the Company, at its own expense, shall cause such
transfer agent to provide the Underwriter, if so requested in writing, with
copies of the Company's daily transfer sheets, and, when requested by the
Underwriter, a current list of the Company's securityholders, including a list
of the beneficial owners of securities held by a depository trust company and
other nominees.
(t) The Company hereby agrees, at its sole cost and
expense, to supply and deliver to the Underwriter and Underwriter's Counsel,
within a reasonable period from the date hereof, four bound volumes, including
the Registration Statement, as amended or supplemented, all exhibits to the
Registration Statement, the Prospectus and all other underwriting documents.
(u) The Company shall, as of the date hereof, have applied
for listing in Standard & Poor's Corporation Records Service (including annual
report information) or Moody's Industrial Manual (Moody's OTC Industrial Manual
not being sufficient for these purposes) and shall use its best efforts to have
the Company listed in such manual and shall maintain such listing for a period
of five (5) years from the Effective Date.
(v) For a period of five (5) years from the Effective Date,
the Company shall provide the Underwriter, on a not less than annual basis, with
internal forecasts setting forth projected results of operations for each
quarterly and annual period in the two (2) fiscal years following the respective
dates of such forecasts. Such forecasts shall be provided to the Underwriter
more frequently than annually if prepared more frequently by management, and
revised forecasts shall be prepared and provided to the Underwriter when
required to reflect more current information, revised assumptions or actual
results that differ materially from those set forth in the forecasts.
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(w) For a period of five (5) years from the Effective Date,
or until such earlier time as the Common Shares are listed on the New York Stock
Exchange or the American Stock Exchange, the Company shall cause its legal
counsel to provide the Underwriter with a list, to be updated at least annually,
of those states in which the Common Shares may be traded in non-issuer
transactions under the Blue Sky laws of the 50 states.
(x) For a period of three (3) years from the Effective
Date, the Company shall continue to retain Ernst & Young LLP (or such other
nationally recognized accounting firm acceptable to the Underwriter) as the
Company's independent public accountants.
(y) For a period of five (5) years from the Effective Date,
the Company, at its expense, shall cause its then independent certified public
accountants, as described in Section 5(x) above, to review (but not audit) the
Company's financial statements for each of the first three fiscal quarters prior
to the announcement of quarterly financial information, the filing of the
Company's 10-Q (or 10-QSB) quarterly report (or other equivalent report) and the
mailing of quarterly financial information to stockholders.
(z) For a period of twenty-five (25) days from the
Effective Date, the Company will not issue press releases or engage in any other
publicity without the Underwriter's prior written consent, other than normal and
customary releases issued in the ordinary course of the Company's business or
those releases required by law.
(aa) The Company will not increase or authorize an increase
in the compensation of its five (5) most highly paid employees greater than
those increases provided for in their employment agreements with the Company in
effect as of the effective date and disclosed in the Registration Statement,
without the prior written consent of the Underwriter, for a period of three (3)
years from the Effective Date.
(ab) For a period of three (3) years from the Effective
Date, the Company will promptly submit to the Underwriter copies of accountant's
management reports and similar correspondence between the Company's accountants
and the Company.
(ac) For a period of three (3) years from the Effective
Date, the Company will not offer or sell any of its securities (i) pursuant to
Regulation S promulgated under the Act or (ii) at a discount to market or in a
discounted transaction, without the prior written consent of the Underwriter.
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(ad) For a period of three (3) years from the Effective
Date, the Company will provide to the Underwriter ten day's written notice prior
to any issuance by the Company or its subsidiaries of any equity securities or
securities exchangeable for or convertible into equity securities of the
Company, except for (i) Common Shares issuable upon exercise of currently
outstanding options and warrants or conversion of currently outstanding
convertible securities and (ii) options available for future grant pursuant to
any stock option plan in effect on the Effective Date and the issuance of shares
of Common Shares upon the exercise of such options.
(ae) Prior to the Effective Date and for a period of three
(3) years thereafter, the Company will retain a financial public relations firm
reasonably acceptable to the Underwriter.
(af) For a period of five (5) years from the Effective
Date, the Company will cause its Board of Directors to meet, either in person or
telephonically, a minimum of four (4) times per year and will hold a
shareholder's meeting at least once per annum.
(ag) Prior to the Effective Date, the Company shall have
obtained Director's and Officer's insurance naming the Underwriter as an
additional insured party, in an amount equal to twenty-five percent (25%) of the
gross proceeds of the offering, and the Company will maintain such insurance for
a period of at least three (3) years from the Closing Date.
6. Conditions of the Underwriter's Obligation to Purchase the
Offered Shares from the Company. The obligation of the Underwriter to purchase
and pay for the Offered Shares which it has agreed to purchase from the Company
is subject (as of the date hereof and the Closing Date) to the accuracy of and
compliance in all material respects with the representations and warranties of
the Company herein, to the accuracy of the statements of the Company or its
officers made pursuant hereto, to the performance in all material respects by
the Company of its obligations hereunder, and to the following additional
conditions:
(a) The Registration Statement will have become effective
not later than __.M., New York City time, on the day following the date of this
Agreement, or at such later time or on such later date as the Underwriter may
agree to in writing; prior to the Closing Date, no stop order suspending the
effectiveness of the Registration Statement will have been issued and no
proceedings for that purpose will have been initiated or will be pending or, to
the best of the Underwriter's or the Company's knowledge, will be contemplated
by the Commission; and any request on the part of the Commission for additional
information will have been complied with to the satisfaction of Underwriter's
Counsel.
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(b) At the time that this Agreement is executed and at the
Closing Date, there will have been delivered to the Underwriter a signed opinion
of Hartman & Craven LLP, counsel for the Company ("Company Counsel"), dated as
of the date hereof or the Closing Date, as the case may be (and any other
opinions of counsel referred to in such opinion of Company Counsel or relied
upon by Company Counsel in rendering their opinion), reasonably satisfactory to
Underwriter's Counsel, to the effect that:
(i) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
with full power and authority, corporate and other, and with all Permits
necessary to own or lease, as the case may be, and operate its properties,
whether tangible or intangible, and to conduct its business as described in the
Registration Statement. To the best of Company Counsel's knowledge, the Company
has no subsidiaries, other than the Subsidiary, a corporation duly organized,
validly existing and in good standing in the State of New York. To the best of
Company Counsel's knowledge, the Company owns all of the capital stock of the
Subsidiary, free and clear of all liens, security interests and other
encumbrances of any nature whatsoever, except as set forth in the Registration
Statement. To the best of Company Counsel's knowledge, other than the
Subsidiary, the Company has no equity interests in any other entity. Unless the
context otherwise requires, all references to the "Company" shall include the
Subsidiary. The Company and the Subsidiary are duly qualified to do business as
foreign corporations and are in good standing in all jurisdictions wherein such
qualification is necessary and failure so to qualify could have a material
adverse effect on the financial condition, results of operations, business or
properties of the Company. The Subsidiary has full corporate power and
authority, with all Permits, to own or lease, as the case may be, and operate
its properties, whether tangible or intangible, and to conduct its business as
described in the Registration Statement.
(ii) The Company has full power and authority,
corporate and other, to execute, deliver and perform this Agreement, the
Consulting Agreement and the Underwriter's Warrant Agreement and to consummate
the transactions contemplated hereby and thereby. The execution, delivery and
performance of this Agreement, the Consulting Agreement and the Underwriter's
Warrant Agreement by the Company, the consummation by the Company of the
transactions herein and therein contemplated and the compliance by the Company
with the terms of this Agreement, the Consulting Agreement and the Underwriter's
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Warrant Agreement have been duly authorized by all necessary corporate action,
and this Agreement has been duly executed and delivered by the Company. This
Agreement is (assuming for the purposes of this opinion that it is valid and
binding upon the other party thereto) and, when executed and delivered by the
Company on the Closing Date, each of the Consulting Agreement and the
Underwriter's Warrant Agreement will be, valid and binding obligations of the
Company, enforceable in accordance with their respective terms, subject, as to
enforcement of remedies, to applicable bankruptcy, insolvency, reorganization,
moratorium and other laws affecting the rights of creditors generally and the
discretion of courts in granting equitable remedies and except that
enforceability of the indemnification provisions set forth in Section 7 hereof
and the contribution provisions set forth in Section 8 hereof may be limited by
the federal securities laws or public policy underlying such laws.
(iii) The execution, delivery and performance of this
Agreement, the Consulting Agreement and the Underwriter's Warrant Agreement by
the Company, the consummation by the Company of the transactions herein and
therein contemplated and the compliance by the Company with the terms of this
Agreement, the Consulting Agreement and the Underwriter's Warrant Agreement do
not, and will not, with or without the giving of notice or the lapse of time, or
both, (A) result in a violation of the Certificate of Incorporation or By-Laws,
each as amended, of the Company or the Subsidiary, (B) result in a breach of or
conflict with any terms or provisions of, or constitute a default under, or
result in the modification or termination of, or result in the creation or
imposition of any lien, security interest, charge or encumbrance upon any of the
properties or assets of the Company or the Subsidiary pursuant to any indenture,
mortgage, note, contract, commitment or other material agreement or instrument
to which the Company or the Subsidiary is a party or by which the Company or the
Subsidiary or any of the Company's or the Subsidiary's properties or assets are
or may be bound or affected; (C) violate any existing applicable law, rule,
regulation, judgment, order or decree of any governmental agency or court,
domestic or foreign, or self regulatory organization, including, without
limitation, the NASD, NYSE and AMEX, having jurisdiction over the Company or the
Subsidiary or any of the Company's or the Subsidiary's properties or business;
or (D) have any effect on any Permit necessary for the Company or the Subsidiary
to own or lease, as the case may be, and operate their respective properties or
conduct their businesses or the ability of the Company or the Subsidiary to make
use thereof.
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(iv) To the best of Company Counsel's knowledge, no
Permits of any court or governmental agency or body (other than under the Act,
the Regulations and applicable state securities or Blue Sky laws) are required
for the valid authorization, issuance, sale and delivery of the Shares or the
Underwriter's Warrants to the Underwriter, and the consummation by the Company
of the transactions contemplated by this Agreement, the Consulting Agreement or
the Underwriter's Warrant Agreement.
(v) The Registration Statement has become effective
under the Act; to the best of Company Counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been issued, and
no proceedings for that purpose have been instituted or are pending, threatened
or contemplated under the Act or applicable state securities laws.
(vi) The Registration Statement and the Prospectus, as
of the Effective Date, and each amendment or supplement thereto as of its
effective or issue date (except for the financial statements and other financial
data included therein or omitted therefrom, as to which Company Counsel need not
express an opinion) comply as to form in all material respects with the
requirements of the Act and Regulations and the conditions for use of a
registration statement on Form SB-2 have been satisfied by the Company.
(vii) The descriptions in the Registration Statement
and the Prospectus of statutes, regulations, government classifications,
contracts and other documents (including opinions of such counsel); and the
response to Item 13 of Form SB-2 have been reviewed by Company Counsel, and,
based upon such review, are accurate in all material respects and present fairly
the information required to be disclosed, and there are no material statutes,
regulations or government classifications, or, to the best of Company Counsel's
knowledge, material contracts or documents, of a character required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement, which are not so described or filed as
required.
None of the material provisions of the contracts or
instruments described above violates any existing applicable law, rule,
regulation, judgment, order or decree of any governmental agency or court,
domestic or foreign, or self regulatory organization, including, without
limitation, the NASD, NYSE and AMEX, having jurisdiction over the Company or the
Subsidiary or any of their assets or businesses, including, without limitation,
those promulgated by the Commission and comparable state and local regulatory
authorities.
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(viii) The outstanding Common Shares and outstanding
options and warrants to purchase Common Shares have been duly authorized and
validly issued. The outstanding Common Shares are fully paid and nonassessable.
The outstanding options and warrants to purchase Common Shares constitute the
valid and binding obligations of the Company, enforceable in accordance with
their terms. None of the outstanding Common Shares or options or warrants to
purchase Common Shares has been issued in violation of the preemptive rights of
any shareholder of the Company. None of the holders of the outstanding Common
Shares is subject to personal liability solely by reason of being such a holder.
The offers and sales of the outstanding Common Shares and outstanding options
and warrants to purchase Common Shares were at all relevant times either
registered under the Act and the applicable state securities or Blue Sky laws or
exempt from such registration requirements. The authorized Common Shares and
outstanding options and warrants to purchase Common Shares conform to the
descriptions thereof contained in the Registration Statement and Prospectus. To
the best of Company Counsel's knowledge, except as set forth in the Prospectus,
no holders of any of the Company's securities has any rights, "demand",
"piggyback" or otherwise, to have such securities registered under the Act.
(ix) The issuance and sale of the Shares have been duly
authorized and, when the Shares have been issued and duly delivered against
payment therefor as contemplated by this Agreement, the Shares will be validly
issued, fully paid and nonassessable, and the holders thereof will not be
subject to personal liability solely by reason of being such holders. The Shares
are not subject to preemptive rights of any shareholder of the Company. The
certificates representing the Shares are in proper legal form.
(x) The issuance and sale of the Common Shares issuable
upon exercise of the Underwriter's Warrants have been duly authorized and, when
such Common Shares have been duly delivered against payment therefor, as
contemplated by the Underwriter's Warrant Agreement, such Common Shares will be
validly issued, fully paid and nonassessable. Holders of Common Shares issuable
upon exercise of the Underwriter's Warrants will not be subject to personal
liability solely by reason of being such holders. Neither the Underwriter's
Warrants nor the Common Shares issuable upon exercise thereof will be subject to
preemptive rights of any shareholder of the Company. The Company has reserved a
sufficient number of Common Shares from its authorized, but unissued Common
Shares for issuance upon exercise of the Underwriter's Warrants in accordance
with the provisions of the Underwriter's Warrant Agreement. The Underwriter's
Warrants conform to the descriptions thereof in the Registration Statement and
Prospectus.
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(xi) Upon delivery of the Offered Shares to the
Underwriter against payment therefor as provided in this Agreement, the
Underwriter (assuming it is a bona fide purchaser within the meaning of the
Uniform Commercial Code) will acquire good title to the Offered Shares, free and
clear of all liens, encumbrances, equities, security interests and claims.
(xii) Assuming that the Underwriter exercises the
over-allotment option to purchase any of the Optional Shares and makes payment
therefor in accordance with the terms of this Agreement, upon delivery of the
Optional Shares to the Underwriter hereunder, the Underwriter (assuming it is a
bona fide purchaser within the meaning of the Uniform Commercial Code) will
acquire good title to such Optional Shares, free and clear of any liens,
encumbrances, equities, security interests and claims.
(xiii) To the best of Company Counsel's knowledge,
there are no claims, actions, suits, proceedings, arbitrations, investigations
or inquiries before any governmental agency, court or tribunal, foreign or
domestic, or before any private arbitration tribunal, pending or threatened
against the Company or the Subsidiary, or involving the Company's or the
Subsidiary's properties or businesses, other than as described in the
Prospectus, such description being accurate, and other than litigation incident
to the kind of business conducted by the Company which, individually and in the
aggregate, is not material.
(xiv) The Company and the Subsidiary each owns or
possesses adequate and enforceable rights to use all patents, patent
applications, trademarks, service marks, copyrights, rights, trade secrets,
confidential information, processes and formulations used or proposed to be used
in the conduct of its business as described in the Prospectus (collectively the
"Intangibles"); to the best of Company Counsel's knowledge, neither the Company
nor the Subsidiary has infringed nor is infringing with the rights of others
with respect to the Intangibles; and, to the best of Company Counsel's
knowledge, neither the Company nor the Subsidiary has received any notice that
it has or may have infringed, is infringing upon or is conflicting with the
asserted rights of others with respect to the Intangibles which might, singly or
in the aggregate, materially adversely affect its business, results of
operations or financial condition and such counsel is not aware of any licenses
with respect to the Intangibles which are required to be obtained by the
Company. The opinions described in this Section 6(b)(xiv) may be given by
Company Counsel in reliance on the opinion of an attorney, reasonably acceptable
to Underwriter's Counsel, practicing in the patent area.
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Company Counsel has participated in reviews and
discussions in connection with the preparation of the Registration Statement and
the Prospectus, and in the course of such reviews and discussions and such other
investigation as Company Counsel deemed necessary, no facts came to its
attention which lead it to believe that (A) the Registration Statement (except
as to the financial statements and other financial data contained therein, as to
which Company Counsel need not express an opinion), on the Effective Date,
contained any untrue statement of a material fact required to be stated therein
or omitted to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading, or that (B) the Prospectus (except as to the
financial statements and other financial data contained therein, as to which
Company Counsel need not express an opinion) contains any untrue statement of a
material fact or omits to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. Each counsel giving an opinion must give the opinion set
forth in this Section 6(b)(xv) as to such subject matter of its opinion.
In rendering its opinion pursuant to this Section 6(b),
Company Counsel may rely upon the certificates of government officials and
officers of the Company as to matters of fact, provided that Company Counsel
shall state that they have no reason to believe, and do not believe, that they
are not justified in relying upon such opinions or such certificates of
government officials and officers of the Company as to matters of fact, as the
case may be.
The opinion letter delivered pursuant to this Section
6(b) shall state that any opinion given therein qualified by the phrase "to the
best of our knowledge" is being given by Company Counsel after due investigation
of the matters therein discussed.
(c) At the Closing Date, there will have been
delivered to the Underwriter a signed opinion of Underwriter's Counsel, dated as
of the Closing Date, to the effect that the opinions delivered pursuant to
Section 6(b) hereof appear on their face to be appropriately responsive to the
requirements of this Agreement, except to the extent waived by the Underwriter,
specifying the same, and with respect to such related matters as the Underwriter
may require.
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(d) At the Closing Date (i) the Registration Statement and
the Prospectus and any amendments or supplements thereto will contain all
material statements which are required to be stated therein in accordance with
the Act and the Regulations and will conform in all material respects to the
requirements of the Act and the Regulations, and neither the Registration
Statement nor the Prospectus nor any amendment or supplement thereto will
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading; (ii)
since the respective dates as of which information is given in the Registration
Statement and the Prospectus, there will not have been any material adverse
change in the financial condition, results of operations or general affairs of
the Company from that set forth or contemplated in the Registration Statement
and the Prospectus, except changes which the Registration Statement and the
Prospectus indicate might occur after the Effective Date; (iii) since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, there shall have been no material transaction, contract or
agreement entered into by the Company, other than in the ordinary course of
business, which would be required to be set forth in the Registration Statement
and the Prospectus, other than as set forth therein; and (iv) no action, suit or
proceeding at law or in equity will be pending or, to the best of the Company's
knowledge, threatened against the Company which is required to be set forth in
the Registration Statement and the Prospectus, other than as set forth therein,
and no proceedings will be pending or, to the best of the Company's knowledge,
threatened against the Company before or by any federal, state or other
commission, board or administrative agency wherein an unfavorable decision,
ruling or finding would materially adversely affect the business, property,
financial condition or results of operations of the Company, other than as set
forth in the Registration Statement and the Prospectus. At the Closing Date,
there will be delivered to the Underwriter a certificate signed by the Chairman
of the Board or the President or a Vice President of the Company, dated the
Closing Date, evidencing compliance with the provisions of this Section 6(d) and
stating that the representations and warranties of the Company set forth in
Section 4 hereof were accurate and complete in all material respects when made
on the date hereof and are accurate and complete in all material respects on the
Closing Date as if then made; that the Company has performed all covenants and
complied with all conditions required by this Agreement to be performed or
complied with by the Company prior to or as of the Closing Date; and that, as of
the Closing Date, no stop order suspending the effectiveness of the Registration
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Statement has been issued and no proceedings for that purpose have been
initiated or, to the best of his knowledge, are contemplated or threatened. In
addition, the Underwriter will have received such other and further certificates
of officers of the Company as the Underwriter or Underwriter's Counsel may
reasonably request.
(e) At the time that this Agreement is executed and at the
Closing Date, the Underwriter will have received a signed letter from Ernst &
Young, LLP, dated the date such letter is to be received by the Underwriter and
addressed to it, confirming that it is a firm of independent public accountants
within the meaning of the Act and Regulations and stating that: (i) insofar as
reported on by them, in their opinion, the financial statements of the Company
included in the Prospectus comply as to form in all material respects with the
applicable accounting requirements of the Act and the applicable Regulations;
(ii) on the basis of procedures and inquiries (not constituting an examination
in accordance with generally accepted auditing standards) consisting of a
reading of the unaudited interim financial statements of the Company, if any,
appearing in the Registration Statement and the Prospectus and the latest
available unaudited interim financial statements of the Company, if more recent
than that appearing in the Registration Statement and Prospectus, inquiries of
officers of the Company responsible for financial and accounting matters as to
the transactions and events subsequent to the date of the latest audited
financial statements of the Company, and a reading of the minutes of meetings of
the stockholders, the Board of Directors of the Company and any committees of
the Board of Directors, as set forth in the minute books of the Company, nothing
has come to their attention which, in their judgment, would indicate that (A)
during the period from the date of the latest financial statements of the
Company appearing in the Registration Statement and Prospectus to a specified
date not more than three business days prior to the date of such letter, there
have been any decreases in net current assets or net assets as compared with
amounts shown in such financial statements or decreases in net sales or
decreases [increases] in total or per share net income [loss] compared with the
corresponding period in the preceding year or any change in the capitalization
or long-term debt of the Company, except in all cases as set forth in or
contemplated by the Registration Statement and the Prospectus, and (B) the
unaudited interim financial statements of the Company, if any, appearing in the
Registration Statement and the Prospectus, do not comply as to form in all
material respects with the applicable accounting requirements of the Act and the
Regulations or are not fairly presented in conformity with generally accepted
accounting principles and practices on a basis substantially consistent with the
audited financial statements included in the Registration Statement or the
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Prospectus; and (iii) they have compared specific dollar amounts, numbers of
shares, numerical data, percentages of revenues and earnings, and other
financial information pertaining to the Company set forth in the Prospectus
(with respect to all dollar amounts, numbers of shares, percentages and other
financial information contained in the Prospectus, to the extent that such
amounts, numbers, percentages and information may be derived from the general
accounting records of the Company, and excluding any questions requiring an
interpretation by legal counsel) with the results obtained from the application
of specified readings, inquiries and other appropriate procedures (which
procedures do not constitute an examination in accordance with generally
accepted auditing standards) set forth in the letter, and found them to be in
agreement.
(f) There shall have been duly tendered to the Underwriter
certificates representing the Offered Shares to be sold on the Closing Date.
(g) The NASD shall have indicated that it has no objection
to the underwriting arrangements pertaining to the sale of the Shares by the
Underwriter.
(h) No action shall have been taken by the Commission or
the NASD the effect of which would make it improper, at any time prior to the
Closing Date or the Option Closing Date, as the case may be, for any member firm
of the NASD to execute transactions (as principal or as agent) in the Shares,
and no proceedings for the purpose of taking such action shall have been
instituted or shall be pending, or, to the best of the Underwriter's or the
Company's knowledge, shall be contemplated by the Commission or the NASD. The
Company represents at the date hereof, and shall represent as of the Closing
Date or Option Closing Date, as the case may be, that it has no knowledge that
any such action is in fact contemplated by the Commission or the NASD.
(i) The Company meets the current and any existing and
proposed criteria for inclusion of the Shares on Nasdaq SmallCap Market.
(j) All proceedings taken at or prior to the Closing Date
or the Option Closing Date, as the case may be, in connection with the
authorization, issuance and sale of the Shares shall be reasonably satisfactory
in form and substance to the Underwriter and to Underwriter's Counsel, and such
counsel shall have been furnished with all such documents, certificates and
opinions as they may request for the purpose of enabling them to pass upon the
matters referred to in Section 6(c) hereof and in order to evidence the accuracy
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and completeness of any of the representations, warranties or statements of the
Company, the performance of any covenants of the Company, or the compliance by
the Company with any of the conditions herein contained.
(k) As of the date hereof, the Company will have delivered
to the Underwriter the written undertakings of its officers, directors and
securityholders and/or registration rights holders, as the case may be, to the
effect of the matters set forth in Sections 5(l) and (q).
If any of the conditions specified in this Section 6 have
not been fulfilled, this Agreement may be terminated by the Underwriter on
notice to the Company.
7. Indemnification.
(a) The Company agrees to indemnify and hold
harmless the Underwriter, each officer, director, partner, employee and agent of
the Underwriter, and each person, if any, who controls the Underwriter within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, from
and against any and all losses, claims, damages, expenses or liabilities, joint
or several (and actions in respect thereof), to which they or any of them may
become subject under the Act or under any other statute or at common law or
otherwise, and, except as hereinafter provided, will reimburse the Underwriter
and each such person, if any, for any legal or other expenses reasonably
incurred by them or any of them in connection with investigating or defending
any actions, whether or not resulting in any liability, insofar as such losses,
claims, damages, expenses, liabilities or actions arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained
(i) in the Registration Statement, in any Preliminary Prospectus or in the
Prospectus (or the Registration Statement or Prospectus as from time to time
amended or supplemented) or (ii) in any application or other document executed
by the Company, or based upon written information furnished by or on behalf of
the Company, filed in any jurisdiction in order to qualify the Shares under the
securities laws thereof (hereinafter "application"), or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading, in light of the circumstances under which they were
made, unless such untrue statement or omission was made in such Registration
Statement, Preliminary Prospectus, Prospectus or application in reliance upon
and in conformity with information furnished in writing to the Company in
connection therewith by the Underwriter or any such person through the
Underwriter expressly for use therein; provided, however, that the indemnity
agreement contained in this Section 7(a) with respect to any Preliminary
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<PAGE>
Prospectus will not inure to the benefit of the Underwriter (or to the benefit
of any other person that may be indemnified pursuant to this Section 7(a)) if
(A) the person asserting any such losses, claims, damages, expenses or
liabilities purchased the Shares which are the subject thereof from the
Underwriter or other indemnified person; (B) the Underwriter or other
indemnified person failed to send or give a copy of the Prospectus to such
person at or prior to the written confirmation of the sale of such Shares to
such person; and (C) the Prospectus did not contain any untrue statement or
alleged untrue statement or omission or alleged omission giving rise to such
cause, claim, damage, expense or liability.
(b) The Underwriter agrees to indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, from and against any and all losses, claims, damages, expenses or
liabilities, joint or several (and actions in respect thereof), to which they or
any of them may become subject under the Act or under any other statute or at
common law or otherwise, and, except as hereinafter provided, will reimburse the
Company and each such director, officer or controlling person for any legal or
other expenses reasonably incurred by them or any of them in connection with
investigating or defending any actions, whether or not resulting in any
liability, insofar as such losses, claims, damages, expenses, liabilities or
actions arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained (i) in the Registration Statement, in any
Preliminary Prospectus or in the Prospectus (or the Registration Statement or
Prospectus as from time to time amended or supplemented) or (ii) in any
application (including any application for registration of the Shares under
state securities or Blue Sky laws), or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary in order to make the statements therein not
misleading, in light of the circumstances under which they were made, but only
insofar as any such statement or omission was made in reliance upon and in
conformity with information furnished in writing to the Company in connection
therewith by the Underwriter expressly for use therein.
(c) Promptly after receipt of notice of the
commencement of any action in respect of which indemnity may be sought against
any indemnifying party under this Section 7, the indemnified party will notify
the indemnifying party in writing of the commencement thereof, and the
indemnifying party will, subject to the provisions hereinafter stated, assume
the defense of such action (including the employment of counsel satisfactory
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<PAGE>
to the indemnified party and the payment of expenses) insofar as such action
relates to an alleged liability in respect of which indemnity may be sought
against the indemnifying party. After notice from the indemnifying party of its
election to assume the defense of such claim or action, the indemnifying party
shall no longer be liable to the indemnified party under this Section 7 for any
legal or other expenses subsequently incurred by the indemnified party in
connection with the defense thereof other than reasonable costs of
investigation; provided, however, that if, in the reasonable judgment of the
indemnified party or parties, it is advisable for the indemnified party or
parties to be represented by separate counsel, the indemnified party or parties
shall have the right to employ a single counsel to represent the indemnified
parties who may be subject to liability arising out of any claim in respect of
which indemnity may be sought by the indemnified parties thereof against the
indemnifying party, in which event the fees and expenses of such separate
counsel shall be borne by the indemnifying party. Any party against whom
indemnification may be sought under this Section 7 shall not be liable to
indemnify any person that might otherwise be indemnified pursuant hereto for any
settlement of any action effected without such indemnifying party's consent,
which consent shall not be unreasonably withheld.
8. Contribution. To provide for just and equitable
contribution, if (i) an indemnified party makes a claim for indemnification
pursuant to Section 7 hereof (subject to the limitations thereof) and it is
finally determined, by a judgment, order or decree not subject to further
appeal, that such claim for indemnification may not be enforced, even though
this Agreement expressly provides for indemnification in such case; or (ii) any
indemnified or indemnifying party seeks contribution under the Act, the Exchange
Act, or otherwise, then the Company (including, for this purpose, any
contribution made by or on behalf of any director of the Company, any officer of
the Company who signed the Registration Statement and any controlling person of
the Company) as one entity and the Underwriter (including, for this purpose, any
contribution by or on behalf of each person, if any, who controls the
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act and each officer, director, partner, employee and agent of the
Underwriter) as a second entity, shall contribute to the losses, liabilities,
claims, damages and expenses whatsoever to which any of them may be subject, so
that the Underwriter is responsible for the proportion thereof equal to the
percentage which the underwriting discount per Share set forth on the cover page
of the Prospectus represents of the initial public offering price per Share set
forth on the cover page of the Prospectus and the Company is responsible for the
remaining portion; provided, however, that if applicable law does not permit
such allocation,
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<PAGE>
then, if applicable law permits, other relevant equitable considerations such as
the relative fault of the Company and the Underwriter in connection with the
facts which resulted in such losses, liabilities, claims, damages and expenses
shall also be considered. The relative fault, in the case of an untrue
statement, alleged untrue statement, omission or alleged omission, shall be
determined by, among other things, whether such statement, alleged statement,
omission or alleged omission relates to information supplied by the Company or
by the Underwriter, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement, alleged
statement, omission or alleged omission. The Company and the Underwriter agree
that it would be unjust and inequitable if the respective obligations of the
Company and the Underwriter for contribution were determined by pro rata or per
capita allocation of the aggregate losses, liabilities, claims, damages and
expenses or by any other method of allocation that does not reflect the
equitable considerations referred to in this Section 8. No person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
will be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. For purposes of this Section 8, each person, if
any, who controls the Underwriter within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act and each officer, director, partner, employee
and agent of the Underwriter will have the same rights to contribution as the
Underwriter, and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each
officer of the Company who has signed the Registration Statement and each
director of the Company will have the same rights to contribution as the
Company, subject in each case to the provisions of this Section 8. Anything in
this Section 8 to the contrary notwithstanding, no party will be liable for
contribution with respect to the settlement of any claim or action effected
without its written consent. This Section 8 is intended to supersede, to the
extent permitted by law, any right to contribution under the Act or the Exchange
Act or otherwise available.
9. Survival of Indemnities, Contribution, Warranties and
Representations. The respective indemnity and contribution agreements of the
Company and the Underwriter contained in Sections 7 and 8 hereof, and the
representations and warranties of the Company contained herein shall remain
operative and in full force and effect, regardless of any termination or
cancellation of this Agreement or any investigation made by or on behalf of the
Underwriter, the Company or any of its directors and officers, or any
controlling person referred to in said Sections, and shall survive the delivery
of, and payment for, the Shares.
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<PAGE>
10. Termination of Agreement.
(a) The Company, by written or telegraphic notice
to the Underwriter, or the Underwriter, by written or telegraphic notice to the
Company, may terminate this Agreement prior to the earlier of (i) 11:00 A.M.,
New York City time, on the first full business day after the Effective Date; or
(ii) the time when the Underwriter, after the Registration Statement becomes
effective, releases the Offered Shares for public offering. The time when the
Underwriter "releases the Offered Shares for public offering" for the purposes
of this Section 10 means the time when the Underwriter releases for publication
the first newspaper advertisement, which is subsequently published, relating to
the Offered Shares, or the time when the Underwriter releases for delivery to
members of a selling group copies of the Prospectus and an offering letter or an
offering telegram relating to the Offered Shares, whichever will first occur.
(b) This Agreement, including without limitation,
the obligation to purchase the Shares and the obligation to purchase the
Optional Shares after exercise of the option referred to in Section 3 hereof,
are subject to termination in the absolute discretion of the Underwriter, by
notice given to the Company prior to delivery of and payment for all the Offered
Shares or such Optional Shares, as the case may be, if, prior to such time, any
of the following shall have occurred: (i) the Company withdraws the Registration
Statement from the Commission or the Company does not or cannot expeditiously
proceed with the public offering; (ii) the representations and warranties in
Section 4 hereof are not materially correct or cannot be complied with; (iii)
trading in securities generally on the New York Stock Exchange or the American
Stock Exchange will have been suspended; (iv) limited or minimum prices will
have been established on either such Exchange; (v) a banking moratorium will
have been declared either by federal or New York State authorities; (vi) any
other restrictions on transactions in securities materially affecting the free
market for securities or the payment for such securities, including the Offered
Shares or the Optional Shares, will be established by either of such Exchanges,
by the Commission, by any other federal or state agency, by action of the
Congress or by Executive Order; (vii) trading in any securities of the Company
shall have been suspended or halted by any national securities exchange, the
NASD or the Commission; (viii) there has been a materially adverse change in the
condition (financial or otherwise), prospects or obligations of the Company;
(ix) the Company will have sustained a material loss, whether or not insured, by
reason of fire, flood, accident or other calamity; (x) any action has been taken
by the government of the United States or any department or agency thereof
which, in the judgment of the Underwriter, has had a material adverse effect
upon the market or potential market for securities in general; or (xi) the
market for securities in general or political, financial or economic conditions
will have
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<PAGE>
so materially adversely changed that, in the judgment of the Underwriter, it
will be impracticable to offer for sale, or to enforce contracts made by the
Underwriter for the resale of, the Offered Shares or the Optional Shares, as the
case may be.
(c) If this Agreement is terminated pursuant to
Section 6 hereof or this Section 10 or if the purchases provided for herein are
not consummated because any condition of the Underwriter's obligations hereunder
is not satisfied or because of any refusal, inability or failure on the part of
the Company to comply with any of the terms or to fulfill any of the conditions
of this Agreement, or if for any reason the Company shall be unable to or does
not perform all of its obligations under this Agreement, the Company will not be
liable to the Underwriter for damages on account of loss of anticipated profits
arising out of the transactions covered by this Agreement, but the Company will
remain liable to the extent provided in Sections 5(j), 7, 8 and 9 of this
Agreement.
11. Information Furnished by the Underwriter to the Company.
It is hereby acknowledged and agreed by the parties hereto that for the purposes
of this Agreement, including, without limitation, Sections 4(f), 7(a), 7(b) and
8 hereof, the only information given by the Underwriter to the Company for use
in the Prospectus are the statements set forth in the last sentence of the last
paragraph on the cover page, the statement appearing in the last paragraph on
page __ with respect to stabilizing the market price of Shares, the information
in the __ paragraph on page __ with respect to concessions and reallowances, and
the information in the ___ paragraph on page ___ with respect to the
determination of the public offering price, as such information appears in any
Preliminary Prospectus and in the Prospectus.
12. Notices and Governing Law. All communications hereunder
will be in writing and, except as otherwise provided, will be delivered at, or
mailed by certified mail, return receipt requested, or telegraphed to, the
following addresses: if to the Underwriter, to Whale Securities Co., L.P.,
Attention: William G. Walters, 650 Fifth Avenue, New York, New York 10019, with
a copy to Tenzer Greenblatt LLP, Attention: Robert J. Mittman, Esq., 405
Lexington Avenue, New York, New York 10174; if to the Company, addressed to it
at Internet Financial Services Inc., 33 West 17th Street, New York, New York
10011, Attention: Steven Malin, with a copy to Hartman & Craven LLP, Attention:
Edward I. Tishelman, Esq., 460 Park Avenue, New York, New York 10022.
This Agreement shall be deemed to have been made
and delivered in New York City and shall be governed as to validity,
interpretation, construction, effect and in all other respects by the internal
laws of the State of New York. The Company (1) agrees that any legal suit,
action or proceeding arising out of or relating to this Agreement shall be
instituted
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<PAGE>
exclusively in New York State Supreme Court, County of New York, or in the
United States District Court for the Southern District of New York, (2) waives
any objection which the Company may have now or hereafter to the venue of any
such suit, action or proceeding, and (3) irrevocably consents to the
jurisdiction of the New York State Supreme Court, County of New York, and the
United States District Court for the Southern District of New York in any such
suit, action or proceeding. The Company further agrees to accept and acknowledge
service of any and all process which may be served in any such suit, action or
proceeding in the New York State Supreme Court, County of New York, or in the
United States District Court for the Southern District of New York and agrees
that service of process upon the Company mailed by certified mail to the
Company's address shall be deemed in every respect effective service of process
upon the Company, in any such suit, action or proceeding.
13. Parties in Interest. This Agreement is made solely for the
benefit of the Underwriter, the Company and, to the extent expressed, any person
controlling the Company or the Underwriter, each officer, director, partner,
employee and agent of the Underwriter, the directors of the Company, its
officers who have signed the Registration Statement, and their respective
executors, administrators, successors and assigns, and, no other person will
acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" will not include any purchaser of the Shares from the
Underwriter, as such purchaser.
If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement between the Company and the
Underwriter in accordance with its terms.
Very truly yours,
INTERNET FINANCIAL SERVICES INC.
By_______________________________
Name:
Title:
Confirmed and accepted in
New York, N.Y., as of the
date first above written:
WHALE SECURITIES CO., L.P.
By__________________________________________
Name:
Title:
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<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
OF
INTERNET FINANCIAL SERVICES INC.
It is hereby certified that:
1. The present name of the corporation (hereinafter called the
"corporation") is INTERNET FINANCIAL SERVICES INC., which is the name under
which the corporation was originally incorporated; and the date of filing the
original certificate of incorporation of the corporation with the Secretary of
State of the State of Delaware is May 15, 1996.
2. The certificate of incorporation of the corporation is hereby
amended by striking out Articles FIRST, SECOND, THIRD, FOURTH and FIFTH thereof
and by substituting in lieu thereof new Articles FIRST, SECOND, THIRD and FOURTH
which are set forth in the Restated Certificate of Incorporation hereinafter
provided for. The certificate of incorporation of the corporation is hereby
further amended by inserting new Articles FIFTH, SIXTH, SEVENTH, EIGHTH, NINTH
and TENTH which are set forth in the Restated Certificate of Incorporation
hereinafter provided for.
3. The provisions of the certificate of incorporation of the
corporation as heretofore amended and/or supplemented, and as herein amended,
are hereby restated and integrated into the single instrument which is
hereinafter set forth, and which is entitled Restated Certificate of
Incorporation of INTERNET FINANCIAL SERVICES INC. without any further amendments
other than the amendments herein certified and without any discrepancy between
the provisions of the certificate of incorporation as heretofore amended and
supplemented and the provisions of the said single instrument hereinafter set
forth.
4. The amendments and the restatement of the certificate of
incorporation herein certified have been duly adopted by the stockholders in
accordance with the provisions of Section 228, 242, and 245 of the General
Corporation Law of the State of Delaware.
5. The certificate of incorporation of the corporation, as amended and
restated herein, shall at the effective time of this Restated Certificate of
Incorporation, read as follows:
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
OF
INTERNET FINANCIAL SERVICES INC.
FIRST: The name of the corporation (hereinafter called the
"corporation") is INTERNET FINANCIAL SERVICES INC.
SECOND: The address, including street, number, city, and county, of the
registered office of the corporation in the State of Delaware is 1013 Centre
Road, Wilmington, Delaware 19805, County of New Castle; and the name of the
registered agent of the corporation in the State of Delaware at such address is
W/K Corporate Services (DEL), INC.
THIRD: The purpose of the corporation shall be to conduct any lawful
business, to promote any lawful purpose, and to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: The total number of shares of stock which the corporation shall
have authority to issue is Two Thousand Five Hundred (2,500), without par value.
All such shares are of one class and are shares of Common Stock.
FIFTH: The corporation is to have perpetual existence.
SIXTH: Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this corporation, as the case may be,
and also on this corporation.
1
<PAGE>
SEVENTH: For the management of the business and for the conduct of the
affairs of the corporation, and in further definition, limitation, and
regulation of the powers of the corporation and of its directors and of its
stockholders or any class thereof, as the case may be, it is further provided:
1. After the original or other Bylaws of the corporation have
been adopted, amended, or repealed, as the case may be, in accordance
with the provisions of Section 109 of the General Corporation Law of
the State of Delaware, and, after the corporation has received any
payment for any of its stock, the power to adopt, amend, or repeal the
Bylaws of the corporation may be exercised by the Board of Directors of
the corporation.
2. Whenever the corporation shall be authorized to issue more
than one class of stock, no outstanding share of any class of stock
which is denied voting power under the provisions of the certificate of
incorporation shall entitle the holder thereof to the right to vote at
any meeting of stockholders except as the provisions of paragraph (2)
of subsection (b) of Section 242 of the General Corporation Law of the
State of Delaware shall otherwise require; provided, that no share of
any such class which is otherwise denied voting power shall entitle the
holder thereof to vote upon the increase or decrease in the number of
authorized shares of said class.
EIGHTH: The personal liability of the directors of the corporation is
hereby eliminated to the fullest extent permitted by the provisions of paragraph
(7) of subsection (b) of Section 102 of the General Corporation Law of the State
of Delaware, as the same may be amended and supplemented.
NINTH: The corporation shall, to the fullest extent permitted by the
provisions of Section 145 of the General Corporation Law of the State of
Delaware, as the same may be amended and supplemented, indemnify any and all
persons whom it shall have power to indemnify under said section from and
against any and all of the expenses, liabilities, or other matters referred to
in or covered by said section, and the indemnification provided for herein shall
not be deemed exclusive of any other rights to which those indemnified may be
entitled under any Bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee, or agent and shall
insure to the benefit of the heirs, executors, and administrators of such a
person.
TENTH: From time to time any of the provisions of this certificate of
incorporation may be amended, altered, or repealed, and other provisions
authorized by the laws of the State of
2
<PAGE>
Delaware at the time in force may be added or inserted in the manner and at the
time prescribed by said laws, and all rights at any time conferred upon the
stockholders of the corporation by this certificate of incorporation are granted
subject to the provisions of this Article TENTH."
Signed on October 15, 1996
/s/ Steven Malin
------------------
Steven Malin
President
3
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
INTERNET FINANCIAL SERVICES INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "corporation")
is INTERNET FINANCIAL SERVICES INC.
2. The certificate of incorporation of the corporation is hereby
amended by striking out Article FOURTH thereof and by substituting in lieu of
said Article the following new Article:
"FOURTH: The total number of shares of stock which the
corporation shall have authority to issue is Ten Million ($10,000,000),
par value $.001 per share. All such shares are of one class and are
shares of Common Stock.
3. To effectuate the change in shares set forth herein, each issued and
outstanding share of common stock, without par value, shall be automatically
converted into one share of common stock, par value $.001 per share.
4. The amendment of the certificate of incorporation herein certified
have been duly adopted in accordance with the provisions of Sections 228 and 242
of the General Corporation Law of the State of Delaware.
Signed on January 20, 1997
/s/ Steven Malin
--------------------------------------
Steven E. Malin
President
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
INTERNET FINANCIAL SERVICES INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "corporation")
is INTERNET FINANCIAL SERVICES INC.
2. The certificate of incorporation of the corporation is hereby
amended by striking out Article FIRST thereof and by substituting in lieu of
said Article the following new Article:
"FIRST: The name of the corporation (hereinafter called the
"corporation") is Internet Financial Services Inc."
3. The certificate of incorporation of the corporation is hereby
further amended by striking out Article FOURTH thereof and by substituting in
lieu of said Article the following new Article:
"FOURTH: The aggregate number of shares of all classes of stock
which the corporation shall have authority to issue is twenty-one
million (21,000,000) shares, of which one million (1,000,000) shares
shall be Preferred Stock ($.01 par value), issuable in one or more
series, and twenty million (20,000,000) shares shall be Common Stock
($.001 par value).
The designation, relative rights, preferences and limitations of the
shares of each class are as follows:
(i) The shares of Preferred Stock may be issued from time to
time in one or more series of any number of shares, provided that the
aggregate number of shares issued and not cancelled of any and all such
series shall not exceed the total number of shares of Preferred Stock
hereinabove authorized, and with distinctive serial designations, all
as shall hereafter be stated and expressed in the resolution or
resolutions providing
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<PAGE>
for the issue of such shares of Preferred Stock from time to time
adopted by the Board of Directors pursuant to authority so to do which
is hereby vested in the Board of Directors. Each series of shares of
Preferred Stock (a) may have such voting powers, full or limited, or
may be without voting powers; (b) may be subject to redemption at such
time or times and at such prices; (c) may be entitled to receive
dividends (which may be cumulative or non-cumulative) at such rate or
rates, on such conditions and at such times, and payable in preference
to, or in such relation to, the dividends payable on any other class or
classes or series of stock; (d) may have such rights upon the
dissolution of, or upon any distribution of the assets of, the
corporation; (e) may be made convertible into or exchangeable for,
shares of any other class or classes or of any other series of the same
or any other class or classes of shares of the corporation at such
price or prices or at such rates of exchange and with such adjustments;
(f) may be entitled to the benefit of a sinking fund to be applied to
the purchase or redemption of shares of such series in such amount or
amounts; (g) may be entitled to the benefit of conditions and
restrictions upon the creation of indebtedness of the corporation or
any subsidiary, upon the issue of any additional shares (including
additional shares of such series or of any other series) and upon the
payment of dividends or the making of other distributions on, and the
purchase, redemption or other acquisition by the corporation or any
subsidiary of, any outstanding shares of the corporation and (h) may
have such other relative, participating, optional or other special
rights, qualifications, limitations or restrictions thereof; all as
shall be stated in said resolution or resolutions providing for the
issue of such shares of Pre ferred Stock. Shares of Preferred Stock of
any series that have been redeemed (whether through the operation of a
sinking fund or otherwise) or that if convertible or exchangeable, have
been converted into or exchanged for shares of any other class or
classes shall have the status of authorized and unissued shares of
Preferred Stock of the same series and may be reissued as a part of the
series of which they were originally a part or may be reclassified and
reissued as part of a new series of shares of Preferred Stock to be
created by resolution or resolutions of the Board of Directors or as
part of any other series of shares of Preferred Stock, all subject to
the conditions or restrictions on issuance set forth in the resolution
or resolutions adopted by the Board of Directors providing for the
issue of any series of shares of Preferred Stock.
(ii) Subject to the provisions of any applicable law or of the
By-laws of the corporation, as from time to time amended, with respect
to the closing of the transfer books or the fixing of a record date for
the determination of stockholders entitled to vote and except as
otherwise provided by law or by the resolution or resolutions providing
for the issue
2
<PAGE>
of any series of shares of Preferred Stock, the holders of outstanding
shares of Common Stock shall exclusively possess voting power for the
election of directors and for all other purposes, each holder of record
of shares of Common Stock being entitled to one vote for each share of
Common Stock standing in his or her name on the books of the
corporation. Except as otherwise provided by the resolution or
resolutions providing for the issue of any series of shares of
Preferred Stock, the holders of shares of Common Stock shall be
entitled, to the exclusion of the holders of shares of Preferred Stock
of any and all series, to receive such dividends as from time to time
may be declared by the Board of Directors. In the event of any
liquidation, dissolution or winding up of the corporation, whether
voluntary or involuntary, after payment shall have been made to the
holders of shares of Preferred Stock of the full amount to which they
shall be entitled pursuant to the resolution or resolutions providing
for the issue of any series of shares of Preferred Stock, the holders
of shares of Common Stock shall be entitled, to the exclusion of the
holders of shares of Preferred Stock of any and all series, to share,
ratably according to the number of shares of Common Stock held by them,
in all remaining assets of the corporation available for distribution
to its stockholders.
(iii) Subject to the provisions of this Certificate of
Incorporation and except as otherwise provided by law, the stock of the
corporation, regardless of class, may be issued for such consideration
and for such corporate purposes as the Board of Directors may from time
to time determine.
4. The amendments of the certificate of incorporation herein certified
have been duly adopted in accordance with the provisions of Sections 228 and 242
of the General Corporation Law of the State of Delaware.
Signed on ________ ___, 1999
-----------------------------------
Steven E. Malin
Chairman and Chief Executive Officer
3
<PAGE>
BYLAWS
OF
INTERNET FINANCIAL SERVICES INC.
(A Delaware corporation)
ARTICLE I
Meeting of Stockholders
SECTION 1. Annual Meeting. The annual meeting of the
stockholders of INTERNET FINANCIAL SERVICES INC. (hereinafter, the
"Corporation") for the election of directors and for the transaction of such
other proper business shall be held on such date and at such time as may be
fixed by the Board of Directors or, if no date and time are so fixed, on the
first Thursday in March of each year at the office of the Corporation or at such
other place and at such hour as shall be designated by the Board of Directors
or, if no such time be fixed, then at 10:00 a.m.
SECTION 2. Special Meetings. Special meetings of the
stockholders, unless otherwise prescribed by statute, may be called at any time
by the Board of Directors or by the holder or holders of more than a majority of
the outstanding shares of Common Stock entitled to vote at such meeting.
SECTION 3. Notice of Meetings. Written notice of each meeting
of the stockholders, which shall state the place, date and hour of the meeting
and the purpose or purposes for which it is called, shall be given not less than
ten nor more than sixty days before the date of such meeting to each stockholder
entitled to vote at such meeting, and if mailed, it shall be
<PAGE>
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the Corporation. Any
such notice for any meeting other than the annual meeting shall indicate that it
is being issued at the direction of the Board. Whenever notice is required to be
given, a written waiver thereof signed by the stockholder entitled thereto,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a stockholder at a meeting shall constitute a waiver of
notice of such meeting, except when the stockholder attends a meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. When a meeting is adjourned to another time or place, notice need not
be given of the adjourned meeting if the time and place thereof are announced at
the meeting at which the adjournment is taken. 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 4. Quorum. At any meeting of the stockholders, the
holders of the majority of the shares, issued and outstanding and entitled to
vote, shall be present in person or represented by proxy in order to constitute
a quorum for the transaction of any business. In the absence of a quorum, the
holders of a majority of the shares present in person or represented by proxy
and entitled to vote may adjourn the meeting from time to time. At any such
adjourned meeting at which a quorum may be present, the Corporation may transact
any business which might have been transacted at the original meeting. Shares of
its own stock belonging to the Corporation or to another corporation, if a
majority of the shares entitled to vote in the election of directors of such
other corporation is held, directly or indirectly, by the Corporation, shall
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neither be entitled to vote nor be counted for quorum purposes; provided,
however, that the foregoing shall not limit the right of the Corporation to vote
stock, including but not limited to its own stock, held by it in a fiduciary
capacity.
SECTION 5. Organization. At each meeting of the stockholders,
the President or, in his absence or inability to act, a Vice President of the
Corporation or, in his absence or inability to act, any person chosen by the
majority of those stockholders present in person or represented by proxy 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 6. Order of Business. The order of business at all
meetings of the stockholders shall be as determined by the chairman of the
meeting.
SECTION 7. Voting. Unless otherwise provided in the
Certificate of Incorporation and subject to Section 213 of the General
Corporation Law of the State of Delaware regarding fixing the date for the
determination of stockholders of record, each stockholder shall be entitled to
one vote for each share of capital stock held by such stockholder.
Each stockholder entitled to vote at a meeting of stockholders
or to express consent or dissent to corporate action in writing without a
meeting may authorize another person or persons to act for him by proxy. Any
such proxy shall be delivered to the secretary of such meeting at or prior to
the time designated in the order of business for so delivering such proxies.
Directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of directors. Except as otherwise required by statute, by
the Certificate of Incorporation, or by these Bylaws, a
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majority of the votes cast at a meeting of the stockholders shall be necessary
to authorize any other corporate action to be taken by vote of the stockholders.
Unless required by statute or determined by the chairman of the meeting to be
advisable, the vote on any question need not be by ballot. On a vote by ballot,
each ballot shall be signed by the stockholder voting, or by his proxy if there
be such proxy, and shall state the number of shares voted.
SECTION 8. List of Stockholders. The officer who has charge of
the stock ledger of the Corporation shall prepare and make, at least ten days
before every meeting of stockholders, a complete list of the stockholders,
arranged in alphabetical order, and showing the address of each stockholder and
the number of shares registered in the name of each stockholder. Such list shall
be open to the examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten days prior
to the meeting, either at a place within the city or other municipality or
community where the meeting is to be held, which place shall be specified in the
notice of the meeting, or if not so specified, at the place where the meeting is
to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present. The stock ledger shall be the only evidence as to
who are the stockholders entitled to examine the stock ledger, the list required
by this section or the books of the Corporation, or to vote at any meeting of
stockholders.
SECTION 9. Inspectors. The Board may, but need not, in advance
of any meeting of stockholders, appoint one or more inspectors of election to
act at such meeting or any adjournment thereof. If an inspector or inspectors
shall not be so appointed the chairman of the meeting may, but need not, appoint
one or more inspectors. In case any person who may be
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appointed as an inspector fails to appear or act, the vacancy may be filled by
appointment made by the Board in advance of the meeting or at the meeting by the
chairman of the meeting. Each inspector, if any, 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, if any, shall determine the number of
shares of stock outstanding and the voting power of each, the number of shares
of stock 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 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 inspector or inspectors, if any, shall make a
report in writing of any challenge, question or matter determined by him or them
and shall execute a certificate of any fact found by him or 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. Except as otherwise required by
subsection (e) of Section 231 of the General Corporation Law of the State of
Delaware, the provisions of that Section shall not apply to the Corporation.
SECTION 10. Consent of Stockholders in Lieu of Meeting. Any
action required or permitted to be taken at any annual or special meeting of
stockholders of the Corporation may be taken without a meeting, without prior
notice and without a vote, if a consent or consents 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
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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.
ARTICLE II
Board of Directors
SECTION 1. General Powers. The business and affairs of the
Corporation shall be managed by or under the direction of a Board of Directors.
The Board may exercise all such authority and powers of the Corporation and do
all such lawful acts and things as are not by statute or the Certificate of
Incorporation directed or required to be exercised or done by the stockholders.
SECTION 2. Number, Qualifications, Election and Term of
Office. The Board of Directors shall consist of at least one, but no more than
nine Directors, as determined by a majority vote of the entire Board of
Directors. Each director shall hold office until the annual meeting of
stockholders of the Corporation next succeeding his election and until his
successor is duly elected and qualified. Directors need not be stockholders. The
Board of Directors, by the vote of a majority of the entire Board, may increase
the number of Directors to a number not exceeding nine. The Board of Directors,
by the vote of a majority of the entire Board, may decrease the number of
Directors to a number not less than one but any such decrease shall not affect
the term of office of any Director. Vacancies occurring by reason of any such
increase shall be filled in accordance with Section 13 of this Article II.
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SECTION 3. Place of Meeting. The Board of Directors shall hold
its meetings at such place, within or without the State of Delaware, as it may
from time to time determine or as shall be specified in the notice of any such
meeting.
SECTION 4. Annual Meeting. The Board shall meet for the
purpose of organization, the election of officers and the transaction of other
business as soon as practicable after each annual meeting of the stockholders,
on the same day and at the same place where such annual meeting shall be held.
Notice of such meeting need not be given. Such meeting may be held at any other
time or place, within or without the State of Delaware, which shall be specified
in a notice thereof given as hereinafter provided in Section 7 of this Article
II.
SECTION 5. Regular Meetings. Regular meetings of the Board
shall be held at such time as the Board may fix. If any day fixed for a regular
meeting shall be a legal holiday at the place where the meeting is to be held,
then the meeting which would otherwise be held on that day shall be held at the
same hour on the next succeeding business day. Notice of regular meetings of the
Board need not be given except as otherwise required by statute or these Bylaws.
SECTION 6. Special Meetings. Special meetings of the Board may
be called by the President or by a majority of the entire Board.
SECTION 7. Notice of Meetings. Notice of each special meeting
of the Board (and of each regular meeting for which notice shall be required)
shall be given by the Secretary as hereinafter provided in this Section 7, in
which notice shall be stated the time and place of the meeting. Except as
otherwise required by these Bylaws, such notice need not state the purposes of
such meeting. Notice of each such meeting shall be mailed, postage prepaid, to
each director, addressed to him at his residence or usual place or business, by
first-class mail, at least five (5)
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days before the day on which such meeting is to be held, or shall be sent
addressed to him at such place by telegraph, telex, cable or wireless, or be
delivered to him personally, by facsimile or by telephone, at least 24 hours
before the time at which such meeting is to be held. A written waiver of notice,
signed by the director entitled to notice, whether before or after the time
stated therein, shall be deemed equivalent to notice. Attendance by a director
at a meeting shall constitute a waiver of notice of such meeting, except when
the director attends a meeting for the express purpose of objecting at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened.
SECTION 8. Quorum and Manner of Acting. Except as herein
provided, a majority of the entire Board shall be present in order to constitute
a quorum for the transaction of business at such meeting; and, except as
otherwise required by the Certificate of Incorporation or these Bylaws, the act
of a majority of the directors present at any meeting at which a quorum is
present shall be the act of the Board. In the absence of a quorum at any meeting
of the Board, a majority of the directors present thereat may adjourn such
meeting to another time and place. Notice of the time and place of any such
adjourned meeting shall be given to the directors who were not present at the
time of the adjournment and, unless such time and place were announced at the
meeting at which the adjournment was taken, to the other directors. At any
adjourned meeting at which a quorum is present, any business may be transacted
which might have been transacted at the meeting as originally called. The
directors shall act only as a Board and the individual directors shall have no
power as such.
SECTION 9. Action Without a Meeting. Any action required or
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting if all members
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of the Board consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the Board.
SECTION 10. Telephonic Participation. Members of the Board of
Directors may participate in a meeting of the Board by means of conference
telephone or similar communications equipment allowing all persons participating
in the meeting to hear each other at the same time. Participation in such a
meeting shall constitute presence in person at such meeting.
SECTION 11. Organization. At each meeting of the Board, the
President or, in his absence of inability to act, another director chosen by a
majority of the directors present shall act as chairman of the meeting and
preside thereat. The Secretary or, in his absence or inability to act, any
person appointed by the chairman shall act as secretary of the meeting and keep
the minutes thereof.
SECTION 12. Resignations. Any director may resign at any time
upon written notice to the Corporation. Any such resignation shall take effect
at the time specified therein or, if the time when it shall become effective
shall not be specified therein, immediately upon its receipt; and, unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
SECTION 13. Vacancies. 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, although less than
a quorum, or by a sole remaining director. If there are no directors in office,
then a special meeting of stockholders for the election of directors may be
called and 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
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whole Board (as constituted immediately prior to any such increase), the Court
of Chancery may, upon application of any stockholder of stockholders holding at
least ten person 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, in the manner provided by
statute. When one or more directors shall resign from the Board, effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each director so chosen shall hold office until the next election
of directors and until their successors shall be elected and qualified.
SECTION 14. Removal of Directors. Any director or the entire
Board of Directors may be removed, either with or without cause, at any time, by
the affirmative vote of the holders of record of a majority of the issued and
outstanding stock entitled to vote for the election of directors of the
Corporation given at a special meeting of the stockholders called and held for
such purpose; and the vacancy or vacancies in the Board caused by such removal
may be filled by such stockholders at such meeting, or, if the stockholders
shall fail to fill such vacancy or vacancies, as provided by these Bylaws.
SECTION 15. Compensation. The Board of Directors shall have
authority to fix the compensation, including fees and reimbursement of expenses,
of directors for services to the Corporation in any capacity.
ARTICLE III
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Executive and Other Committees
SECTION 1. Executive and Other Committees. The Board may, by
resolution passed by a majority of the whole Board, designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The Board may 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 of disqualification of any member of
such committee or committees, 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 to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution, shall have and may exercise
all the powers and authority of the Board in the management of the business and
affairs of the Corporation with the exception of any authority the delegation of
which is prohibited by Section 141 of the General Corporation Law of the State
of Delaware, and may authorize the seal of the Corporation to be affixed to all
papers which may require it. Each committee shall keep written minutes of its
proceedings and shall report such minutes to the Board when required.
SECTION 2. General. A majority of any committee may determine
its action and fix the time and place of its meetings unless the Board shall
otherwise provide. Notice of such meeting shall be given to each member of the
committee in the manner provided for in Article II, Section 7. The Board shall
have power at any time to fill vacancies in, to change the membership of, or to
dissolve any such committee. Nothing herein shall be deemed to prevent the Board
from appointing one or more committees consisting in whole or in part of persons
who are not directors
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of the Corporation; provided, however, that no such committee shall have or may
exercise any authority of the Board.
SECTION 3. Action Without a Meeting. Any action required or
permitted to be taken at any meeting by any committee may be taken without a
meeting if all of the members of the committee consent thereto in writing, and
the writing or writings are filed with the minutes of proceedings of the
committee.
SECTION 4. Telephone Participation. Members of a committee may
participate in a meeting by means of conference telephone or similar
communications equipment allowing all persons participating in the meeting to
hear each other at the same time. Participation by such means shall constitute
presence in person at the meeting.
ARTICLE IV
Officers
SECTION 1. Number and Qualifications. The officers of the
Corporation shall include the Chairman, the President, the Treasurer and the
Secretary. Any number of offices may be held by the same person. Such officers
shall be elected from time to time by the Board. Each officer shall hold his
office until his successor is elected and qualified or until his earlier
resignation or removal. The Board may from time to time elect such other
officers (including one or more Vice Presidents (including Executive Vice
Presidents and Senior Vice Presidents), one or more Assistant Treasurers and one
or more Assistant Secretaries) and such agents as may be necessary or desirable
for the business of the Corporation. Such other officers and agents shall have
such duties and shall hold their offices for such terms as may be prescribed by
the Board.
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SECTION 2. Resignations. Any officer may resign at any time
upon written notice to the Corporation. Any such resignation shall take effect
at the time specified therein or, if the time when it shall become effective
shall not be specified therein, immediately upon its receipt; and, unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
SECTION 3. Removal. Any officer or agent of the corporation
may be removed, either with or without cause, at any time, by the Board at any
meeting of the Board.
SECTION 4. Vacancies. Any vacancy occurring in any office of
the Corporation by death, resignation, removal or otherwise, shall be filled for
the unexpired portion of the term of the office which shall be vacant, in the
manner prescribed in these Bylaws for the regular election to such office.
SECTION 5A. The Chairman. The Chairman shall be the Chairman
of the Board of Directors and, so long as he is present, shall preside at all
meetings of the Board of Directors and at all meetings of the stockholders. In
addition, unless otherwise provided by the resolution of the Board of Directors
electing the Chairman, the Chairman shall be the Chief Executive Officer and, in
such capacity, have the duty of general and active management of the business
and affairs of the Corporation and general and active supervision and direction
over the other officers, agents and employees and shall see that their duties
are properly performed subject, however, to the control of the Board of
Directors. He shall perform all duties incident to the office of Chairman and
such other duties as from time to time may be assigned to him by the Board of
Directors or these By-Laws.
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SECTION 5B. The President. The President shall be the Chief
Operating Officer of the Corporation and shall perform his duties, subject,
however, to the control of the Chairman and the Board of Directors. He shall
perform all duties incident to the office of President and such other duties as
from time to time may be assigned to him by the Chairman, the Board of
Directors, or these By-Laws.
SECTION 6. Vice Presidents. Each Vice President, including any
Executive Vice President, shall have such powers and perform such duties as from
time to time may be assigned to him by the Board.
SECTION 7. The Treasurer. The Treasurer shall
(a) have charge and custody of, and be
responsible for, all the funds and securities of the
Corporation;
(b) keep full and accurate accounts of
receipts and disbursements in books belonging to the
Corporation;
(c) cause all monies and other valuables to
be deposited to the credit of the Corporation in such
depositories as may be designated by the Board;
(d) receive, and give receipts for, monies
due and payable to the Corporation from any source whatsoever;
(e) disburse the funds of the Corporation
and supervise the investment of its funds as ordered or
authorized by the Board, taking proper vouchers therefor; and
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(f) in general, have all the powers and
perform all the duties incident to the office of Treasurer and
such other duties as from time to time may be assigned to him
by the Board or the President.
SECTION 8. The Secretary. The Secretary shall
(g) record the proceedings of the meetings
of the stockholders and directors in a minute book to be kept
for that purpose;
(h) see that all notices are duly given in
accordance with the provisions of these Bylaws and as required
by law;
(i) be custodian of the records and the
seal of the Corporation and affix and attest the seal to all
stock certificates of the Corporation (unless the seal of the
Corporation on such certificates shall be a facsimile, as
hereinafter provided) and affix and attest the seal to all
other documents to be executed on behalf of the Corporation
under its seal;
(j) see that the books, reports,
statements, certificates and other documents and records
required by law to be kept and filed are properly kept and
filed; and
(k) in general, have all the powers and
perform all the duties incident to the office of Secretary and
such other duties as from time to time may be assigned to him
by the Board or the President.
SECTION 9. Officers' Bonds or Other Security. The Corporation
may secure the fidelity of any or all of its officers or agents by bond or
otherwise, in such amount and with such surety or sureties as the Corporation
may require.
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SECTION 10. Compensation. The compensation of the officers of
the Corporation for their services as such officers shall be fixed from time to
time by the Board; provided, however, that the Board may delegate to the
President the power to fix the compensation of officers and agents. An officer
of the Corporation shall not be prevented from receiving compensation by reason
of the fact that he is also a director of the Corporation, but any such officer
who shall also be a director (except in the event there is only one director of
the Corporation) shall not have any vote in the determination of the amount of
compensation paid to him.
ARTICLE V
Shares, etc.
SECTION 1. Stock Certificates. Every holder of stock in the
Corporation shall be entitled to have a certificate signed by, or in the name
of, the Corporation by the President or a Vice President, and by the Treasurer
or an Assistant Treasurer, or the Secretary or an Assistant Secretary,
certifying the number of shares owned by him in the Corporation. Any or all of
the signatures on the certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon such certificate shall have ceased to be such officer, transfer
agent or registrar before such certificate is issued, it may nevertheless be
issued by the Corporation with the same effect as if he were such officer,
transfer agent or registrar at the date of issue.
SECTION 2. Books of Account and Record of Stockholders. The
books and records of the Corporation may be kept at such places, within or
without the State of Delaware,
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as the Board of Directors may from time to time determine. The stock record
books and the blank stock certificates shall be kept by the Secretary or by any
other officer or agent designated by the Board of Directors.
SECTION 3. Transfer of Shares. Transfers of shares of stock of
the Corporation shall be made on the stock records of the Corporation only upon
authorization by the registered holder thereof, or by his attorney thereunto
authorized by power of attorney duly executed and filed with the Secretary or
with a transfer agent or transfer clerk, and on surrender of the certificate or
certificates for such shares properly endorsed or accompanied by a duly executed
stock transfer power and the payment of all taxes thereon. Except as otherwise
provided by law, the Corporation shall be entitled to recognize the exclusive
right of a person in whose name any share or shares stand on the record of
stockholders as the owner of such share or shares for all purposes, including,
without limitation, the rights to receive dividends or other distributions, and
to vote as such owner, and the Corporation may hold any such stockholder of
record liable for calls and assessments and the Corporation shall not be bound
to recognize any equitable or legal claim to or interest in any such share or
shares on the part of any other person whether or not it shall have express or
other notice thereof. Whenever any transfers of shares shall be made for
collateral security and not absolutely, and both the transferor and transferee
request the Corporation to do so, such fact shall be stated in the entry of the
transfer.
SECTION 4. Regulations. The Board may make such additional
rules and regulations, not inconsistent with these Bylaws, as it may deem
expedient concerning the issue, transfer and registration of certificates for
shares of stock of the Corporation. It may appoint, or authorize any officer or
officers to appoint, one or more transfer agents or one or more transfer
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clerks and one or more registrars and may require all certificates for shares of
stock to bear the signature or signatures of any of them.
SECTION 5. Fixing of Record Date. 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 entitled 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 the
stockholders entitled to exercise any rights in respect of any 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 (i) not
be more than sixty nor less than ten days before the date of such meeting, (ii)
not be more than ten days after the date upon which the resolution fixing the
record date for consent to corporate action in writing is adopted by the Board
of Directors, and (iii) not be more than sixty days prior to such payment,
exercise of rights or such other action.
SECTION 6. Lost, Stolen or Destroyed Stock Certificates. The
holder of any certificate representing shares of stock of the Corporation shall
immediately notify the Corporation of any loss, destruction or mutilation of
such certificate, and the Corporation may issue a new certificate of stock in
the place of any certificate theretofore issued by it, alleged to have been
lost, stolen or destroyed, and the Corporation may, in its discretion, require
the owner of the lost, stolen or destroyed certificate, or his legal
representative, to give the Corporation a bond sufficient, as the Corporation in
its absolute discretion shall determine, to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss, theft or
destruction of any such certificate or the issuance of such new certificate.
Anything herein to the
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contrary notwithstanding, the Corporation, in its absolute discretion, may
refuse to issue any such new certificate, except pursuant to judicial
proceedings under the laws of the State of Delaware.
ARTICLE VI
Contracts, Checks, Drafts, Bank Accounts, Etc.
SECTION 1. Execution of Contracts. Except as otherwise
required by statute, the Certificate of Incorporation or these Bylaws, any
contract or other instrument may be executed and delivered in the name and on
behalf of the Corporation by such officer or officers (including any assistant
officer) of the Corporation as the Board may from time to time direct. Such
authority may be general or confined to specific instances as the Board may
determine. Unless authorized by the Board or expressly permitted by these
Bylaws, no officer, agent or employee shall have any power or authority to bind
the Corporation by any contract or engagement or to pledge its credit or to
render it pecuniarily liable for any purpose or to any amount.
SECTION 2. Loans. Unless the Board shall otherwise determine,
the President or any Vice President may effect loans and advances at any time
for the Corporation from any bank, trust company or other institution, or from
any firm, corporation or individual, and for such loans and advances may make,
execute and deliver promissory notes, bonds or other certificates or evidences
of indebtedness of the Corporation, but no officer or officers shall mortgage,
pledge, hypothecate or transfer any securities or other property of the
Corporation other than in connection with the purchase of chattels for use in
the Corporation's operations, except when authorized by the Board.
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SECTION 3. Checks, Drafts, etc. All checks, drafts, bills of
exchange or other orders for the payment of money out of the funds of the
Corporation, and all notes or other evidence of indebtedness of the Corporation,
shall be signed in the name and on behalf of the Corporation by such persons and
in such manner as shall from time to time be authorized by the Board.
SECTION 4. Deposits. All funds of the Corporation not
otherwise employed shall be deposited from time to time to the credit of the
Corporation in such banks, trust companies or other depositories as the Board
may from time to time designate or as may be designated by any officer or
officers of the Corporation to whom such power of designation may from time to
time be delegated by the Board. For the purpose of deposit and for the purpose
of collection for the account of the Corporation, checks, drafts and other
orders for the payment of money which are payable to the order of the
Corporation may be endorsed, assigned and delivered by any officer or agent of
the Corporation.
SECTION 5. General and Special Bank Accounts. The Board may
from time to time authorize the opening and keeping of general and special bank
accounts with such banks, trust companies or other depositories as the Board may
designate or as may be designated by any officer or officers of the Corporation
to whom such power of designation may from time to time be delegated by the
Board. The Board may make such special rules and regulations with respect to
such bank accounts, not inconsistent with the provisions of these Bylaws, as it
may deem expedient.
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ARTICLE VII
Offices
SECTION 1. Registered Office. The registered office and
registered agent of the Corporation will be as specified in the Certificate of
Incorporation of the Corporation.
SECTION 2. Other Offices. The Corporation may also have such
offices, both within or 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 VIII
Fiscal Year
The fiscal year of the Corporation shall be so determined by
the Board of Directors.
ARTICLE IX
Seal
The seal of the Corporation shall be circular in form, shall
bear the name of the Corporation and shall include the words and numbers
"Corporate Seal", "Delaware" and the year of incorporation.
ARTICLE X
Indemnification
SECTION 1. General. Each person who was or is a party or is
threatened to be made a party to or is involved in any threatened, pending or
completed action, suit or proceeding,
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<PAGE>
whether civil, criminal, administrative or investigative (hereinafter a
"Proceeding"), by reason of the fact that he or she, or a person of whom he or
she is or was the legal representative, is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such Proceeding is an alleged
action in an official capacity as a director, officer, employee or agent or in
any other capacity while serving as a director, officer, employee or agent,
shall be indemnified and held harmless by the Corporation to the fullest extent
authorized by the General Corporation Law of the State of Delaware, as the same
exists or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits the Corporation to provide broader
indemnification rights than said law permitted the Corporation to provide prior
to such amendment), against all expenses, liabilities and losses (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid or to be paid in settlement), actually and reasonably incurred or suffered
by such person in connection therewith and such indemnification shall continue
as to a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of his or her heirs, executors and administrators;
provided, however, that, except as provided in Section 2 of this Article X, the
Corporation shall indemnify any such person seeking indemnification in
connection with a Proceeding (or part thereof) initiated by such person only if
such Proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation. The right to indemnification conferred in this Article X shall
be a contract right and shall include the right to be paid by the Corporation
the expenses incurred in defending any such Proceeding in advance of its final
disposition; provided, however,
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<PAGE>
that, if the General Corporation Law of the State of Delaware requires the
payment of such expenses incurred by a director or officer in his or her
capacity as a director or officer, (and not in any other capacity in which
service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a Proceeding, such advancement shall be made only
upon delivery to the Corporation of an undertaking, by or on behalf of such
director or officer, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
this Article X or otherwise. The Corporation may, by action of its Board of
Directors, provide indemnification to employees and agents of the Corporation
with the same scope and effect as the foregoing indemnification of directors and
officers.
SECTION 2. Claims. If a claim under Section 1 of this Article
X is not paid in full by the Corporation within thirty days after a written
claim has been received by the Corporation, the claimant may at any time
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim and, if successful as a whole or in part, the claimant also shall be
entitled to be paid the expense of prosecuting such claim. It shall be a defense
to any such action (other than an action brought to enforce a claim for expenses
incurred by defending any Proceeding in advance of its final disposition where
the required undertaking, if any is required, has been tendered to the
Corporation) that the claimant has not met the standards of conduct which make
it permissible under the General Corporation Law of the State of Delaware for
the Corporation to indemnify the claimant for the amount claimed, but the burden
of proving such defense shall be on the Corporation. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior
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<PAGE>
to the commencement of such action that indemnification of the claimant is
proper in the circumstances because he or she has met the applicable standard of
conduct set forth in the General Corporation Law of the State of Delaware, nor
an actual determination by the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) that the claimant has not met
such applicable standard of conduct, shall not create a presumption that the
claimant has not met the applicable standard of conduct.
SECTION 3. Non-Exclusivity of Rights. The right to
indemnification and the payment of expenses incurred in defending a Proceeding
in advance of its final disposition conferred in this Article X shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, provision of the Certificate of Incorporation, these Bylaws,
agreement, vote of stockholders or disinterested directors, or otherwise.
SECTION 4. Insurance. The Corporation may maintain insurance,
at its expense, to protect itself and any person who is or was a director,
officer, employee or agent of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
such expense, liability or loss, whether or not the Corporation would have the
power to indemnify such person against such expense, liability or loss under the
General Corporation Law of the State of Delaware.
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<PAGE>
ARTICLE XI
Amendment
The Bylaws may be adopted, amended, or repealed by vote of the
holders of a majority of the shares of stock at the time entitled to vote in the
election of directors, except as otherwise provided in the Certificate of
Incorporation. The Bylaws may also be adopted, amended or repealed by the Board
of Directors, but any Bylaw adopted by the Board of Directors may be amended,
repealed or altered by the stockholders entitled to vote thereon as herein
provided.
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<PAGE>
WARRANT AGREEMENT dated as of _________, 1999 between Internet
Financial Services Inc., a Delaware corporation (the "Company"), and Whale
Securities Co., L.P. (hereinafter referred to as the "Underwriter").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company proposes to issue to the Underwriter
warrants (the "Warrants") to purchase up to 170,000 (as such number may be
adjusted from time to time pursuant to Article 8 of this Agreement) shares (the
"Shares") of common stock, par value $____ per share (the "Common Stock"), of
the Company; and
WHEREAS, the Underwriter has agreed, pursuant to the
underwriting agreement (the "Underwriting Agreement") dated ____________, 1999
between the Underwriter and the Company, to act as the underwriter in connection
with the Company's proposed public offering (the "Public Offering") of 1,700,000
shares of Common Stock (the "Public Shares") at an initial public offering price
of $6.00 per Public Share; and
WHEREAS, the Warrants issued pursuant to this Agreement are
being issued by the Company to the Underwriter or to its designees who are
officers and partners of the Underwriter or to members of the selling group
participating in the distribution of the Public Shares to the public in the
Public Offering and/or their respective officers or partners (collectively, the
"Designees"), in consideration for, and as part of the
<PAGE>
Underwriter's compensation in connection with, the Underwriter
acting as the Underwriter pursuant to the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment
by the Underwriter to the Company of ONE HUNDRED DOLLARS ($100.00), the
agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Grant.
------
The Underwriter, and/or the Designees are hereby granted the
right to purchase, at any time from ____________, 2000 until 5:00 P.M., New York
time, on _______, 2004 (the "Warrant Exercise Term"), up to 170,000 fully-paid
and non-assessable Shares at an initial exercise price (subject to adjustment as
provided in Article 8 hereof) of $9.90 per Share.
2. Warrant Certificates.
--------------------
The warrant certificates delivered and to be delivered pursuant
to this Agreement (the "Warrant Certificates") shall be in the form set forth in
Exhibit A attached hereto and made a part hereof, with such appropriate
insertions, omissions, substitutions and other variations as required or
permitted by this Agreement.
3. Exercise of Warrant.
-------------------
3.1. Cash Exercise. The Warrants initially are exercisable at
a price of $9.90 per Share, payable in cash or by check to the order of the
Company, or any combination thereof, subject to adjustment as provided in
Article 8 hereof. Upon surrender of the Warrant Certificate with the annexed
Form of
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<PAGE>
Election to Purchase duly executed, together with payment of the Exercise Price
(as hereinafter defined) for the Shares purchased, at the Company's principal
offices in New York (currently located at 33 West 17th Street, New York, New
York 10011) the registered holder of a Warrant Certificate ("Holder" or
"Holders") shall be entitled to receive a certificate or certificates for the
Shares so purchased. The purchase rights represented by each Warrant Certificate
are exercisable at the option of the Holder thereof, in whole or in part (but
not as to fractional Shares). In the case of the purchase of less than all the
Shares purchasable under any Warrant Certificate, the Company shall cancel said
Warrant Certificate upon the surrender thereof and shall execute and deliver a
new Warrant Certificate of like tenor for the balance of the Shares purchasable
thereunder.
3.2. Cashless Exercise. At any time during the Warrant
Exercise Term, the Holder may, at the Holder's option, exchange, in whole or in
part, the Warrants represented by such Holder's Warrant Certificate (a "Warrant
Exchange"), into the number of Shares determined in accordance with this Section
3.2, by surrendering such Warrant Certificate at the principal office of the
Company or at the office of its transfer agent, accompanied by a notice stating
such Holder's intent to effect such exchange, the number of Warrants to be so
exchanged and the date on which the Holder requests that such Warrant Exchange
occur (the "Notice of Exchange"). The Warrant Exchange shall take place on the
date specified in the Notice of Exchange or, if later, the date the Notice of
Exchange is received by the Company
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<PAGE>
(the "Exchange Date"). Certificates for the Shares issuable upon such Warrant
Exchange and, if applicable, a new Warrant Certificate of like tenor
representing the Warrants which were subject to the surrendered Warrant
Certificate and not included in the Warrant Exchange, shall be issued as of the
Exchange Date and delivered to the Holder within three (3) days following the
Exchange Date. In connection with any Warrant Exchange, the Holder shall be
entitled to subscribe for and acquire (i) the number of Shares (rounded to the
next highest integer) which would, but for the Warrant Exchange, then be
issuable pursuant to the provision of Section 3.1 above upon the exercise of the
Warrants specified by the Holder in its Notice of Exchange (the "Total Number")
less (ii) the number of Shares equal to the quotient obtained by dividing (a)
the product of the Total Number and the existing Exercise Price (as hereinafter
defined) by (b) the Market Price (as hereinafter defined) of a Public Share on
the day preceding the Warrant Exchange. "Market Price" at any date shall be
deemed to be the last reported sale price, or, in case no such reported sales
takes place on such day, the average of the last reported sale prices for the
last three (3) trading days, in either case as officially reported by the
principal securities exchange on which the Common Stock is listed or admitted to
trading or as reported in the NASDAQ National market System, or, if the Common
Stock is not listed or admitted to trading on any national securities exchange
or quoted on the NASDAQ National Market System, the closing bid price as
furnished by (i) the National Association of Securities Dealers, Inc.
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<PAGE>
through Nasdaq or (ii) a similar organization if Nasdaq is no longer reporting
such information.
4. Issuance of Certificates.
-------------------------
Upon the exercise of the Warrants, the issuance of certificates
for the Shares purchased shall be made forthwith (and in any event within three
(3) business days thereafter) without charge to the Holder thereof including,
without limitation, any tax which may be payable in respect of the issuance
thereof, and such certificates shall (subject to the provisions of Article 5
hereof) be issued in the name of, or in such names as may be directed by, the
Holder thereof; provided, however, that the Company shall not be required to pay
any tax which may be payable in respect of any transfer involved in the issuance
and delivery of any such certificates in a name other than that of the Holder
and the Company shall not be required to issue or deliver such certificates
unless or until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the
Shares shall be executed on behalf of the Company by the manual or facsimile
signature of the present or any future Chairman or Vice Chairman of the Board of
Directors, Chief Executive Officer or President or Vice President of the Company
under its corporate seal reproduced thereon, attested to by the manual or
facsimile signature of the present or any future Secretary or Assistant
Secretary of the Company. Warrant
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<PAGE>
Certificates shall be dated the date of execution by the Company upon initial
issuance, division, exchange, substitution or transfer.
Upon exercise, in part or in whole, of the Warrants,
certificates representing the Shares shall bear a legend substantially similar
to the following:
"The securities represented by this certificate have not been
registered for purposes of public distribution under the Securities Act
of 1933, as amended (the "Act"), and may not be offered or sold except
(i) pursuant to an effective registration statement under the Act, (ii)
to the extent applicable, pursuant to Rule 144 under the Act (or any
similar rule under such Act relating to the disposition of securities),
or (iii) upon the delivery by the holder to the Company of an opinion
of counsel, reasonably satisfactory to counsel to the Company, stating
that an exemption from registration under such Act is available."
5. Restriction on Transfer of Warrants.
-----------------------------------
The Holder of a Warrant Certificate, by the Holder's acceptance
thereof, covenants and agrees that the Warrants are being acquired as an
investment and not with a view to the distribution thereof, and that the
Warrants may not be sold, transferred, assigned, hypothecated or otherwise
disposed of, in whole or in part, for a period of one (1) year from the date
hereof [Effective Date], except to the Designees.
6. Price.
-----
6.1. Initial and Adjusted Exercise Price. The initial
exercise price of each Warrant shall be $9.90 per Share. The adjusted exercise
price per Share shall be the price which shall result from time to time from any
and all adjustments of
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<PAGE>
the initial exercise price per Share in accordance with the provisions of
Article 8 hereof.
6.2. Exercise Price. The term "Exercise Price" herein shall
mean the initial exercise price or the adjusted exercise price, depending upon
the context.
7. Registration Rights.
-------------------
7.1. Registration Under the Securities Act of 1933. None of
the Warrants or Shares have been registered for purposes of public distribution
under the Securities Act of 1933, as amended (the "Act").
7.2. Registrable Securities. As used herein the term
"Registrable Security" means each of the Warrants, the Shares and any shares of
Common Stock issued upon any stock split or stock dividend in respect of such
Shares; provided, however, that with respect to any particular Registrable
Security, such security shall cease to be a Registrable Security when, as of the
date of determination, (i) it has been effectively registered under the Act and
disposed of pursuant thereto, (ii) registration under the Act is no longer
required for the subsequent public distribution of such security or (iii) it has
ceased to be outstanding. The term "Registrable Securities" means any and/or all
of the securities falling within the foregoing definition of a "Registrable
Security." In the event of any merger, reorganization, consolidation,
recapitalization or other change in corporate structure affecting the Common
Stock, such adjustment shall be made in the definition of "Registrable
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<PAGE>
Security" as is appropriate in order to prevent any dilution or enlargement of
the rights granted pursuant to this Article 7.
7.3. Piggyback Registration. If, at any time following the
effective date of the Public Offering, the Company proposes to prepare and file
one or more post-effective amendments to the registration statement filed in
connection with the Public Offering or any new registration statement or
post-effective amendments thereto covering equity or debt securities of the
Company, or any such securities of the Company held by its shareholders (in any
such case, other than in connection with a merger, acquisition or pursuant to
Form S-8 or successor form), (for purposes of this Article 7, collectively, the
"Registration Statement"), it will give written notice of its intention to do so
by registered mail ("Notice"), at least thirty (30) business days prior to the
filing of each such Registration Statement, to all holders of the Registrable
Securities. Upon the written request of such a holder (a "Requesting Holder"),
made within twenty (20) business days after receipt of the Notice, that the
Company include any of the Requesting Holder's Registrable Securities in the
proposed Registration Statement, the Company shall, as to each such Requesting
Holder, use its best efforts to effect the registration under the Act of the
Registrable Securities which it has been so requested to register ("Piggyback
Registration"), at the Company's sole cost and expense and at no cost or expense
to the Requesting Holders (except as provided in Section 7.5(d) hereof.
-8-
<PAGE>
7.4. Demand Registration.
(a) At any time during the Warrant Exercise Term, any
"Majority Holder" (as such term is defined in Section 7.4(c) below) of the
Registrable Securities shall have the right (which right is in addition to the
piggyback registration rights provided for under Section 7.3 hereof),
exercisable by written notice to the Company (the "Demand Registration
Request"), to have the Company prepare and file with the Securities and Exchange
Commission (the "Commission"), on one occasion, at the sole expense of the
Company (except as provided in Section 7.5(b) hereof), a Registration Statement
and such other documents, including a prospectus, as may be necessary (in the
opinion of both counsel for the Company and counsel for such Majority Holder),
in order to comply with the provisions of the Act, so as to permit a public
offering and sale of the Registrable Securities by the holders thereof. The
Company shall use its best efforts to cause the Registration Statement to become
effective under the Act, so as to permit a public offering and sale of the
Registrable Securities by the holders thereof. Once effective, the Company will
use its best efforts to maintain the effectiveness of the Registration Statement
until the earlier of (i) the date that all of the Registrable Securities have
been sold or (ii) the date that the holders of the Registrable Securities
receive an opinion of counsel to the Company that all of the Registrable
Securities may be freely traded (without limitation or restriction as to
quantity or timing and without
-9-
<PAGE>
registration under the Act) under Rule 144(k) promulgated under the Act or
otherwise.
(b) The Company covenants and agrees to give written
notice of any Demand Registration Request to all holders of the Registrable
Securities within ten (10) business days from the date of the Company's receipt
of any such Demand Registration Request. After receiving notice from the Company
as provided in this Section 7.4(b), holders of Registrable Securities may
request the Company to include their Registrable Securities in the Registration
Statement to be filed pursuant to Section 7.4(a) hereof by notifying the Company
of their decision to have such securities included within ten (10) days of their
receipt of the Company's notice.
(c) The term "Majority Holder" as used in Section 7.4
hereof shall mean any holder or any combination of holders of Registrable
Securities, if included in such holders' Registrable Securities are that
aggregate number of shares of Common Stock (including Shares already issued and
Shares issuable pursuant to the exercise of outstanding Warrants) as would
constitute a majority of the aggregate number of Shares (including Shares
already issued and Shares issuable pursuant to the exercise of outstanding
Warrants) included in all the Registrable Securities.
7.5. Covenants of the Company With Respect to Registration.
The Company covenants and agrees as follows:
(a) In connection with any registration under Section
7.4 hereof, the Company shall file the Registration
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<PAGE>
Statement as expeditiously as possible, but in any event no later than twenty
(20) days following receipt of any demand therefor, shall use its best efforts
to have any such Registration Statement declared effective at the earliest
possible time, and shall furnish each holder of Registrable Securities such
number of prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs, fees and expenses
(other than underwriting fees, discounts and nonaccountable expense allowance
applicable to the Registrable Securities and the fees and expenses of counsel
retained by the holders of Registrable Securities) in connection with all
Registration Statements filed pursuant to Sections 7.3 and 7.4(a) hereof
including, without limitation, the Company's legal and accounting fees, printing
expenses, and blue sky fees and expenses.
(c) The Company will take all necessary action which may
be required in qualifying or registering the Registrable Securities included in
the Registration Statement for offering and sale under the securities or blue
sky laws of such states as are reasonably requested by the holders of such
securities.
(d) The Company shall indemnify any holder of the
Registrable Securities to be sold pursuant to any Registration Statement and any
underwriter or person deemed to be an underwriter under the Act and each person,
if any, who controls such holder or underwriter or person deemed to be an
underwriter within the meaning of Section 15 of the Act or Section 20(a) of
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<PAGE>
the Securities Exchange Act of 1934, as amended ("Exchange Act"), against all
loss, claim, damage, expense or liability (including all expenses reasonably
incurred in investigating, preparing or defending against any claim whatsoever)
to which any of them may become subject under the Act, the Exchange Act or
otherwise, arising from such registration statement to the same extent and with
the same effect as the provisions pursuant to which the Company has agreed to
indemnify the Underwriter as set forth in Section 7 of the Underwriting
Agreement and to provide for just and equitable contribution as set forth in
Section 8 of the Underwriting Agreement.
(e) Any holder of Registrable Securities to be sold
pursuant to a registration statement, and such Holder's successors and assigns,
shall severally, and not jointly, indemnify, the Company, its officers and
directors and each person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss,
claim, damage or expense or liability (including all expenses reasonably
incurred in investigating, preparing or defending against any claim whatsoever)
to which they may become subject under the Act, the Exchange Act or otherwise,
arising from information furnished by or on behalf of such holder, or such
Holder's successors or assigns, for specific inclusion in such Registration
Statement to the same extent and with the same effect as the provisions pursuant
to which the Underwriter has agreed to indemnify the Company as set forth in
Section 7 of the Underwriting Agreement and to provide for just and equitable
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<PAGE>
contribution as set forth in Section 8 of the Underwriting
Agreement.
(f) Nothing contained in this Agreement shall be
construed as requiring any Holder to exercise the Warrants held by such Holder
prior to the initial filing of any registration statement or the effectiveness
thereof.
(g) If the Company shall fail to comply with the
provisions of this Article 7, the Company shall, in addition to any other
equitable or other relief available to the holders of Registrable Securities, be
liable for any or all incidental, special and consequential damages sustained by
the holders of Registrable Securities, requesting registration of their
Registrable Securities.
(h) The Company shall promptly deliver copies of all
correspondence between the Commission and the Company, its counsel or auditors
and all memoranda relating to discussions with the Commission or its staff with
respect to the Registration Statement to each holder of Registrable Securities
included for such registration in such Registration Statement pursuant to
Section 7.3 hereof or Section 7.4 hereof requesting such correspondence and
memoranda and to the managing underwriter, if any, of the offering in connection
with which such Holder's Registrable Securities are being registered and shall
permit each holder of Registrable Securities and such underwriter to do such
reasonable investigation, upon reasonable advance notice, with respect to
information contained in or omitted from the Registration Statement as it deems
reasonably
-13-
<PAGE>
necessary to comply with applicable securities laws or rules of the National
Association of Securities Dealers, Inc. Such investigation shall include access
to books, records and properties and opportunities to discuss the business of
the Company with its officers and independent auditors, all to such reasonable
extent and at such reasonable times and as often as any such holder of
Registrable Securities or underwriter shall reasonably request.
8. Adjustments of Exercise Price and Number of Shares.
--------------------------------------------------
8.1. Computation of Adjusted Price. In case the Company shall
at any time after the date hereof pay a dividend in shares of Common Stock or
make a distribution in shares of Common Stock, then upon such dividend or
distribution the Exercise Price in effect immediately prior to such dividend or
distribution shall forthwith be reduced to a price determined by dividing:
(a) an amount equal to the total number of shares of
Common Stock outstanding immediately prior to such dividend or distribution
multiplied by the Exercise Price in effect immediately prior to such dividend or
distribution, by
(b) the total number of shares of Common Stock
outstanding immediately after such issuance or sale.
For the purposes of any computation to be made in accordance
with the provisions of this Section 8.1, the Common Stock issuable by way of
dividend or other distribution on any stock of the Company shall be deemed to
have been issued immediately after the opening of business on the date following
-14-
<PAGE>
the date fixed for the determination of stockholders entitled to receive such
dividend or other distribution.
8.2. Subdivision and Combination. In case the Company shall
at any time subdivide or combine the outstanding shares of Common Stock, the
Exercise Price shall forthwith be proportionately decreased in the case of
subdivision or increased in the case of combination.
8.3. Adjustment in Number of Shares. Upon each adjustment of
the Exercise Price pursuant to the provisions of this Article 8, the number of
Shares issuable upon the exercise of each Warrant shall be adjusted to the
nearest full number by multiplying a number equal to the Exercise Price in
effect immediately prior to such adjustment by the number of Shares issuable
upon exercise of the Warrants immediately prior to such adjustment and dividing
the product so obtained by the adjusted Exercise Price.
8.4. Reclassification, Consolidation, Merger, etc. In case of
any reclassification or change of the outstanding shares of Common Stock (other
than a change in par value to no par value, or from no par value to par value,
or as a result of a subdivision or combination), or in the case of any
consolidation of the Company with, or merger of the Company into, another
corporation (other than a consolidation or merger in which the Company is the
surviving corporation and which does not result in any reclassification or
change of the outstanding shares of Common Stock, except a change as a result of
a subdivision or combination of such shares or a change in par value, as
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<PAGE>
aforesaid), or in the case of a sale or conveyance to another corporation of the
property of the Company as an entirety, the Holders shall thereafter have the
right to purchase the kind and number of shares of stock and other securities
and property receivable upon such reclassification, change, consolidation,
merger, sale or conveyance as if the Holders were the owners of the shares of
Common Stock underlying the Warrants immediately prior to any such events at a
price equal to the product of (x) the number of shares of Common Stock issuable
upon exercise of the Holder's Warrants and (y) the Exercise Price in effect
immediately prior to the record date for such reclassification, change,
consolidation, merger, sale or conveyance as if such Holders had exercised the
Warrants.
8.5. Determination of Outstanding Shares of Common Stock. The
number of shares of Common Stock at any one time outstanding shall include the
aggregate number of shares of Common Stock issued and the aggregate number of
shares of Common Stock issuable upon the exercise of options, rights, warrants
and upon the conversion or exchange of convertible or exchangeable securities.
8.6. Dividends and Other Distributions with Respect to
Outstanding Securities. In the event that the Company shall at any time prior to
the exercise of all Warrants make any distribution of its assets to holders of
its Common Stock as a liquidating or a partial liquidating dividend, then the
holder of Warrants who exercises its Warrants after the record date for the
determination of those holders of Common Stock entitled to such
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<PAGE>
distribution of assets as a liquidating or partial liquidating dividend shall be
entitled to receive for the Warrant Price per Warrant, in addition to each share
of Common Stock, the amount of such distribution (or, at the option of the
Company, a sum equal to the value of any such assets at the time of such
distribution as determined by the Board of Directors of the Company in good
faith) which would have been payable to such holder had he been the holder of
record of the Common Stock receivable upon exercise of his Warrant on the record
date for the determination of those entitled to such distribution. At the time
of any such dividend or distribution, the Company shall make appropriate
reserves to ensure the timely performance of the provisions of this Subsection
8.6.
8.7. Subscription Rights for Shares of Common Stock or Other
Securities. In the case that the Company or an affiliate of the Company shall at
any time after the date hereof and prior to the exercise of all the Warrants
issue any rights, warrants or options to subscribe for shares of Common Stock or
any other securities of the Company or of such affiliate to all the shareholders
of the Company, the Holders of unexercised Warrants on the record date set by
the Company or such affiliate in connection with such issuance of rights,
warrants or options shall be entitled, in addition to the shares of Common Stock
or other securities receivable upon the exercise of the Warrants, to receive
such rights, warrants or options that such Holders would have been entitled to
receive had they been, on such record date, the holders of record of the number
of whole shares of Common
-17-
<PAGE>
Stock then issuable upon exercise of their outstanding Warrants (assuming for
purposes of this Section 8.7), that the exercise of the Warrants is permissible
immediately upon issuance).
9. Exchange and Replacement of Warrant Certificates.
------------------------------------------------
Each Warrant Certificate is exchangeable without expense, upon
the surrender thereof by the registered Holder at the principal executive office
of the Company, for a new Warrant Certificate of like tenor and date
representing in the aggregate the right to purchase the same number of
securities in such denominations as shall be designated by the Holder thereof at
the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory
to it of the loss, theft, destruction or mutilation of any Warrant Certificate,
and, in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrant
Certificate, if mutilated, the Company will make and deliver a new Warrant
Certificate of like tenor, in lieu thereof.
10. Elimination of Fractional Interests.
-----------------------------------
The Company shall not be required to issue certificates
representing fractions of Shares, nor shall it be required to issue scrip or pay
cash in lieu of fractional interests, it being the intent of the parties that
all fractional interests shall be eliminated by rounding any fraction up to the
nearest whole number of Shares.
-18-
<PAGE>
11. Reservation and Listing of Securities.
-------------------------------------
The Company shall at all times reserve and keep avail- able out
of its authorized shares of Common Stock, solely for the purpose of issuance
upon the exercise of the Warrants, such number of shares of Common Stock as
shall be issuable upon the exercise thereof. The Company covenants and agrees
that, upon exercise of the Warrants and payment of the Exercise Price therefor,
all Shares issuable upon such exercise shall be duly and validly issued, fully
paid, non-assessable and not subject to the preemptive rights of any
shareholder. As long as the Warrants shall be outstanding, the Company shall use
its best efforts to cause all shares of Common Stock issuable upon the exercise
of the Warrants to be listed on or quoted by Nasdaq or listed on such national
securities exchange, in the event the Common Stock is listed on a national
securities exchange.
12. Notices to Warrant Holders.
--------------------------
Nothing contained in this Agreement shall be construed
as conferring upon the Holder or Holders the right to vote or to consent or to
receive notice as a shareholder in respect of any meetings of shareholders for
the election of directors or any other matter, or as having any rights
whatsoever as a shareholder of the Company. If, however, at any time prior to
the expiration of the Warrants and their exercise, any of the following events
shall occur:
(a) the Company shall take a record of the holders of
its shares of Common Stock for the purpose of entitling them
to receive a dividend or distribution
-19-
<PAGE>
payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained
earnings, as indicated by the accounting treatment of such
dividend or distribution on the books of the Company; or
(b) the Company shall offer to all the holders of its
Common Stock any additional shares of capital stock of the
Company or securities convertible into or exchangeable for
shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation or
merger) or a sale of all or substantially all of its property,
assets and business as an entirety shall be proposed; or
(d) reclassification or change of the outstanding shares
of Common Stock (other than a change in par value to no par
value, or from no par value to par value, or as a result of a
subdivision or combination), consolidation of the Company
with, or merger of the Company into, another corporation
(other than a consolidation or merger in which the Company is
the surviving corporation and which does not result in any
reclassification or change of the outstanding shares of
Common Stock, except a change as a result of a subdivision or
combination of such shares or a change in par
-20-
<PAGE>
value, as aforesaid), or a sale or conveyance to
another corporation of the property of the Company as
an entirety is proposed; or
(e) The Company or an affiliate of the Company shall
propose to issue any rights to subscribe for shares of Common
Stock or any other securities of the Company or of such
affiliate to all the shareholders of the Company;
then, in any one or more of said events, the Company shall give written notice
to the Holder or Holders of such event at least fifteen (15) days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the shareholders entitled to such dividend, distribution,
convertible or exchangeable securities or subscription rights, options or
warrants, or entitled to vote on such proposed dissolution, liquidation, winding
up or sale. Such notice shall specify such record date or the date of closing
the transfer books, as the case may be. Failure to give such notice or any
defect therein shall not affect the validity of any action taken in connection
with the declaration or payment of any such dividend or distribution, or the
issuance of any convertible or exchangeable securities or subscription rights,
options or warrants, or any proposed dissolution, liquidation, winding up or
sale.
13. Notices.
-------
All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have
-21-
<PAGE>
been duly made when delivered, or mailed by registered or certified mail, return
receipt requested:
(a) If to a registered Holder of the Warrants, to the
address of such Holder as shown on the books of the Company;
or
(b) If to the Company, to the address set forth in
Section 3 of this Agreement or to such other address as the
Company may designate by notice to the Holders.
14. Supplements and Amendments.
--------------------------
The Company and the Underwriter may from time to time supplement
or amend this Agreement without the approval of any Holders of Warrant
Certificates in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any
provisions herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company and the Underwriter may deem
necessary or desirable and which the Company and the Underwriter deem not to
adversely affect the interests of the Holders of Warrant Certificates.
15. Successors.
----------
All the covenants and provisions of this Agreement by or for the
benefit of the Company and the Holders inure to the benefit of their respective
successors and assigns hereunder.
16. Termination.
-----------
This Agreement shall terminate at the close of business on
__________, 2007. Notwithstanding the foregoing, this Agree-
-22-
<PAGE>
ment will terminate on any earlier date when all Warrants have been exercised
and all the Shares issuable upon exercise of the Warrants have been resold to
the public; provided, however, that the provisions of Section 7 shall survive
any termination pursuant to this Section 16 until the close of business on
_________, 2010.
17. Governing Law.
-------------
This Agreement and each Warrant Certificate issued hereunder
shall be deemed to be a contract made under the laws of the State of New York
and for all purposes shall be construed in accordance with the laws of said
State.
18. Benefits of This Agreement.
--------------------------
Nothing in this Agreement shall be construed to give to any
person or corporation other than the Company and the Underwriter and any other
registered holder or holders of the Warrant Certificates, Warrants or the Shares
any legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and the
Underwriter and any other holder or holders of the Warrant Certificates,
Warrants or the Shares.
19. Counterparts.
------------
This Agreement may be executed in any number of counterparts and
each of such counterparts shall for all purposes be deemed to be an original,
and such counterparts shall together constitute but one and the same instrument.
-23-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
[SEAL] INTERNET FINANCIAL SERVICES INC.
By:__________________________________
Name:
Title:
Attest:
_______________________
WHALE SECURITIES CO., L.P.
By:__________________________________
Name:
Title:
-24-
<PAGE>
EXHIBIT A
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED FOR PURPOSES OF PUBLIC
DISTRIBUTION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY
NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144
UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION
OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO THE COMPANY OF AN
OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY, STATING
THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT
AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, _________, 2004
No. W- _______ Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that _______________
___________________ or registered assigns, is the registered holder of
____________ (________) Warrants to purchase, at any time from ____________,
2000 until 5:00 P.M. New York City time on ___________, 2004 ("Expiration
Date"), up to _________ fully-paid and non-assessable shares ("Shares") of
common stock, par value $____ per share (the "Common Stock"), of Internet
Financial Services Inc., a Delaware corporation (the "Company"), at the initial
exercise price, subject to adjustment in certain events (the "Exercise Price"),
of $9.90 per Share upon surrender of this Warrant Certificate and payment of
the Exercise Price at an office or agency of the Company, but subject to the
conditions set forth herein and in the warrant agreement dated as of
____________, 1999 between the Company and Whale Securities Co., L.P. (the
"Warrant Agreement"). Payment of the Exercise Price may be made in cash, or by
certified or official bank check in New York Clearing House funds payable to the
order of the Company, or any combination thereof.
No Warrant may be exercised after 5:00 P.M., New York City
time, on the Expiration Date, at which time all Warrants evidenced hereby,
unless exercised prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is
<PAGE>
hereby referred to in a description of the rights, limitation of rights,
obligations, duties and immunities thereunder of the Company and the holders
(the words "holders" or "holder" meaning the registered holders or registered
holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of
certain events, the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax, or
other governmental charge imposed in connection therewith.
Upon the exercise of less than all of the Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated: ___________, 1999 INTERNET FINANCIAL SERVICES INC.
[SEAL] By:___________________________
Name:
Title:
Attest:
_______________________
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase _________ shares of
Common Stock and herewith tenders in payment for such securities cash or a
certified or official bank check payable in New York Clearing House Funds to the
order of Internet Financial Services Inc. in the amount of $_________, all in
accordance with the terms hereof. The undersigned requests that a certificate
for such securities be registered in the name of ______________________________
_________________, whose address is __________________, and that such
Certificate be delivered to __________________, whose address is _____________.
Dated: Signature:______________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)
________________________________
________________________________
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ___________________________________________
hereby sells, assigns and transfers unto
________________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _______________, Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: Signature:____________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate)
_______________________________
_______________________________
(Insert Social Security or Other
Identifying Number of Assignee)
<PAGE>
INTERNET FINANCIAL SERVICES, INC.
1997 STOCK OPTION PLAN
1. Purpose
This plan (the "Plan") enables employees, non-employee directors and
officers (including officers and directors who are also employees) as well as
independent contractors who contribute to the success of Internet Financial
Services, Inc., a Delaware Corporation (the "Company") to participate in its
future prosperity and growth and further to identify their interests with those
of the shareholders of the Company. The purpose of this Plan is to provide
long-term incentive for gain through outstanding service to the Company and its
shareholders and to assist in recruiting and retaining people of ability and
initiative.
2. Administration
This Plan shall be administered by a stock option committee (the
"Committee") selected by the Board of Directors (the "Board") of the Company
which shall consist of not less than one (1) nor more than three (3) persons.
The Board may also select one or more persons as alternate members of the
Committee, who may take the place of any absent member or members at any meeting
of the Committee. Any vacancy occurring in the membership of the Committee shall
be filled by appointment of the Board. The Committee shall have complete
authority to interpret all provisions of this Plan consistent with law, to
determine and designate those directors or employees of the Company (including,
but not limited to, members of the Committee) to whom options may be granted and
the type and number of option to be granted, to prescribe the form of
instruments evidencing any option granted under this Plan, to adopt, amend and
rescind general and special rules and regulations for its administration, and to
make all other determinations necessary or advisable for the administration of
this Plan.
3. Eligibility
Any member of the Board of the Company, officer and/or any salaried
employee or independent contractor of or to the Company or any of its
subsidiaries (including any subsidiary acquired after adoption of this Plan) who
in the judgment of the Committee contributes significantly to the overall
success of the Company or a subsidiary may be granted an option hereunder.
The Committee will designate non-employee directors and officers and
employees and independent contractors to whom options are to be granted and will
specify whether the option is an Incentive Stock Option (as hereinafter defined)
or non-statutory stock option (except that non-employee directors and officers,
and independent contractors may only be granted non-statutory stock options) and
the number of shares subject to each option.
The Committee will also designate non-employee directors and officers,
and employees to whom options are to be granted and will specify the number of
shares subject to each option.
<PAGE>
4. Shares Subject to Option
Options may be granted under this Plan on or after January 27, 1997.
Each option so granted will give the optionee the right to purchase a designated
number of the shares of common stock of the Company, $.001 par value (the
"Shares"), (subject to adjustment under Section 9 hereof). Upon exercise of any
option the Company may deliver to the optionee authorized but unissued Shares,
treasury Shares, or any combination thereof.
The Committee will maintain records showing the cumulative total of all
Shares subject to options outstanding under this Plan. The number of Shares
delivered under this Plan shall not exceed in the aggregate 400,000 Shares. The
number may be adjusted to reflect any change in the capitalization of the
Company resulting from a stock dividend or a stock split or other adjustment
contemplated by Section 9 hereof and occurring after the adoption of this Plan.
Subject to Section 6(D) hereof, if an option is terminated, in whole or in part,
for any reason other than the exercise thereof, the Shares allocated to the
option or portion thereof so terminated may be reallocated to another option or
options to be granted under this Plan.
5. Stock Options
(A) Allotment of Shares
(1) Subject to the limitations specified in Section
4(A)(2) hereof, the Committee may grant to optionees
(i) options which are intended to qualify as
incentive stock options ("Incentive Stock Options")
under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"); (ii) options which are
not intended to qualify as Incentive Stock Options;
or (iii) both of the foregoing if not granted to an
optionee in tandem where the exercise of one type of
option would reduce the Shares available under the
other type of option. The Committee may, in its sole
discretion, offer an optionee the opportunity to
surrender his or her options granted pursuant to this
Plan in exchange for different options to be granted
pursuant to this Plan.
(2) The aggregate fair market value (determined at the
time the option is granted) of the Shares for which
Incentive Stock Options may be granted to an optionee
with respect to which an option is exercisable for
the first time by such optionee during any calendar
year (under all incentive stock option plans of the
Company and its subsidiaries) may not exceed the
amount set forth in Section 422 of the Code with
respect to vesting limits. No Incentive Stock Option
may be granted more than ten years after the
effective date of this Plan.
(3) Options which are not Incentive Stock Options may be
granted to any optionee without regard to the
limitation stated in Section 5(A)(2) hereof.
- 2 -
<PAGE>
(B) Option Price
The price per share for Shares purchased by the exercise of
any Incentive Stock Option granted pursuant to this Plan will be the fair market
value per Share of such Shares at the time the option is granted except that the
price per share for Shares purchased by the exercise of any Incentive Stock
Option granted to any employee who at the time of such grant owns 10% or more of
the total combined voting power of all classes of stock of the Company or any
parent corporation (as defined by Section 425(e) of the Code) or any subsidiary
shall be at least 110% of the fair market value of the Shares at the time of
grant, and such option shall not be exercisable after the expiration of five (5)
years from the date of its grant; the price per share for Shares purchased by
exercise of any non-statutory stock option granted pursuant to this Plan shall
be at the sole discretion of the Committee.
(C) Option Period
Except as set forth in Section 5(B) above, each option shall
expire on such date as the Committee shall determine at the time of the grant
and except further that Incentive Stock Options shall not be exercisable after
the expiration of ten (10) years from the date such option is granted.
(D) Exercise of Options
(1) By an Optionee during Continuous Service or
Employment
Subject to the provisions of this Plan, each option
granted hereunder shall be exercisable on such date
or dates and during such period and for such number
of Shares as the Committee may determine.
Subject to the provisions of subparagraphs (2) and
(3) of paragraph (D) of this Section 5, no director
or employee may exercise any part of an option
granted under this Plan unless, at the time of such
exercise, he had served continuously on the Board of
the Company or he has been in he continuous
employment of the /Company of a subsidiary of the
Company, as the case may be, since the date the
option was granted. The Committee may decide in each
case to what extent leaves of absence for government
or military service, illness, temporary disability,
or other reasons shall not, for this purpose, be
deemed interruptions of continuous employment.
During the lifetime of an optionee, the option may be
exercised only by the optionee, his attorney-in-fact,
his guardian, or his assignee as hereinafter
provided.
- 3 -
<PAGE>
(2) By a Former Director, Former Employee
or Former Independent Contractor
After an optionee ceases to be a director or employee
or independent contractor of the Company or such
subsidiary, as the case may be, whether as a result
of termination by the Company or such subsidiary or
by the optionee, normal retirement, early retirement,
or disability retirement because of physical or
mental disability, the option may be exercised by
him, his attorney-in-fact, or his guardian, as
appropriate, at any time after the date on which he
ceases to be such (but no later than the earlier of
(a) 90 days after he ceases to be a member of the
Company's Board or ceases to be employed by, or an
independent contractor to, the Company or a
subsidiary thereof (for whichever of the above
reasons) or, (b) the end of the fixed term of the
option) for the number of Shares for which the option
could have been exercised at the time he ceased to be
a director or an employee, as the case may be, or for
such greater number of Shares subject to the option
as to which the Committee may authorize an
acceleration of the schedule of the time or times of
exercise under the option.
(3) In Case of Death or Disability
If an optionee shall die or become permanently and
totally disabled (within the meaning of Section
22(e)(3) of the Code, hereinafter referred to as
"Disabled" or "Disability") while an employee or a
director or independent contractor of the Company or
of a subsidiary or if an employee or a director or
independent contractor dies within 90 days after
termination pursuant to 5(D)(2), and at the time of
death or Disability was entitled to exercise any
option granted under this Plan, then the option may
be exercised by such Disabled optionee or his legal
representative, as the case may be, or by his estate,
or by a person who acquires the right to exercise the
option by bequest or inheritance, at any time after
the date of death or Disability (but no later than
the earlier of (a) twelve (12) months after the date
of death or termination by reason of Disability of
the optionee or, (b) the end of the fixed term of the
option); provided, however, in the case of options
which are not Incentive Stock Options, that the
Committee may prescribe a period during which the
option may be exercised which is shorter than twelve
months after the death or Disability. The option may
be exercised only for the number of Shares (subject
to adjustment under Section 9 hereof) for which it
could have been exercised at the time the director or
former director or employee or former employee died
or became Disabled, or for such greater number of
Shares subject to the option for which the Committee
may authorize an acceleration of the schedule of the
time or times of exercise under the option.
- 4 -
<PAGE>
(4) Acceleration or Conversion
On a case-by-case basis, the Committee may, in its
sole discretion, accelerate the schedule of the time
or times when an option granted under this Plan may
be exercised. The Committee may also, in its sole
discretion, from time to time, on a case by case
basis, convert Incentive Stock Options granted to an
optionee hereunder into non-statutory stock option on
such basis as the Committee deems advisable.
6. Special Provisions Respecting Exercise
(A) Simultaneously with the exercise of any options granted hereunder,
the Company may require any such optionee to simultaneously make
payment of any federal, state or employment taxes required to be
withheld with respect to the exercise of such options or payable in
connection with such exercise.
(B) An optionee exercising an option hereunder may pay a portion or all
of the exercise price by delivering Shares of the Company already
issued to, and held by such optionee provided that the Company then has
Shares publicly traded (regardless of whether the Shares being utilized
by such optionee are themselves registered for trading). The value of
the Shares being tendered by an optionee shall be calculated at the
last trade price on the day prior to the date of exercise of such stock
option, when Shares are then listed on NASDAQ or a national stock
exchange or, alternatively, the mean between the "bid" "asked" price
for Shares if there are no trades or if Shares are not listed thereon.
7. Method of Exercise
Each option granted under this Plan shall be deemed exercised when the
optionee shall indicate the decision to do so in a writing delivered to the
Company, and shall at the same time tender to the Company payment in full for
the Shares for which the option is exercised, and shall comply with such other
reasonable requirements as the Committee may establish pursuant to Sections 10
and 11 hereof. Payment for the Shares shall be made in cash or, in the
discretion of the Committee, through delivery of Shares or a combination of cash
and Shares. No person, estate or other entity shall have any of the rights of a
shareholder with reference to Shares subject to an option until a certificate or
certificates for the Shares shall have been delivered to such person, estate or
other entity.
An option granted under this Plan may be exercised for any lesser
number of Shares than the full amount for which it could be exercised. Such
partial exercise of an option or Stock Appreciation Right shall not affect the
right to exercise the option from time to time in accordance with this Plan for
the remaining Shares subject to the option.
- 5 -
<PAGE>
8. Assign ability
No Incentive Stock Option granted to an employee under this Plan shall
be transferable by him except by will or by the laws of descent and
distribution. No non-statutory stock option granted to an optionee hereunder may
be assigned except by will or by the laws of descent and distribution.
9. Adjustment Upon Change of Shares
In the event of a reorganization, merger, consolidation,
reclassification, recapitalization, combination or exchange of Shares, stock
split, stock dividend, spin-off, rights offering or other events affecting
Shares of the Company, the number and class of Shares then subject to options
previously granted under this Plan, and the price per Share payable upon
exercise of such options, shall be equitably adjusted by the Committee to
reflect the change.
10. Compliance With Law and Approval of Regulatory Bodies
No option shall be exercisable and no Shares will be delivered under
this Plan except in compliance with all applicable federal and state laws and
regulations, including without limitation, compliance with withholding tax
requirements and with the rules of all stock exchanges on which the Company's
Shares may be listed. Any Share certificate issued to evidence Shares for which
an option is exercised may bear legends and statements which the Committee shall
deem advisable to assure compliance with federal and state laws and regulations.
No option shall be exercisable, and no Shares will be delivered under this Plan,
until the Company has obtained consent or approval from regulatory bodies,
federal or state, having jurisdiction over such matters as the Committee may
deem advisable.
In the case of the exercise of an option by a person or estate
acquiring the right to exercise the option by bequest or inheritance, the
Committee may require reasonable evidence as to the ownership of the option and
may require such consents and releases of taxing authorities that it may deem
advisable.
11. Investment Representation
The Committee may require the optionee to furnish to the Company,
before the issuance of any Shares upon the exercise of all or any part of an
option granted pursuant to this Plan, a representation (in such form as the
Committee may specify) in which the optionee acknowledges that the Shares
acquired by him upon exercise of his option right have not been registered under
the Securities Act of 1933, as amended, and may not be sold or disposed of,
except in accordance with said Act.
12. General Provisions
Neither the adoption of this Plan nor its operation, nor any document
describing or referring to this Plan, or any part thereof, shall confer upon any
employee any right to continue in the employ of the Company or any subsidiary,
or shall in any way affect the right and power
- 6 -
<PAGE>
of the Company or any subsidiary to terminate the employment of any employee at
any time with or without assigning a reason therefor to the same extent as the
Company might have done if this Plan had not been adopted.
Headings are given to the sections of this Plan solely as a convenience
to facilitate reference; such headings, numbering and paragraphing shall not in
any case be deemed in any way material or relevant to the construction of this
Plan or any provisions thereof. The use of the masculine gender shall also
include within its meanings the feminine. The use of the singular shall also
include within its meaning the plural, and vice versa.
13. Amendment
The Board of Directors of the Company may alter, amend or terminate
this Plan from time to time, except no amendment to this Plan may become
effective for which approval of the shareholders of the Company is necessary for
continued compliance of this Plan with Section 422 of the code without such
approval having been obtained.
14. Duration of the Plan
No option shall be granted under this Plan after January 26, 2007.
Options granted before that date shall remain valid thereafter in accordance
with their terms.
15. Effective Date of Plan
This Plan was adopted by the Board of Directors of the Company on
January 27, 1997.
- 7 -
<PAGE>
INTERNET FINANCIAL SERVICES INC.
AMENDED AND RESTATED 1998 STOCK OPTION PLAN
SECTION 1. Establishment. There is hereby established the
Amended and Restated INTERNET FINANCIAL SERVICES INC. 1998 Stock Option Plan
("Plan"), pursuant to which employees (including officers), directors,
consultants and other persons who perform substantial services for or on behalf
of INTERNET FINANCIAL SERVICES INC. and/or its subsidiaries (the "Company") may
be granted options to purchase shares of common stock of the Company, par value
$.001 per share ("Common Stock"), and thereby share in the future growth of the
business. The subsidiaries of the Company included in this Plan (the
"Subsidiaries") shall be any subsidiary of the Company as defined in Section 424
of the Internal Revenue Code of 1986, as amended (the "Code").
SECTION 2. Status of Options. The options which may be granted
pursuant to this Plan will constitute either incentive stock options within the
meaning of Section 422 of the Code ("Incentive Stock Options") or options which
are not Incentive Stock Options ("Non-incentive Stock Options"). Incentive Stock
Options and Non-incentive Stock Options shall be collectively referred to herein
as "Options".
SECTION 3. Eligibility. All employees (including officers,
whether or not they are members of the Board of Directors) of the Company or any
of its Subsidiaries who are
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employed at the time of the adoption of this Plan or thereafter, any directors
of the Company, and any consultants and other persons who perform substantial
services for or on behalf of the Company, any of its Subsidiaries or affiliates,
or any entity in which the Company has an interest (collectively, the
"Grantees") shall be eligible to be granted Non-incentive Stock Options under
this Plan. All employees (including officers, whether or not they are members of
the Board of Directors) of the Company or any of its Subsidiaries who are
employed at the time of adoption of this Plan or thereafter shall be eligible to
be granted Incentive Stock Options under this Plan.
SECTION 4. Number of Shares Covered by Options; No Preemptive
Rights. The total number of shares which may be issued and sold pursuant to
Options granted under this Plan shall be 600,000 shares of Common Stock (or the
number and kind of shares of stock or other securities which, in accordance with
Section 9 of this Plan, shall be substituted for such shares of Common Stock or
to which said shares shall be adjusted; hereinafter, all references to shares of
Common Stock are deemed to be references to said shares or shares so adjusted.)
The issuance of shares upon exercise of an Option shall be free from any
preemptive or preferential right of subscription or purchase on the part of any
shareholder. If any outstanding Option granted under this Plan expires or is
terminated, for any reason, the shares of Common Stock subject to the
unexercised portion of the Option will again be available for Options issued
under this Plan.
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SECTION 5. Administration.
(a) This Plan shall be administered by the Board of Directors
of the Company (the "Board"). Subject to the express provisions of this Plan,
the Board shall have complete authority, in its discretion, to interpret this
Plan, to prescribe, amend and rescind rules and regulations relating to it, to
determine the terms and provisions of the respective option agreements (which
need not be identical), to determine the Grantees to whom, and the times and the
prices at which, Options shall be granted, the option periods, the number of
shares of the Common Stock to be subject to each Option and, as limited by
Section 3 hereof, whether each Option shall be an Incentive Stock Option or a
Non-incentive Stock Option, and to make all other determinations necessary or
advisable for the administration of the Plan. Each Option shall be clearly
identified at the time of grant as to its status. In making such determinations,
the Board may take into account the nature of the services rendered by the
respective Grantees, their present and potential contributions to the success of
the Company and such other factors as the Board, in its discretion, shall deem
relevant. Nothing contained in this Plan shall be deemed to give any Grantee any
right to be granted an Option to purchase shares of Common Stock except to the
extent and upon such terms and conditions as may be determined by the Board. The
Board's determination on all of the matters referred to in this Section 5 shall
be conclusive.
(b) The Board may at its election provide in any option
agreement covering the grant of Options under this Plan that, upon the exercise
of such Options, the Company will loan to the holder thereof such amount as
shall equal the purchase price of the shares of Common Stock issuable upon such
exercise, such loan to be on terms and conditions deemed appropriate by the
Board.
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(c) Notwithstanding any provision hereof to the contrary, the
Board shall have sole and exclusive authority with respect to the grant of
Options to directors.
SECTION 6. Terms of Incentive Stock Options. Each Incentive
Stock Option granted under this Plan shall be evidenced by an Incentive Stock
Option Agreement which shall be executed by the Company and by the person to
whom such Incentive Stock Option is granted, and shall be subject to the
following terms and conditions:
(a) The price at which shares of Common Stock covered by each
Incentive Stock Option may be purchased pursuant thereto shall be determined in
each case on the date of grant by the Board, but shall be an amount not less
than the par value of such shares and not less than the fair market value of
such shares on the date of grant. For purposes of this Section and Section 7,
the fair market value of shares of Common Stock on any day shall be (i) in the
event the Common Stock is not publicly traded, the fair market value on such day
as determined in good faith by the Board or (ii) in the event the Common Stock
is publicly traded, the last sale price of a share of Common Stock as reported
by the principal quotation service on which the Common Stock is listed, if
available, or, if last sale prices are not reported with respect to the Common
Stock, the mean of the high bid and low asked prices of a share of Common Stock
as reported by such principal quotation service, or, if there is no such report
by such quotation service for such day, such fair market value shall be the
average of (i) the last sale price (or, if last sale prices are
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not reported with respect to the Common Stock, the mean of the high bid and low
asked prices) on the day next preceding such day for which there was a report
and (ii) the last sale price (or, if last sale prices are not reported with
respect to the Common Stock, the mean of the high bid and low asked prices) on
the day next succeeding such day for which there was a report, or as otherwise
determined by the Board in its discretion pursuant to any reasonable method
contemplated by Section 422 of the Code and any regulations issued pursuant to
that Section.
(b) The price of the shares to be purchased pursuant to each
Incentive Stock Option shall be paid in full in cash, or by delivery (i.e.,
surrender) of shares of Common Stock of the Company then owned by the Grantee,
at the time of the exercise of the Incentive Stock Option. Shares of Common
Stock so delivered will be valued on the day of delivery for the purpose of
determining the extent to which the option price has been paid thereby, in the
same manner as provided for the purchase price of Incentive Stock Options as set
forth in paragraph (a) of this Section, or as otherwise determined by the Board,
in its discretion, pursuant to any reasonable method contemplated by Section 422
of the Code and any regulations issued pursuant to that Section.
(c) Each Incentive Stock Option Agreement shall provide that
such Incentive Stock Option may be exercised by the Grantee, in such parts and
at such times as may be specified in such Agreement, within a period not
exceeding ten years after the date on which the Incentive Stock Option is
granted (hereinafter called the "Incentive Stock Option Period") and, in any
event, only during the continuance of the employee's employment by the Company
or any of its
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Subsidiaries or during the period of three months after the termination of such
employment to the extent that the right to exercise such Incentive Stock Option
had accrued at the date of such termination; provided, however, that if
Incentive Stock Options as to 100 or more shares are held by a Grantee, then
such Incentive Stock Options may not be exercised for less than 100 shares at
any one time, and if Incentive Stock Options for less than 100 shares are held
by a Grantee, then Incentive Stock Options for all such shares must be exercised
at one time; and provided, further, that if the Grantee, while still employed by
the Company or any of its Subsidiaries, shall die or become disabled (within the
meaning of Section 22(e)(3) of the Code) within the Incentive Stock Option
Period, the Incentive Stock Option may be exercised, to the extent specified in
the Incentive Stock Option Agreement, and as herein provided, but only prior to
the first to occur of:
(i) the expiration of the period of one year after the
date of the Grantee's death or disability, or
(ii) the expiration of the Incentive Stock Option
Period,
by the person or persons entitled to do so under the Grantee's will, or, if the
Grantee shall fail to make testamentary disposition of said Incentive Stock
Option, or shall die intestate, by the Grantee's legal representative or
representatives.
(d) Each Incentive Stock Option granted under this Plan shall by
its terms be non-transferable by the Grantee except by will or by the laws of
descent and distribution, and each
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Incentive Stock Option shall by its terms be exercisable during the Grantee's
lifetime only by him.
(e) Notwithstanding the foregoing, if an Incentive Stock Option
is granted to a person at any time when such person owns, within the meaning of
Section 424(d) of the Code, more than 10% of the total combined voting power of
all classes of stock of the employer corporation (or a parent or subsidiary of
such corporation within the meaning of Section 424 of the Code), the price at
which each share of Common Stock covered by such Incentive Stock Option may be
purchased pursuant to such Incentive Stock Option shall not be less than 110% of
the fair market value (determined as in paragraph (a) of this Section) of the
shares of Common Stock at the time the Incentive Stock Option is granted, and
such Incentive Stock Option must be exercised within a period specified in the
Incentive Stock Option Agreement which does not exceed five years after the date
on which such Incentive Stock Option is granted.
(f) The Incentive Stock Option Agreement entered into pursuant
hereto may contain such other terms, provisions and conditions not inconsistent
herewith as shall be determined by the Board including, without limitation,
provisions (i) requiring the giving of satisfactory assurances by the Grantee
that the shares are purchased for investment and not with a view to resale in
connection with a distribution of such shares, and will not be transferred in
violation of applicable securities laws, (ii) restricting the transferability of
such shares during a specified period and (iii) requiring the resale of such
shares to the Company at the option price if the employment of the employee
terminates prior to a specified time. In addition, the Board, in its discretion,
may afford to holders of Incentive Stock Options granted under this Plan the
right to
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require the Company to cause to be registered under the Securities Act of 1933,
as amended, for public sale by the holders thereof, shares of Common Stock
subject to such Incentive Stock Options upon such terms and subject to such
conditions as the Board may determine to be appropriate.
(g) In the discretion of the Board, a single Stock Option
Agreement may include both Incentive Stock Options and Non-incentive Stock
Options, or those options may be included in separate stock option agreements.
SECTION 7. Terms of Non-incentive Stock Options. Each
Non-incentive Stock Option granted under this Plan shall be evidenced by a
Non-incentive Stock Option Agreement which shall be executed by the Company and
by the person to whom such Non-incentive Stock Option is granted, and shall be
subject to the following terms and conditions:
(a) The price at which shares of Common Stock covered by each
Non-incentive Stock Option may be purchased pursuant thereto shall be an amount
not less than the par value of such shares and not less than the fair market
value of such shares on the date of grant.
(b) Each Non-incentive Stock Option Agreement shall provide that
such Non-incentive Stock Option may be exercised by the Grantee, in such parts
and at such times as may be specified in such Agreement, within a period up to
and including ten years after the date on which the Non-incentive Stock Option
is granted.
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(c) Each Non-incentive Stock Option granted under this Plan
shall by its terms be non-transferable by the optionee except by will or by the
laws of descent and distribution, and each Non-incentive Stock Option shall by
its terms be exercisable during the Grantee's lifetime only by him.
(d) The Non-incentive Stock Option Agreement entered into
pursuant hereto may contain such other terms, provisions and conditions not
inconsistent herewith as shall be determined by the Board, in its sole
discretion, including without limitation the terms, provisions and conditions
set forth in Section 6(f) with respect to Incentive Stock Option Agreements.
SECTION 8. Limit on Option Amount.
(a) Notwithstanding any provision contained herein, the
aggregate fair market value (determined under Section 6(a) as of the time
Incentive Stock Options are granted) of the shares of Common Stock with respect
to which Incentive Stock Options are first exercisable by any employee during
any calendar year (under all stock option plans of the employee's employer
corporation and its parent and subsidiary corporation within the meaning of
Section 424 of the Code) shall not exceed $100,000. If an Incentive Stock Option
exceeds this $100,000 limitation, the portion of such Option which is
exercisable for shares of Common Stock in excess of the $100,000 limitation
shall be treated as a Non-incentive Stock Option. The limit in this paragraph
shall not apply to Options which are designated as Non-incentive Stock Options,
and, except as otherwise provided herein, there shall be no limit on the amount
of such Options which may be first exercisable in any year.
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(b) Notwithstanding any provision contained herein, grants of
options under this Plan to any one optionee who is an employee of the Company
shall be limited to Options to purchase no more than 150,000 shares of Common
Stock per calendar year (subject to adjustment in the event of a stock split).
SECTION 9. Adjustment of Number of Shares.
(a) In the event that a dividend shall be declared upon the
shares of Common Stock payable in shares of Common Stock, the number of shares
of Common Stock then subject to any Option granted hereunder, and the number of
shares reserved for issuance pursuant to this Plan but not yet covered by an
Option, shall be adjusted by adding to each of such shares the number of shares
which would be distributable thereon if such share had been outstanding on the
date fixed for determining the shareholders entitled to receive such stock
dividend. In the event that the outstanding shares of Common Stock shall be
changed into or exchanged for a different number or kind of shares of stock or
other securities of the Company or of another corporation, whether through
reorganization, recapitalization, stock split-up, combination of shares, merger
or consolidation, then there shall be substituted for each share of Common Stock
subject to any such Option and for each share of Common Stock reserved for
issuance pursuant to the Plan but not yet covered by an Option, the number and
kind of shares of stock or other securities into which each outstanding share of
Common Stock shall be so changed or for which each such share shall be
exchanged; provided, however, that in the event that such change or exchange
results from a merger or consolidation, and in the judgment of the Board such
substitution cannot be effected or would be inappropriate, or if the Company
shall sell all or substantially all of its assets,
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the Company shall use reasonable efforts to effect some other adjustment of each
then outstanding Option which the Board, in its sole discretion, shall deem
equitable. In the event that there shall be any change, other than as specified
above in this Section 9(a), in the number or kind of outstanding shares of
Common Stock or of any stock or other securities into which such shares of
Common Stock shall have been changed or for which they shall have been
exchanged, then, if the Board shall determine that such change equitably
requires an adjustment in the number or kind of shares theretofore reserved for
issuance pursuant to the Plan but not yet covered by an Option and of the shares
then subject to an Option or Options, such adjustment shall be made by the Board
and shall be effective and binding for all purposes of this Plan and of each
stock option agreement. Notwithstanding the foregoing, if any adjustment in the
number of shares which may be issued and sold pursuant to Options is required by
the Code or regulations issued pursuant thereto to be approved by the
stockholders in order to enable the Company to issue Incentive Stock Options
pursuant to this Plan, then no such adjustment shall be made without the
approval of the stockholders. In the case of any such substitution or adjustment
as provided for in this Section 9(a), the option price in each stock option
agreement for each share covered thereby prior to such substitution or
adjustment will be the total option price for all shares of stock or other
securities which shall have been substituted for each such share or to which
such share shall have been adjusted pursuant to this Section 9. No adjustment or
substitution provided for in this Section 9 shall require the Company, in any
stock option agreement, to sell a fractional share, and the total substitution
or adjustment with respect to each stock option agreement shall be limited
accordingly. Notwithstanding the foregoing, in the case of Incentive Stock
Options, if the effect of the adjustments or substitution is to cause the
Incentive Stock Option to fail to continue to
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qualify as an Incentive Stock Option or to cause a modification, extension or
renewal of such Incentive Stock Option within the meaning of Section 424 of the
Code, the Board of Directors shall use reasonable efforts to effect such other
adjustment of each then outstanding option as the Board of Directors, in its
sole discretion, shall deem equitable.
(b) In the event that the Company shall effect a distribution,
other than a normal and customary cash dividend, upon shares of Common Stock,
the Board may, in order to prevent significant diminution in the value of
Options as a result of any such distribution, take such measures as it deems
fair and equitable, including, without limitation, the adjustment of the option
price per share for shares not issued and sold hereunder prior to the record
date for said distribution.
SECTION 10. Amendments. This Plan may be terminated or amended
from time to time by vote of the Board; provided, however, that no such
termination or amendment shall materially adversely affect or impair any then
outstanding Option without the consent of the Grantee thereof and no amendment
which shall (i) change the total number of shares which may be issued and sold
pursuant to Options granted under this Plan, or (ii) change the designation or
class of employees or other persons eligible to receive Incentive Options or
Non-incentive Options, shall be effective without the approval of the
stockholders. Notwithstanding the foregoing, the Plan may be amended by the
Board to incorporate any amendments made to the Code or regulations promulgated
thereunder which the Board deems to be necessary or desirable to preserve (i)
incentive stock option status for outstanding Incentive Stock Options and the
ability
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to issue Incentive Stock Options pursuant to the Plan, and (ii) the
deductibility by the Company pursuant to Section 162(m) of the Code of amounts
taxed to Plan participants as ordinary compensation income.
SECTION 11. Effective Date and Termination. The Plan shall
become effective on the date hereof, subject to timely adoption and approval by
the stockholders of the Company. Except to the extent necessary to govern
outstanding Options, this Plan shall terminate on, and no additional Options
shall be granted after, ten years from the date of first adoption of the Plan
and approval by the stockholders. (March 16, 1998)
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EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT entered into as of June 1, 1997 by and between
Internet Financial Services, Inc., a Delaware corporation, with principal
offices at 33 West 17th Street, New York, New York 10011 ("Employer") and Steven
Malin, c/o the Company ("Executive").
A. Employer, directly and through its A.B. Watley, Inc. subsidiary, is
engaged in the business of providing electronic brokerage services and
electronic trading programs for use by professional and other retail
customers including allowing such customers to trade through their own
home or office computers, and services incident thereto ("Employer's
Business"); and
B. Employer wants to employ Executive, and Executive wants to accept such
employment, on the terms and conditions set forth in this Agreement.
In consideration of the facts mentioned above, and of the covenants and
conditions set out below, the parties agree as follows:
1. Employment
(a) During the Term of Employment as defined in Section 2, Employer
agrees to employ Executive as an executive, subject to the direction
and control at all times of the Chairman of the Board of Directors and
Chief Executive Officer of Employer and the Board of Directors of
Employer. Executive agrees to act in the foregoing capacity, in
accordance with the terms and conditions contained in this Agreement.
It is anticipated that Executive will have the title of Chairman of the
Board of Directors and Chief Executive Officer.
(b) Executive shall devote substantially all of his working time to
Employer's Business as conducted from time to time. Executive shall
render services, without additional compensation, in connection with
the operation of Employer's Business, including activities of
affiliates and subsidiaries of the Employer as may exist from time to
time, including, without limitation, A.B. Watley, Inc. Executive also
agrees to serve as a member of the board of directors, if elected, of
Employer and/or any subsidiaries or affiliates, without additional
compensation.
2. Term
The term of Executive's employment under this Agreement shall commence
on June 1, 1997 and end on May 31, 2002 (the "Initial Term").
Thereafter, this Agreement shall be automatically renewed and extended
for consecutive one year renewal terms, unless either party sends to
the other party a notice of non-renewal at least one hundred and eighty
days prior to the expiration of the Initial Term or any renewal term
(the "Renewal Term"). The Initial Term and Renewal Term are subject to
earlier termination as set forth in Section 5. The actual term of
employment is defined as "Term of Employment."
<PAGE>
3. Compensation
(a) Employer shall pay to Executive an annual base salary of $70,000
per annum during the first year of the Initial Term. Thereafter, the
amount of Executive's annual base salary shall be subject to annual
review by the Board of Directors of Employer, provided, however, that
in no event shall such base salary be less than $70,000 per annum.
(b) In addition to the compensation set forth in Section 3(a),
Executive may receive an annual bonus, solely in the discretion of the
Board of Directors. Any payments to be made under this Section shall be
paid within 120 days of the end of the calendar year for which such
incentive bonus relates.
(c) All payments shall be made in equal monthly installments, in
arrears, or such other installments as may be consistent with the
payroll practices of Employer for its executives.
4. Additional Executive Benefits
(a) Employer shall reimburse Executive for all expenses reasonably
incurred by Executive in connection with the performance of Executive's
duties under this Agreement against Executive's pre-submitted
documented vouchers for such expenses, which must be approved in
writing prior to the incurrence of such expense. Such approval shall be
required by either the Chairman or Vice Chairman of the Board of
Directors.
(b) Executive shall be entitled to reasonable vacation periods each
year (which shall be in accordance with Employer's policy for
executives) and other general medical and Executive benefit plans
(including profit sharing or pension plans) as shall have been
established and are continuing for executives of Employer.
(c) Executive has subscribed to purchase shares of Employer's common
stock, par value $.001 per share ("Employer's Common Stock"), which are
only being offered to certain employees and other consultants to
Employer. The purchase of such shares of Employer's Common Stock was
and is subject to the right of Employer to repurchase the same from
Executive in certain circumstances, including upon termination of
employment under this Agreement, with such repurchase rights and
obligations in the form of a Repurchase and Lock-Up Agreement being
executed by the parties simultaneously herewith.
5. Termination
(a) Employer may terminate this Agreement for cause.
(b) "Cause" within the meaning of this Agreement shall mean:
(i) Executive's breach of the provisions of Section 6(c).
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(ii) Executive's failure or refusal to follow any specific
written directions of the Board of Directors of
Employer (which directions include a statement to the
effect that failure or refusal to follow such
directions shall constitute cause for termination of
the employment of Executive hereunder).
(iii) Executive's failure or refusal to perform Executive's
duties in accordance with Section 1 hereof; provided,
however, that no discharge "for cause" under this
paragraph 5(b)(iii) shall be deemed effective unless
Executive shall have first received written notice
from the President or Board of Directors of Employer
advising Executive of the specific acts or omission
alleged to constitute a failure or refusal to perform
Executive's duties, and such failure or refusal
continues after Executive shall have had a reasonable
opportunity (which shall be defined as a period of
time consisting of at least ten (10) days from the
date Executive receives said notice from the Board of
Directors) to correct the acts or omissions so
complained of.
(iv) Failure by Executive to comply in any material
respect with the terms of this Agreement, if any, or
any written policies or directives of the Board as
determined by the Board in good faith in its sole
discretion, which has not been corrected by Executive
within 10 days after written notice from the Employer
of such failure.
(v) Physical incapacity or disability of Executive to
perform the services required to be performed under
this Agreement. For purposes of this Section 5(b)(v),
Executive's incapacity or disability to perform such
services for any cumulative period of one hundred
twenty (120) days during any twelve-month period, or
for any consecutive period of ninety (90) days, shall
be deemed "cause" hereunder.
(vi) Executive is convicted of, pleads guilty to,
confesses to any felony or any act of fraud,
misappropriation or embezzlement.
(vii) Executive engages in a fraudulent act or dishonest
act to the damage or prejudice of Employer and its
affiliates or in conduct or activities damaging to
the property, business or reputation of Employer and
its affiliates, all as determined by the Board in
good faith in its sole discretion.
(c) If Employer notifies Executive of its election to terminate this Agreement
for cause, this termination shall become effective at the time notice is deemed
to have been given in accordance with Section 9.
(d) This Agreement shall automatically terminate upon the death of Executive.
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6. Non-Competition and Non-Disclosure
(a) Notwithstanding any other provisions in this Agreement, nothing in
this Agreement shall prohibit Executive from acquiring or owning
without disclosure to the Employer less than 1% of the outstanding
securities of any class of any corporation that are listed on a
national securities exchange or traded in the over-the-counter market.
(b) During and after the Term of Employment and for a period of two
years thereafter, Executive covenants and agrees that Executive shall
keep strictly confidential all non-public proprietary information which
Executive may obtain during the course of Executive's employment with
respect to the business practices, finances, developments, marketing,
sales, customers, affairs, trade secrets and other confidential
information of Employer which shall remain the Employer's exclusive
property and the Executive shall not disclose the same, except solely
in the course of business on behalf of and for the benefit of Employer
pursuant to this Agreement. Executive further agrees that immediately
upon the termination of his employment (irrespective of the time,
manner or cause of termination), Executive will surrender and deliver
to Employer all (1) lists, books, records, memoranda and data, computer
discs, computer access codes, magnetic media, software, of every kind
relating to or in connection with Employer's Business and customers and
suppliers of Employer, and (2) all of Employer's personal and physical
property.
(c) During the Term of Employment and for a period of two years
thereafter, Executive covenants and agrees that Executive shall not
compete, directly or indirectly, with Employer in Employer's Business.
(d) During the Term of Employment and for a period of two years
thereafter, Executive covenants and agrees that Executive shall not,
alone or with others, directly or indirectly:
(i) solicit for Executive's benefit or the benefit of any
person or organization other than Employer, the
employment or other services of any Executive or
consultant of Employer; or
(ii) solicit for Executive's benefit or the benefit of any
person or organization other than Employer, the
employment of any Executive of any customer of
Employer, to compete in an area of business activity
similar to that conducted by Employer.
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7. Representation and Indemnification
Executive hereby represents and warrants that he is not a party to any
agreement, whether oral or written, which would prohibit him from being employed
by Employer, and Executive further agrees to indemnify and hold Employer, its
directors, officers, shareholders and agents, harmless from and against any and
all losses, cost or expense of every kind, nature and description (including,
without limitation, whether or not suit be brought, all reasonable costs,
expenses and fees of legal counsel), based upon, arising out of or otherwise in
respect of any breach of such representation and warranty.
8. Injunctive Relief
The parties acknowledge that the services to be rendered hereunder by
Executive are special, unique and of extraordinary character, and that in the
event of a breach or a threatened breach of Executive of any of Executive's
obligations under this Agreement, Employer will not have an adequate remedy at
law. Accordingly, in the event of any breach or threatened breach of Executive,
Employer shall be entitled to such equitable and injunctive relief as may be
available to restrain Executive and any business, firm, partnership, individual,
corporation or entity participating in the breach of this agreement. Nothing in
this agreement shall be construed as prohibiting Employer from pursing any other
remedies available at law or in equity for such breach or threatened breach,
including the recovery of damages and the immediate termination of the
employment of Executive under this agreement.
9. Notices
All notices shall be in writing and shall be delivered personally
(including by courier), sent by facsimile transmission (with appropriate
documented receipt thereof), by overnight receipted courier service (such as UPS
or Federal Express) or sent by certified, registered or express mail, postage
prepaid, to the parties at their address set forth at the beginning of this
Agreement with Employer's copy being sent to Employer at its then principal
office. Any such notice shall be deemed given when so delivered personally, or
if sent by facsimile transmission, when transmitted, or, if mailed, forty-eight
(48) hours after the date of deposit in the mail. Any party may, by notice given
in accordance with this Section to the other party, designate another address or
person for receipt of notices hereunder. Copies of any notices to be given to
Employer shall be given simultaneously to: Hartman & Craven LLP, 460 Park
Avenue, New York, New York 10022, Attention: Edward I. Tishelman, Esq..
10. Miscellaneous
(a) This Agreement shall be governed in all respects, including
validity, construction, interpretation and effect, by New York law.
(b) This Agreement may be amended, superseded, canceled, renewed or
extended, and the terms hereof may be waived, only by a written
instrument signed by authorized
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<PAGE>
representatives of the parties or, in the case of a waiver, by an
authorized representative of the party waiving compliance. No such
written instrument shall be effective unless it expressly recites that
it is intended to amend, supersede, cancel, renew or extend this
Agreement or to waive compliance with one or more of the terms hereof,
as the case may be. No delay on the part of any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof,
nor shall any waiver on the part of any party of any such right, power
or privilege, or any single or partial exercise of any such right,
power or privilege, preclude any further exercise thereof or the
exercise of any other such right, power or privilege. The rights and
remedies herein provided are cumulative and are not exclusive of any
rights or remedies that any party may otherwise have at law or in
equity.
(c) If any provision or any portion of any provision of this Agreement
or the application of any such provision or any portion thereof to any
person or circumstance, shall be held invalid or unenforceable, the
remaining portion of such provision and the remaining provisions of
this Agreement, or the application of such provision or portion of such
provision as is held invalid or unenforceable to persons or
circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby and such provision or
portion of any provision as shall have been held invalid or
unenforceable shall be deemed limited or modified to the extent
necessary to make it valid and enforceable; in no event shall this
Agreement be rendered void or unenforceable.
(d) The headings to the Sections of this Agreement are for convenience
of reference only and shall not be given any effect in the construction
or enforcement of this Agreement.
(e) This Agreement shall inure to the benefit of and be binding upon
the successor and assigns of Employer, but no interest in this
Agreement shall be transferable in any manner by Executive.
(f) This Agreement constitutes the entire agreement and understanding
between the parties and supersedes all prior discussions, agreements
and undertakings, written or oral, of any and every nature with respect
thereto.
(g) This Agreement may be executed by the parties hereto in separate
counterparts which together shall constitute one and the same
instrument.
(h) In the event of the termination or expiration of this Agreement,
the provisions of Sections 4(d) and 6 hereof shall remain in full force
and effect, in accordance with their respective terms.
6
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as of the date
stated at the beginning of this Agreement.
INTERNET FINANCIAL SERVICES, INC.
By: /s/ Steven Malin
--------------------------------------------------
Steven Malin, Chairman and Chief Executive Officer
/s/ Steven Malin
--------------------------------------------------
Executive - Steven Malin
7
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
AMENDMENT dated as of October 1, 1998 ("Amendment") to a certain
employment agreement entered into as of May 1, 1997 ("Employment Agreement") by
and between Internet Financial Services Inc., a Delaware corporation, with
principal offices at 33 West 17th Street, New York, New York 10011 ("Employer")
and Steven Malin, c/o the Company ("Executive").
WITNESSETH:
A. Employer is contemplating filing a registration statement on Form SB-2
covering an initial public offering of Employer's shares of common
stock (the "Registration Statement"); and
B. Employer and Executive desire to amend the terms of the Employment
Agreement in certain respects hereinafter set forth in this Amendment,
conditioned upon the effectiveness of the Registration Statement and
the consummation of the public offering provided for therein.
In consideration of the facts mentioned above, and of the covenants and
conditions set out below, the parties agree as follows:
1. Incorporation by Reference
(a) The Employment Agreement is hereby incorporated by reference as if
fully set forth herein.
(b) Unless expressly modified herein, the Employment Agreement and the
terms thereof remain in full force and effect.
(c) The definitions in the Employment Agreement shall have the same
meanings when used in this Amendment, unless otherwise specified
herein.
(d) In the event of any conflict between the terms of the Employment
Agreement and the terms of this Amendment, the terms of this Amendment
shall prevail.
2. Term
The Initial Term of Executive's employment, as provided in Section 2 of
the Employment Agreement, is hereby extended from April 30, 2002 to the
close of business on September 30, 2002.
<PAGE>
3. Base Compensation
(a) Section 3(a) of the Employment Agreement is hereby amended to
substitute the number "$90,000" for the number "$70,000" in the two
places in which the number appears.
(b) Effective upon the consummation of the initial public offering
covered by the Registration Statement, the number "$110,000" shall be
substituted for the number "$90,000" in section 3(a) of the Employment
Agreement, as heretofore modified in subparagraph (a) of this paragraph
3.
4. Bonus
(a) Section 3(b) of the Employment Agreement, providing for an annual
bonus, is hereby modified by being stricken in its entirety. In lieu
thereof, there shall be inserted the following:
"(b) In addition to the compensation set forth in Section
3(a), from and after the effectiveness of the offering
pursuant to the Registration Statement referred to
hereinabove, Executive shall receive a semi-annual bonus,
calculated from the time of effectiveness of the Registration
Statement. The first calculation period ("Calculation Period")
shall commence as of the first day of the month in which such
offering occurs and end six months thereafter, and each
Calculation Period shall run for a consecutive six month
period, following expiration of the prior Calculation Period.
Such bonus shall only be due if the Company, whose
determination shall be final, as contained on its internally
prepared financial statements, evidences at least a 30%
increase in gross revenues during a Calculation Period in
excess of the gross revenues for the corresponding six month
period in the prior year. If such increase in gross revenues
is achieved by the Company, then Executive shall receive a
bonus equal to 20% of the base compensation payable to him
during such six month Calculation Period. If, at the
termination or expiration of this Employment Agreement, there
is a Calculation Period through the date of termination or
expiration of less than six months, then the entitlement to
bonus shall be determined, and the bonus shall be calculated,
on a pro rata basis, by multiplying the gross revenues or
bonus amount, as the case may be, by a fraction whose
numerator consists of the number of months from the start of
the Calculation Period to the termination or expiration of his
employment hereunder, and whose denominator shall be six
months."
-2-
<PAGE>
IN WITNESS WHEREOF, this Amendment has been executed by the parties on
the day and year first above written.
INTERNET FINANCIAL SERVICES INC.
By: /s/ Steven Malin
-------------------------------
Steven Malin, Chairman and
Chief Executive Officer
/s/ Steven Malin
-------------------------------
Executive - Steven Malin
-3-
<PAGE>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT entered into as of June 1, 1997 by and between
Internet Financial Services, Inc., a Delaware corporation, with principal
offices at 33 West 17th Street, New York, New York 10011 ("Employer") and Harry
Simpson, c/o the Company ("Executive").
A. Employer, directly and through its A.B. Watley, Inc. subsidiary, is
engaged in the business of providing electronic brokerage services and
electronic trading programs for use by professional and other retail
customers including allowing such customers to trade through their own
home or office computers, and services incident thereto ("Employer's
Business"); and
B. Employer wants to employ Executive, and Executive wants to accept such
employment, on the terms and conditions set forth in this Agreement.
In consideration of the facts mentioned above, and of the covenants and
conditions set out below, the parties agree as follows:
1. Employment
(a) During the Term of Employment as defined in Section 2, Employer
agrees to employ Executive as an executive, subject to the direction
and control at all times of the Chairman of the Board of Directors and
Chief Executive Officer of Employer and the Board of Directors of
Employer. Executive agrees to act in the foregoing capacity, in
accordance with the terms and conditions contained in this Agreement.
It is anticipated that Executive will have the title of Executive
Vice-President - On-Line Brokerage Services.
(b) Executive shall devote substantially all of his working time to
Employer's Business as conducted from time to time. Executive shall
render services, without additional compensation, in connection with
the operation of Employer's Business, including activities of
affiliates and subsidiaries of the Employer as may exist from time to
time, including, without limitation, A.B. Watley, Inc. Executive also
agrees to serve as a member of the board of directors, if elected, of
Employer and/or any subsidiaries or affiliates, without additional
compensation.
2. Term
The term of Executive's employment under this Agreement shall commence
on June 1, 1997 and end on May 31, 2002 (the "Initial Term").
Thereafter, this Agreement shall be automatically renewed and extended
for consecutive one year renewal terms, unless either party sends to
the other party a notice of non-renewal at least one hundred and eighty
days prior to the expiration of the Initial Term or any renewal term
(the "Renewal Term"). The Initial Term and Renewal Term are subject to
earlier termination as set forth in Section 5. The actual term of
employment is defined as "Term of Employment."
1
<PAGE>
3. Compensation
(a) Employer shall pay to Executive an annual base salary of $90,000
per annum during the first year of the Initial Term. Thereafter, the
amount of Executive's annual base salary shall be subject to annual
review by the Board of Directors of Employer, provided, however, that
in no event shall such base salary be less than $90,000 per annum.
(b) In addition to the compensation set forth in Section 3(a),
Executive may receive an annual bonus, solely in the discretion of the
Board of Directors. Any payments to be made under this Section shall be
paid within 120 days of the end of the calendar year for which such
incentive bonus relates.
(c) All payments shall be made in equal monthly installments, in
arrears, or such other installments as may be consistent with the
payroll practices of Employer for its executives.
4. Additional Executive Benefits
(a) Employer shall reimburse Executive for all expenses reasonably
incurred by Executive in connection with the performance of Executive's
duties under this Agreement against Executive's pre-submitted
documented vouchers for such expenses, which must be approved in
writing prior to the incurrence of such expense. Such approval shall be
required by either the Chairman or Vice Chairman of the Board of
Directors.
(b) Executive shall be entitled to reasonable vacation periods each
year (which shall be in accordance with Employer's policy for
executives) and other general medical and Executive benefit plans
(including profit sharing or pension plans) as shall have been
established and are continuing for executives of Employer.
(c) Executive has subscribed to purchase shares of Employer's common
stock, par value $.001 per share ("Employer's Common Stock"), which are
only being offered to certain employees and other consultants to
Employer. The purchase of such shares of Employer's Common Stock was
and is subject to the right of Employer to repurchase the same from
Executive in certain circumstances, including upon termination of
employment under this Agreement, with such repurchase rights and
obligations in the form of a Repurchase and Lock-Up Agreement being
executed by the parties simultaneously herewith.
(d) Executive is or shall be entitled to receive options to purchase
75,000 shares of Employer's Common Stock at a price of $.02 per share.
These options are granted pursuant to Employer's 1997 Stock Option Plan
and the Stock Option Agreement executed in connection with such grant.
5. Termination
(a) Employer may terminate this Agreement for cause.
2
<PAGE>
(b) "Cause" within the meaning of this Agreement shall mean:
(i) Executive's breach of the provisions of Section 6(c).
(ii) Executive's failure or refusal to follow any specific
written directions of the Board of Directors of
Employer (which directions include a statement to the
effect that failure or refusal to follow such
directions shall constitute cause for termination of
the employment of Executive hereunder).
(iii) Executive's failure or refusal to perform Executive's
duties in accordance with Section 1 hereof; provided,
however, that no discharge "for cause" under this
paragraph 5(b)(iii) shall be deemed effective unless
Executive shall have first received written notice
from the President or Board of Directors of Employer
advising Executive of the specific acts or omission
alleged to constitute a failure or refusal to perform
Executive's duties, and such failure or refusal
continues after Executive shall have had a reasonable
opportunity (which shall be defined as a period of
time consisting of at least ten (10) days from the
date Executive receives said notice from the Board of
Directors) to correct the acts or omissions so
complained of.
(iv) Failure by Executive to comply in any material
respect with the terms of this Agreement, if any, or
any written policies or directives of the Board as
determined by the Board in good faith in its sole
discretion, which has not been corrected by Executive
within 10 days after written notice from the Employer
of such failure.
(v) Physical incapacity or disability of Executive to
perform the services required to be performed under
this Agreement. For purposes of this Section 5(b)(v),
Executive's incapacity or disability to perform such
services for any cumulative period of one hundred
twenty (120) days during any twelve-month period, or
for any consecutive period of ninety (90) days, shall
be deemed "cause" hereunder.
(vi) Executive is convicted of, pleads guilty to,
confesses to any felony or any act of fraud,
misappropriation or embezzlement.
(vii) Executive engages in a fraudulent act or dishonest
act to the damage or prejudice of Employer and its
affiliates or in conduct or activities damaging to
the property, business or reputation of Employer and
its affiliates, all as determined by the Board in
good faith in its sole discretion.
3
<PAGE>
(c) If Employer notifies Executive of its election to terminate this
Agreement for cause, this termination shall become effective at the
time notice is deemed to have been given in accordance with Section 9.
(d) This Agreement shall automatically terminate upon the death of
Executive.
6. Non-Competition and Non-Disclosure
(a) Notwithstanding any other provisions in this Agreement, nothing in
this Agreement shall prohibit Executive from acquiring or owning
without disclosure to the Employer less than 1% of the outstanding
securities of any class of any corporation that are listed on a
national securities exchange or traded in the over-the-counter market.
(b) During and after the Term of Employment and for a period of two
years thereafter, Executive covenants and agrees that Executive shall
keep strictly confidential all non-public proprietary information which
Executive may obtain during the course of Executive's employment with
respect to the business practices, finances, developments, marketing,
sales, customers, affairs, trade secrets and other confidential
information of Employer which shall remain the Employer's exclusive
property and the Executive shall not disclose the same, except solely
in the course of business on behalf of and for the benefit of Employer
pursuant to this Agreement. Executive further agrees that immediately
upon the termination of his employment (irrespective of the time,
manner or cause of termination), Executive will surrender and deliver
to Employer all (1) lists, books, records, memoranda and data, computer
discs, computer access codes, magnetic media, software, of every kind
relating to or in connection with Employer's Business and customers and
suppliers of Employer, and (2) all of Employer's personal and physical
property.
(c) During the Term of Employment and for a period of two years
thereafter, Executive covenants and agrees that Executive shall not
compete, directly or indirectly, with Employer in Employer's Business.
(d) During the Term of Employment and for a period of two years
thereafter, Executive covenants and agrees that Executive shall not,
alone or with others, directly or indirectly:
(i) solicit for Executive's benefit or the benefit of any
person or organization other than Employer, the
employment or other services of any Executive or
consultant of Employer; or
(ii) solicit for Executive's benefit or the benefit of any
person or organization other than Employer, the
employment of any Executive of any customer of
Employer, to compete in an area of business activity
similar to that conducted by Employer.
4
<PAGE>
7. Representation and Indemnification
Executive hereby represents and warrants that he is not a party to any
agreement, whether oral or written, which would prohibit him from being employed
by Employer, and Executive further agrees to indemnify and hold Employer, its
directors, officers, shareholders and agents, harmless from and against any and
all losses, cost or expense of every kind, nature and description (including,
without limitation, whether or not suit be brought, all reasonable costs,
expenses and fees of legal counsel), based upon, arising out of or otherwise in
respect of any breach of such representation and warranty.
8. Injunctive Relief
The parties acknowledge that the services to be rendered hereunder by
Executive are special, unique and of extraordinary character, and that in the
event of a breach or a threatened breach of Executive of any of Executive's
obligations under this Agreement, Employer will not have an adequate remedy at
law. Accordingly, in the event of any breach or threatened breach of Executive,
Employer shall be entitled to such equitable and injunctive relief as may be
available to restrain Executive and any business, firm, partnership, individual,
corporation or entity participating in the breach of this agreement. Nothing in
this agreement shall be construed as prohibiting Employer from pursing any other
remedies available at law or in equity for such breach or threatened breach,
including the recovery of damages and the immediate termination of the
employment of Executive under this agreement.
9. Notices
All notices shall be in writing and shall be delivered personally
(including by courier), sent by facsimile transmission (with appropriate
documented receipt thereof), by overnight receipted courier service (such as UPS
or Federal Express) or sent by certified, registered or express mail, postage
prepaid, to the parties at their address set forth at the beginning of this
Agreement with Employer's copy being sent to Employer at its then principal
office. Any such notice shall be deemed given when so delivered personally, or
if sent by facsimile transmission, when transmitted, or, if mailed, forty-eight
(48) hours after the date of deposit in the mail. Any party may, by notice given
in accordance with this Section to the other party, designate another address or
person for receipt of notices hereunder. Copies of any notices to be given to
Employer shall be given simultaneously to: Hartman & Craven LLP, 460 Park
Avenue, New York, New York 10022, Attention: Edward I. Tishelman, Esq..
10. Miscellaneous
(a) This Agreement shall be governed in all respects, including
validity, construction, interpretation and effect, by New York law.
(b) This Agreement may be amended, superseded, canceled, renewed or
extended, and the terms hereof may be waived, only by a written
instrument signed by authorized
5
<PAGE>
representatives of the parties or, in the case of a waiver, by an
authorized representative of the party waiving compliance. No such
written instrument shall be effective unless it expressly recites that
it is intended to amend, supersede, cancel, renew or extend this
Agreement or to waive compliance with one or more of the terms hereof,
as the case may be. No delay on the part of any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof,
nor shall any waiver on the part of any party of any such right, power
or privilege, or any single or partial exercise of any such right,
power or privilege, preclude any further exercise thereof or the
exercise of any other such right, power or privilege. The rights and
remedies herein provided are cumulative and are not exclusive of any
rights or remedies that any party may otherwise have at law or in
equity.
(c) If any provision or any portion of any provision of this Agreement
or the application of any such provision or any portion thereof to any
person or circumstance, shall be held invalid or unenforceable, the
remaining portion of such provision and the remaining provisions of
this Agreement, or the application of such provision or portion of such
provision as is held invalid or unenforceable to persons or
circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby and such provision or
portion of any provision as shall have been held invalid or
unenforceable shall be deemed limited or modified to the extent
necessary to make it valid and enforceable; in no event shall this
Agreement be rendered void or unenforceable.
(d) The headings to the Sections of this Agreement are for convenience
of reference only and shall not be given any effect in the construction
or enforcement of this Agreement.
(e) This Agreement shall inure to the benefit of and be binding upon
the successor and assigns of Employer, but no interest in this
Agreement shall be transferable in any manner by Executive.
(f) This Agreement constitutes the entire agreement and understanding
between the parties and supersedes all prior discussions, agreements
and undertakings, written or oral, of any and every nature with respect
thereto.
(g) This Agreement may be executed by the parties hereto in separate
counterparts which together shall constitute one and the same
instrument.
(h) In the event of the termination or expiration of this Agreement,
the provisions of Sections 4(d) and 6 hereof shall remain in full force
and effect, in accordance with their respective terms.
6
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as of the date
stated at the beginning of this Agreement.
INTERNET FINANCIAL SERVICES, INC.
By: /s/ Steven Malin
---------------------------------------------------
Steven Malin, Chairman and Chief Executive Officer
/s/ Harry Simpson
---------------------------------------------------
Executive - Harry Simpson
7
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
AMENDMENT dated as of October 1, 1998 ("Amendment") to a certain
employment agreement entered into as of June 1, 1997 ("Employment Agreement") by
and between Internet Financial Services Inc., a Delaware corporation, with
principal offices at 33 West 17th Street, New York, New York 10011 ("Employer")
and Harry Simpson, c/o the Company ("Executive").
WITNESSETH:
A. Employer is contemplating filing a registration statement on Form SB-2
covering an initial public offering of Employer's shares of common
stock (the "Registration Statement"); and
B. Employer and Executive desire to amend the terms of the Employment
Agreement in certain respects hereinafter set forth in this Amendment,
conditioned upon the effectiveness of the Registration Statement and
the consummation of the public offering provided for therein.
In consideration of the facts mentioned above, and of the covenants and
conditions set out below, the parties agree as follows:
1. Incorporation by Reference
(a) The Employment Agreement is hereby incorporated by reference as if
fully set forth herein.
(b) Unless expressly modified herein, the Employment Agreement and the
terms thereof remain in full force and effect.
(c) The definitions in the Employment Agreement shall have the same
meanings when used in this Amendment, unless otherwise specified
herein.
(d) In the event of any conflict between the terms of the Employment
Agreement and the terms of this Amendment, the terms of this Amendment
shall prevail.
2. Term
The Initial Term of Executive's employment, as provided in Section 2 of
the Employment Agreement, is hereby reduced from May 31, 2002 to the
close of business on September 30, 2001.
-1-
<PAGE>
3. Base Compensation
(a) Section 3(a) of the Employment Agreement is hereby amended to
substitute the number "$90,000" for the number "$70,000" in the two
places in which the number appears.
(b) Effective upon the consummation of the initial public offering
covered by the Registration Statement, the number "$110,000" shall be
substituted for the number "$90,000" in section 3(a) of the Employment
Agreement, as heretofore modified in subparagraph (a) of this paragraph
3.
4. Bonus
(a) Section 3(b) of the Employment Agreement, providing for an annual
bonus, is hereby modified by being stricken in its entirety. In lieu
thereof, there shall be inserted the following:
"(b) In addition to the compensation set forth in Section
3(a), from and after the effectiveness of the offering
pursuant to the Registration Statement referred to
hereinabove, Executive shall receive a semi-annual bonus,
calculated from the time of effectiveness of the Registration
Statement. The first calculation period ("Calculation Period")
shall commence as of the first day of the month in which such
offering occurs and end six months thereafter, and each
Calculation Period shall run for a consecutive six month
period, following expiration of the prior Calculation Period.
Such bonus shall only be due if the Company, whose
determination shall be final, as contained on its internally
prepared financial statements, evidences at least a 30%
increase in gross revenues during a Calculation Period in
excess of the gross revenues for the corresponding six month
period in the prior year. If such increase in gross revenues
is achieved by the Company, then Executive shall receive a
bonus equal to 20% of the base compensation payable to him
during such six month Calculation Period. If, at the
termination or expiration of this Employment Agreement, there
is a Calculation Period through the date of termination or
expiration of less than six months, then the entitlement to
bonus shall be determined, and the bonus shall be calculated,
on a pro rata basis, by multiplying the gross revenues or
bonus amount, as the case may be, by a fraction whose
numerator consists of the number of months from the start of
the Calculation Period to the termination or expiration of his
employment hereunder, and whose denominator shall be six
months."
-2-
<PAGE>
IN WITNESS WHEREOF, this Amendment has been executed by the parties on
the day and year first above written.
INTERNET FINANCIAL SERVICES INC.
By: /s/ Steven Malin
---------------------------------
Steven Malin, Chairman and
Chief Executive Officer
/s/ Harry Simpson
---------------------------------
Executive - Harry Simpson
-3-
<PAGE>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT entered into as of January 1, 1999 by and between
Internet Financial Services, Inc., a Delaware corporation, with principal
offices at 33 West 17th Street, New York, New York 10011 ("Employer") and Robert
Malin, c/o the Company ("Executive").
A. Employer, directly and through its A.B. Watley, Inc. subsidiary
("Watley"), is engaged in the business of providing electronic
brokerage services and electronic trading programs for use by
professional and other retail customers including allowing such
customers to trade through their own home or office computers, and
services incident thereto ("Employer's Business"); and
B. Employer wants to employ Executive, and Executive wants to accept such
employment, on the terms and conditions set forth in this Agreement.
In consideration of the facts mentioned above, and of the covenants and
conditions set out below, the parties agree as follows:
1. Employment
(a) During the Term of Employment as defined in Section 2, Employer
agrees to employ Executive in an executive capacity at Watley, subject
to the direction and control at all times of the Chairman of the Board
of Directors and Chief Executive Officer of Employer and the Board of
Directors of Employer. Executive agrees to act in the foregoing
capacity, in accordance with the terms and conditions contained in this
Agreement. It is anticipated that Executive will have the title of
President of Watley.
(b) Executive shall devote substantially all of his working time to
Employer's Business as conducted from time to time. Executive shall
render services, without additional compensation, in connection with
the operation of Employer's Business, including activities of
affiliates and subsidiaries of the Employer as may exist from time to
time, including, without limitation, Watley. Executive also agrees to
serve as a member of the board of directors, if elected, of Employer
and/or any subsidiaries or affiliates, without additional compensation.
2. Term
The term of Executive's employment under this Agreement shall commence
on January 1, 1999 and end on September 30, 2001 (the "Initial Term").
Thereafter, this Agreement shall be automatically renewed and extended
for consecutive one year renewal terms, unless either party sends to
the other party a notice of non-renewal at least one hundred and eighty
days prior to the expiration of the Initial Term or any renewal term
(the "Renewal Term"). The Initial Term and Renewal Term are subject
1
<PAGE>
to earlier termination as set forth in Section 5. The actual term of
employment is defined as "Term of Employment."
3. Compensation
(a) Employer shall pay to Executive an annual base salary of $90,000
per annum during the Initial Term; provided, however, that in the event
Employer effects a public offering of its securities on a Registration
Statement under federal securities laws, the base salary shall
thereafter be increased to the rate of $110,000 per annum during the
Initial Term. Thereafter, the amount of Executive's annual base salary
shall be subject to annual review by the Board of Directors of
Employer; provided, however, that in no event shall such base salary be
less than $110,000 per annum.
(b) In addition to the compensation set forth in Section 3(a), from and
after the effectiveness of the offering pursuant to the Registration
Statement referred to hereinabove, Executive shall receive a
semi-annual bonus, calculated from the time of effectiveness of the
Registration Statement. The first calculation period ("Calculation
Period") shall commence as of the first day of the month in which such
offering occurs and end six months thereafter, and each Calculation
Period shall run for a consecutive six month period, following
expiration of the prior Calculation Period. Such bonus shall only be
due if the Company, whose determination shall be final, as contained on
its internally prepared financial statements, evidences at least a 30%
increase in gross revenues during a Calculation Period in excess of the
gross revenues for the corresponding six month period in the prior
year. If such increase in gross revenues is achieved by the Company,
then Executive shall receive a bonus equal to 20% of the base
compensation payable to him during such six month Calculation Period.
If, at the termination or expiration of this Employment Agreement,
there is a Calculation Period through the date of termination or
expiration of less than six months, then the entitlement to bonus shall
be determined, and the bonus shall be calculated, on a pro rata basis,
by multiplying the gross revenues or bonus amount, as the case may be,
by a fraction whose numerator consists of the number of months from the
start of the Calculation Period to the termination or expiration of his
employment hereunder, and whose denominator shall be six months.
(c) All payments shall be made in equal monthly installments, in
arrears, or such other installments as may be consistent with the
payroll practices of Employer for its executives.
4. Additional Executive Benefits
(a) Employer shall reimburse Executive for all expenses reasonably
incurred by Executive in connection with the performance of Executive's
duties under this Agreement against Executive's pre-submitted
documented vouchers for such
2
<PAGE>
expenses, which must be approved in writing prior to the incurrence of
such expense. Such approval shall be required by either the Chairman or
Vice Chairman of the Board of Directors.
(b) Executive shall be entitled to reasonable vacation periods each
year (which shall be in accordance with Employer's policy for
executives) and other general medical and Executive benefit plans
(including profit sharing or pension plans) as shall have been
established and are continuing for executives of Employer.
5. Termination
(a) Employer may terminate this Agreement for cause.
(b) "Cause" within the meaning of this Agreement shall mean:
(i) Executive's breach of the provisions of Section 6(c).
(ii) Executive's failure or refusal to follow any specific
written directions of the Board of Directors of
Employer (which directions include a statement to the
effect that failure or refusal to follow such
directions shall constitute cause for termination of
the employment of Executive hereunder).
(iii) Executive's failure or refusal to perform Executive's
duties in accordance with Section 1 hereof; provided,
however, that no discharge "for cause" under this
paragraph 5(b)(iii) shall be deemed effective unless
Executive shall have first received written notice
from the President or Board of Directors of Employer
advising Executive of the specific acts or omission
alleged to constitute a failure or refusal to perform
Executive's duties, and such failure or refusal
continues after Executive shall have had a reasonable
opportunity (which shall be defined as a period of
time consisting of at least ten (10) days from the
date Executive receives said notice from the Board of
Directors) to correct the acts or omissions so
complained of.
(iv) Failure by Executive to comply in any material
respect with the terms of this Agreement, if any, or
any written policies or directives of the Board as
determined by the Board in good faith in its sole
discretion, which has not been corrected by Executive
within 10 days after written notice from the Employer
of such failure.
(v) Physical incapacity or disability of Executive to
perform the services required to be performed under
this Agreement. For purposes of this Section 5(b)(v),
Executive's incapacity or disability to perform such
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<PAGE>
services for any cumulative period of one hundred
twenty (120) days during any twelve-month period, or
for any consecutive period of ninety (90) days, shall
be deemed "cause" hereunder.
(vi) Executive is convicted of, pleads guilty to,
confesses to any felony or any act of fraud,
misappropriation or embezzlement.
(vii) Executive engages in a fraudulent act or dishonest
act to the damage or prejudice of Employer and its
affiliates or in conduct or activities damaging to
the property, business or reputation of Employer and
its affiliates, all as determined by the Board in
good faith in its sole discretion.
(c) If Employer notifies Executive of its election to terminate this
Agreement for cause, this termination shall become effective at the
time notice is deemed to have been given in accordance with Section 9.
(d) This Agreement shall automatically terminate upon the death of
Executive.
6. Non-Competition and Non-Disclosure
(a) Notwithstanding any other provisions in this Agreement, nothing in
this Agreement shall prohibit Executive from acquiring or owning
without disclosure to the Employer less than 1% of the outstanding
securities of any class of any corporation that are listed on a
national securities exchange or traded in the over-the-counter market.
(b) During and after the Term of Employment and for a period of two
years thereafter, Executive covenants and agrees that Executive shall
keep strictly confidential all non-public proprietary information which
Executive may obtain during the course of Executive's employment with
respect to the business practices, finances, developments, marketing,
sales, customers, affairs, trade secrets and other confidential
information of Employer which shall remain the Employer's exclusive
property and the Executive shall not disclose the same, except solely
in the course of business on behalf of and for the benefit of Employer
pursuant to this Agreement. Executive further agrees that immediately
upon the termination of his employment (irrespective of the time,
manner or cause of termination), Executive will surrender and deliver
to Employer all (1) lists, books, records, memoranda and data, computer
discs, computer access codes, magnetic media, software, of every kind
relating to or in connection with Employer's Business and customers and
suppliers of Employer, and (2) all of Employer's personal and physical
property.
4
<PAGE>
(c) During the Term of Employment and for a period of two years
thereafter, Executive covenants and agrees that Executive shall not
compete, directly or indirectly, with Employer in Employer's Business.
(d) During the Term of Employment and for a period of two years
thereafter, Executive covenants and agrees that Executive shall not,
alone or with others, directly or indirectly:
(i) solicit for Executive's benefit or the benefit of any
person or organization other than Employer, the
employment or other services of any Executive or
consultant of Employer; or
(ii) solicit for Executive's benefit or the benefit of any
person or organization other than Employer, the
employment of any Executive of any customer of
Employer, to compete in an area of business activity
similar to that conducted by Employer.
7. Representation and Indemnification
Executive hereby represents and warrants that he is not a party to any
agreement, whether oral or written, which would prohibit him from being employed
by Employer, and Executive further agrees to indemnify and hold Employer, its
directors, officers, shareholders and agents, harmless from and against any and
all losses, cost or expense of every kind, nature and description (including,
without limitation, whether or not suit be brought, all reasonable costs,
expenses and fees of legal counsel), based upon, arising out of or otherwise in
respect of any breach of such representation and warranty.
8. Injunctive Relief
The parties acknowledge that the services to be rendered hereunder by
Executive are special, unique and of extraordinary character, and that in the
event of a breach or a threatened breach of Executive of any of Executive's
obligations under this Agreement, Employer will not have an adequate remedy at
law. Accordingly, in the event of any breach or threatened breach of Executive,
Employer shall be entitled to such equitable and injunctive relief as may be
available to restrain Executive and any business, firm, partnership, individual,
corporation or entity participating in the breach of this agreement. Nothing in
this agreement shall be construed as prohibiting Employer from pursing any other
remedies available at law or in equity for such breach or threatened breach,
including the recovery of damages and the immediate termination of the
employment of Executive under this agreement.
5
<PAGE>
9. Notices
All notices shall be in writing and shall be delivered personally
(including by courier), sent by facsimile transmission (with appropriate
documented receipt thereof), by overnight receipted courier service (such as UPS
or Federal Express) or sent by certified, registered or express mail, postage
prepaid, to the parties at their address set forth at the beginning of this
Agreement with Employer's copy being sent to Employer at its then principal
office. Any such notice shall be deemed given when so delivered personally, or
if sent by facsimile transmission, when transmitted, or, if mailed, forty-eight
(48) hours after the date of deposit in the mail. Any party may, by notice given
in accordance with this Section to the other party, designate another address or
person for receipt of notices hereunder. Copies of any notices to be given to
Employer shall be given simultaneously to: Hartman & Craven LLP, 460 Park
Avenue, New York, New York 10022, Attention: Edward I. Tishelman, Esq..
10. Miscellaneous
(a) This Agreement shall be governed in all respects, including
validity, construction, interpretation and effect, by New York law.
(b) This Agreement may be amended, superseded, canceled, renewed or
extended, and the terms hereof may be waived, only by a written
instrument signed by authorized representatives of the parties or, in
the case of a waiver, by an authorized representative of the party
waiving compliance. No such written instrument shall be effective
unless it expressly recites that it is intended to amend, supersede,
cancel, renew or extend this Agreement or to waive compliance with one
or more of the terms hereof, as the case may be. No delay on the part
of any party in exercising any right, power or privilege hereunder
shall operate as a waiver thereof, nor shall any waiver on the part of
any party of any such right, power or privilege, or any single or
partial exercise of any such right, power or privilege, preclude any
further exercise thereof or the exercise of any other such right, power
or privilege. The rights and remedies herein provided are cumulative
and are not exclusive of any rights or remedies that any party may
otherwise have at law or in equity.
(c) If any provision or any portion of any provision of this Agreement
or the application of any such provision or any portion thereof to any
person or circumstance, shall be held invalid or unenforceable, the
remaining portion of such provision and the remaining provisions of
this Agreement, or the application of such provision or portion of such
provision as is held invalid or unenforceable to persons or
circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby and such provision or
portion of any provision as shall have been held invalid or
unenforceable shall be deemed limited or modified to the extent
necessary to make it valid and enforceable; in no event shall this
Agreement be rendered void or unenforceable.
6
<PAGE>
(d) The headings to the Sections of this Agreement are for convenience
of reference only and shall not be given any effect in the construction
or enforcement of this Agreement.
(e) This Agreement shall inure to the benefit of and be binding upon
the successor and assigns of Employer, but no interest in this
Agreement shall be transferable in any manner by Executive.
(f) This Agreement constitutes the entire agreement and understanding
between the parties and supersedes all prior discussions, agreements
and undertakings, written or oral, of any and every nature with respect
thereto.
(g) This Agreement may be executed by the parties hereto in separate
counterparts which together shall constitute one and the same
instrument.
(h) In the event of the termination or expiration of this Agreement,
the provisions of Sections 6 and 8 hereof shall remain in full force
and effect, in accordance with their respective terms.
IN WITNESS WHEREOF, this Agreement has been executed as of the date
stated at the beginning of this Agreement.
INTERNET FINANCIAL SERVICES, INC.
By: /s/ Steven Malin
----------------------------------
Steven Malin, Chairman
and Chief Executive Officer
/s/ Robert Malin
----------------------------------
Executive - Robert Malin
7
<PAGE>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT entered into as of June 1, 1997 by and between
Internet Financial Services, Inc., a Delaware corporation, with principal
offices at 33 West 17th Street, New York, New York 10011 ("Employer") and
Anthony G. Huston, c/o the Company ("Executive").
A. Employer, directly and through its A.B. Watley, Inc. subsidiary, is
engaged in the business of providing electronic brokerage services and
electronic trading programs for use by professional and other retail
customers including allowing such customers to trade through their own
home or office computers, and services incident thereto ("Employer's
Business"); and
B. Employer wants to employ Executive, and Executive wants to accept such
employment, on the terms and conditions set forth in this Agreement.
In consideration of the facts mentioned above, and of the covenants and
conditions set out below, the parties agree as follows:
1. Employment
(a) During the Term of Employment as defined in Section 2, Employer
agrees to employ Executive as an executive, subject to the direction
and control at all times of the Chairman of the Board of Directors and
Chief Executive Officer of Employer and the Board of Directors of
Employer. Executive agrees to act in the foregoing capacity, in
accordance with the terms and conditions contained in this Agreement.
It is anticipated that Executive will have the title of Executive
Vice-President - Marketing.
(b) Executive shall devote substantially all of his working time to
Employer's Business as conducted from time to time. Executive shall
render services, without additional compensation, in connection with
the operation of Employer's Business, including activities of
affiliates and subsidiaries of the Employer as may exist from time to
time, including, without limitation, A.B. Watley, Inc. Executive also
agrees to serve as a member of the board of directors, if elected, of
Employer and/or any subsidiaries or affiliates, without additional
compensation, it being agreed that, subject to stockholder approval,
Executive shall continue to be elected to serve as a member of
Employer's board of directors during the term hereof, as well as a
member of the stock option committee.
2. Term
The term of Executive's employment under this Agreement shall commence
on June 1, 1997 and end on May 31, 2002 (the "Initial Term").
Thereafter, this Agreement shall be automatically renewed and extended
for consecutive one year renewal terms, unless either party sends to
the other party a notice of non-renewal at least one hundred and eighty
days
1
<PAGE>
prior to the expiration of the Initial Term or any renewal term (the
"Renewal Term"). The Initial Term and Renewal Term are subject to
earlier termination as set forth in Section 5. The actual term of
employment is defined as "Term of Employment."
3. Compensation
(a) Employer shall pay to Executive an annual base salary of $70,000
per annum during the first year of the Initial Term. Thereafter, the
amount of Executive's annual base salary shall be subject to annual
review by the Board of Directors of Employer, provided, however, that
in no event shall such base salary be less than $70,000 per annum.
(b) In addition to the compensation set forth in Section 3(a),
Executive may receive an annual bonus, solely in the discretion of the
Board of Directors. Any payments to be made under this Section shall be
paid within 120 days of the end of the calendar year for which such
incentive bonus relates.
(c) All payments shall be made in equal monthly installments, in
arrears, or such other installments as may be consistent with the
payroll practices of Employer for its executives.
4. Additional Executive Benefits
(a) Employer shall reimburse Executive for all expenses reasonably
incurred by Executive in connection with the performance of Executive's
duties under this Agreement against Executive's pre-submitted
documented vouchers for such expenses, which must be approved in
writing prior to the incurrence of such expense. Such approval shall be
required by either the Chairman or Vice Chairman of the Board of
Directors.
(b) Executive shall be entitled to reasonable vacation periods each
year (which shall be in accordance with Employer's policy for
executives) and other general medical and Executive benefit plans
(including profit sharing or pension plans) as shall have been
established and are continuing for executives of Employer.
(c) Executive has subscribed to purchase shares of Employer's common
stock, par value $.001 per share ("Employer's Common Stock"), which are
only being offered to certain employees and other consultants to
Employer. The purchase of such shares of Employer's Common Stock was
and is subject to the right of Employer to repurchase the same from
Executive in certain circumstances, including upon termination of
employment under this Agreement, with such repurchase rights and
obligations in the form of a Repurchase and Lock-Up Agreement being
executed by the parties simultaneously herewith.
(d) Executive is or shall be entitled to receive options to purchase
25,000 shares of Employer's Common Stock at a price of $.02 per share.
These options are granted pursuant to Employer's 1997 Stock Option Plan
and the Stock Option Agreement executed in connection with such grant.
2
<PAGE>
5. Termination
(a) Employer may terminate this Agreement for cause.
(b) "Cause" within the meaning of this Agreement shall mean:
(i) Executive's breach of the provisions of Section 6(c).
(ii) Executive's failure or refusal to follow any specific
written directions of the Board of Directors of
Employer (which directions include a statement to the
effect that failure or refusal to follow such
directions shall constitute cause for termination of
the employment of Executive hereunder).
(iii) Executive's failure or refusal to perform Executive's
duties in accordance with Section 1 hereof; provided,
however, that no discharge "for cause" under this
paragraph 5(b)(iii) shall be deemed effective unless
Executive shall have first received written notice
from the President or Board of Directors of Employer
advising Executive of the specific acts or omission
alleged to constitute a failure or refusal to perform
Executive's duties, and such failure or refusal
continues after Executive shall have had a reasonable
opportunity (which shall be defined as a period of
time consisting of at least ten (10) days from the
date Executive receives said notice from the Board of
Directors) to correct the acts or omissions so
complained of.
(iv) Failure by Executive to comply in any material
respect with the terms of this Agreement, if any, or
any written policies or directives of the Board as
determined by the Board in good faith in its sole
discretion, which has not been corrected by Executive
within 10 days after written notice from the Employer
of such failure.
(v) Physical incapacity or disability of Executive to
perform the services required to be performed under
this Agreement. For purposes of this Section 5(b)(v),
Executive's incapacity or disability to perform such
services for any cumulative period of one hundred
twenty (120) days during any twelve-month period, or
for any consecutive period of ninety (90) days, shall
be deemed "cause" hereunder.
(vi) Executive is convicted of, pleads guilty to,
confesses to any felony or any act of fraud,
misappropriation or embezzlement.
(vii) Executive engages in a fraudulent act or dishonest
act to the damage or prejudice of Employer and its
affiliates or in conduct or activities damaging
3
<PAGE>
to the property, business or reputation of Employer
and its affiliates, all as determined by the Board in
good faith in its sole discretion.
(c) If Employer notifies Executive of its election to terminate this
Agreement for cause, this termination shall become effective at the
time notice is deemed to have been given in accordance with Section 9.
(d) This Agreement shall automatically terminate upon the death of
Executive.
6. Non-Competition and Non-Disclosure
(a) Notwithstanding any other provisions in this Agreement, nothing in
this Agreement shall prohibit Executive from acquiring or owning
without disclosure to the Employer less than 1% of the outstanding
securities of any class of any corporation that are listed on a
national securities exchange or traded in the over-the-counter market.
(b) During and after the Term of Employment and for a period of two
years thereafter, Executive covenants and agrees that Executive shall
keep strictly confidential all non-public proprietary information which
Executive may obtain during the course of Executive's employment with
respect to the business practices, finances, developments, marketing,
sales, customers, affairs, trade secrets and other confidential
information of Employer which shall remain the Employer's exclusive
property and the Executive shall not disclose the same, except solely
in the course of business on behalf of and for the benefit of Employer
pursuant to this Agreement. Executive further agrees that immediately
upon the termination of his employment (irrespective of the time,
manner or cause of termination), Executive will surrender and deliver
to Employer all (1) lists, books, records, memoranda and data, computer
discs, computer access codes, magnetic media, software, of every kind
relating to or in connection with Employer's Business and customers and
suppliers of Employer, and (2) all of Employer's personal and physical
property.
(c) During the Term of Employment and for a period of two years
thereafter, Executive covenants and agrees that Executive shall not
compete, directly or indirectly, with Employer in Employer's Business.
(d) During the Term of Employment and for a period of two years
thereafter, Executive covenants and agrees that Executive shall not,
alone or with others, directly or indirectly:
(i) solicit for Executive's benefit or the benefit of any
person or organization other than Employer, the
employment or other services of any Executive or
consultant of Employer; or
(ii) solicit for Executive's benefit or the benefit of any
person or organization other than Employer, the
employment of any Executive of any customer of
4
<PAGE>
Employer, to compete in an area of business activity
similar to that conducted by Employer.
7. Representation and Indemnification
Executive hereby represents and warrants that he is not a party to any
agreement, whether oral or written, which would prohibit him from being employed
by Employer, and Executive further agrees to indemnify and hold Employer, its
directors, officers, shareholders and agents, harmless from and against any and
all losses, cost or expense of every kind, nature and description (including,
without limitation, whether or not suit be brought, all reasonable costs,
expenses and fees of legal counsel), based upon, arising out of or otherwise in
respect of any breach of such representation and warranty.
8. Injunctive Relief
The parties acknowledge that the services to be rendered hereunder by
Executive are special, unique and of extraordinary character, and that in the
event of a breach or a threatened breach of Executive of any of Executive's
obligations under this Agreement, Employer will not have an adequate remedy at
law. Accordingly, in the event of any breach or threatened breach of Executive,
Employer shall be entitled to such equitable and injunctive relief as may be
available to restrain Executive and any business, firm, partnership, individual,
corporation or entity participating in the breach of this agreement. Nothing in
this agreement shall be construed as prohibiting Employer from pursing any other
remedies available at law or in equity for such breach or threatened breach,
including the recovery of damages and the immediate termination of the
employment of Executive under this agreement.
9. Notices
All notices shall be in writing and shall be delivered personally
(including by courier), sent by facsimile transmission (with appropriate
documented receipt thereof), by overnight receipted courier service (such as UPS
or Federal Express) or sent by certified, registered or express mail, postage
prepaid, to the parties at their address set forth at the beginning of this
Agreement with Employer's copy being sent to Employer at its then principal
office. Any such notice shall be deemed given when so delivered personally, or
if sent by facsimile transmission, when transmitted, or, if mailed, forty-eight
(48) hours after the date of deposit in the mail. Any party may, by notice given
in accordance with this Section to the other party, designate another address or
person for receipt of notices hereunder. Copies of any notices to be given to
Employer shall be given simultaneously to: Hartman & Craven LLP, 460 Park
Avenue, New York, New York 10022, Attention: Edward I. Tishelman, Esq..
10. Miscellaneous
(a) This Agreement shall be governed in all respects, including
validity, construction, interpretation and effect, by New York law.
5
<PAGE>
(b) This Agreement may be amended, superseded, canceled, renewed or
extended, and the terms hereof may be waived, only by a written
instrument signed by authorized representatives of the parties or, in
the case of a waiver, by an authorized representative of the party
waiving compliance. No such written instrument shall be effective
unless it expressly recites that it is intended to amend, supersede,
cancel, renew or extend this Agreement or to waive compliance with one
or more of the terms hereof, as the case may be. No delay on the part
of any party in exercising any right, power or privilege hereunder
shall operate as a waiver thereof, nor shall any waiver on the part of
any party of any such right, power or privilege, or any single or
partial exercise of any such right, power or privilege, preclude any
further exercise thereof or the exercise of any other such right, power
or privilege. The rights and remedies herein provided are cumulative
and are not exclusive of any rights or remedies that any party may
otherwise have at law or in equity.
(c) If any provision or any portion of any provision of this Agreement
or the application of any such provision or any portion thereof to any
person or circumstance, shall be held invalid or unenforceable, the
remaining portion of such provision and the remaining provisions of
this Agreement, or the application of such provision or portion of such
provision as is held invalid or unenforceable to persons or
circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby and such provision or
portion of any provision as shall have been held invalid or
unenforceable shall be deemed limited or modified to the extent
necessary to make it valid and enforceable; in no event shall this
Agreement be rendered void or unenforceable.
(d) The headings to the Sections of this Agreement are for convenience
of reference only and shall not be given any effect in the construction
or enforcement of this Agreement.
(e) This Agreement shall inure to the benefit of and be binding upon
the successor and assigns of Employer, but no interest in this
Agreement shall be transferable in any manner by Executive.
(f) This Agreement constitutes the entire agreement and understanding
between the parties and supersedes all prior discussions, agreements
and undertakings, written or oral, of any and every nature with respect
thereto.
(g) This Agreement may be executed by the parties hereto in separate
counterparts which together shall constitute one and the same
instrument.
(h) In the event of the termination or expiration of this Agreement,
the provisions of Sections 4(d) and 6 hereof shall remain in full force
and effect, in accordance with their respective terms.
6
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as of the date
stated at the beginning of this Agreement.
INTERNET FINANCIAL SERVICES, INC.
By: /s/ Steven Malin
------------------------------------------
Steven Malin, Chairman and Chief Executive Officer
/s/ Anthony G. Huston
------------------------------------------
Executive - Anthony G. Huston
7
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
AMENDMENT dated as of October 1, 1998 ("Amendment") to a certain
employment agreement entered into as of June 1, 1997 ("Employment Agreement") by
and between Internet Financial Services Inc., a Delaware corporation, with
principal offices at 33 West 17th Street, New York, New York 10011 ("Employer")
and Anthony G. Huston, c/o the Company ("Executive").
WITNESSETH:
A. Employer is contemplating filing a registration statement on Form SB-2
covering an initial public offering of Employer's shares of common
stock (the "Registration Statement"); and
B. Employer and Executive desire to amend the terms of the Employment
Agreement in certain respects hereinafter set forth in this Amendment,
conditioned upon the effectiveness of the Registration Statement and
the consummation of the public offering provided for therein.
In consideration of the facts mentioned above, and of the covenants and
conditions set out below, the parties agree as follows:
1. Incorporation by Reference
(a) The Employment Agreement is hereby incorporated by reference as if
fully set forth herein.
(b) Unless expressly modified herein, the Employment Agreement and the
terms thereof remain in full force and effect.
(c) The definitions in the Employment Agreement shall have the same
meanings when used in this Amendment, unless otherwise specified
herein.
(d) In the event of any conflict between the terms of the Employment
Agreement and the terms of this Amendment, the terms of this Amendment
shall prevail.
2. Term
The Initial Term of Executive's employment, as provided in Section 2 of
the Employment Agreement, is hereby reduced from May 31, 2002 to the
close of business on September 30, 2001.
<PAGE>
3. Base Compensation
(a) Section 3(a) of the Employment Agreement is hereby amended to
substitute the number "$90,000" for the number "$70,000" in the two
places in which the number appears.
(b) Effective upon the consummation of the initial public offering
covered by the Registration Statement, the number "$110,000" shall be
substituted for the number "$90,000" in section 3(a) of the Employment
Agreement, as heretofore modified in subparagraph (a) of this paragraph
3.
4. Bonus
(a) Section 3(b) of the Employment Agreement, providing for an annual
bonus, is hereby modified by being stricken in its entirety. In lieu
thereof, there shall be inserted the following:
"(b) In addition to the compensation set forth in Section
3(a), from and after the effectiveness of the offering
pursuant to the Registration Statement referred to
hereinabove, Executive shall receive a semi-annual bonus,
calculated from the time of effectiveness of the Registration
Statement. The first calculation period ("Calculation Period")
shall commence as of the first day of the month in which such
offering occurs and end six months thereafter, and each
Calculation Period shall run for a consecutive six month
period, following expiration of the prior Calculation Period.
Such bonus shall only be due if the Company, whose
determination shall be final, as contained on its internally
prepared financial statements, evidences at least a 30%
increase in gross revenues during a Calculation Period in
excess of the gross revenues for the corresponding six month
period in the prior year. If such increase in gross revenues
is achieved by the Company, then Executive shall receive a
bonus equal to 20% of the base compensation payable to him
during such six month Calculation Period. If, at the
termination or expiration of this Employment Agreement, there
is a Calculation Period through the date of termination or
expiration of less than six months, then the entitlement to
bonus shall be determined, and the bonus shall be calculated,
on a pro rata basis, by multiplying the gross revenues or
bonus amount, as the case may be, by a fraction whose
numerator consists of the number of months from the start of
the Calculation Period to the termination or expiration of his
employment hereunder, and whose denominator shall be six
months."
-2-
<PAGE>
IN WITNESS WHEREOF, this Amendment has been executed by the parties on
the day and year first above written.
INTERNET FINANCIAL SERVICES INC.
By: /s/ Steven Malin
---------------------------
Steven Malin, Chairman and
Chief Executive Officer
/s/ Anthony G. Huston
--------------------------------
Executive - Anthony G. Huston
-3-
<PAGE>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT entered into as of March 1, 1998 by and between
Internet Financial Services, Inc., a Delaware corporation, with principal
offices at 33 West 17th Street, New York, New York 10011 ("Employer") and Eric
Steinberg, c/o the Company ("Executive").
A. Employer, directly and through its A.B. Watley, Inc. subsidiary
("Watley"), is engaged in the business of providing electronic
brokerage services and electronic trading programs for use by
professional and other retail customers including allowing such
customers to trade through their own home or office computers, and
services incident thereto ("Employer's Business"); and
B. Employer wants to employ Executive, and Executive wants to accept such
employment, on the terms and conditions set forth in this Agreement.
In consideration of the facts mentioned above, and of the covenants and
conditions set out below, the parties agree as follows:
1. Employment
(a) During the Term of Employment as defined in Section 2, Employer
agrees to employ Executive in an executive capacity at Employer,
subject to the direction and control at all times of the Chairman of
the Board of Directors and Chief Executive Officer of Employer and the
Board of Directors of Employer. Executive agrees to act in the
foregoing capacity, in accordance with the terms and conditions
contained in this Agreement. It is anticipated that Executive will have
the title initially of Executive Vice-President- Administration.
(b) Executive shall devote substantially all of his working time to
Employer's Business as conducted from time to time. Executive shall
render services, without additional compensation, in connection with
the operation of Employer's Business, including activities of
affiliates and subsidiaries of the Employer as may exist from time to
time, including, without limitation, Watley. Executive also agrees to
serve as a member of the board of directors or board of Advisors, if
elected, of Employer and/or any subsidiaries or affiliates, without
additional compensation.
2. Term
The term of Executive's employment under this Agreement shall commence
on March 1, 1998 and end on September 30, 2001 (the "Initial Term").
Thereafter, this Agreement shall be automatically renewed and extended
for consecutive one year renewal terms, unless either party sends to
the other party a notice of non-renewal at least one hundred and eighty
days prior to the expiration of the Initial Term or any renewal term
(the "Renewal Term").
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<PAGE>
The Initial Term and Renewal Term are subject to earlier termination as
set forth in Section 5. The actual term of employment is defined as
"Term of Employment."
3. Compensation
(a) Employer shall pay to Executive an annual base salary of $90,000
per annum during the Initial Term; provided, however, that in the event
Employer effects a public offering of its securities on a Registration
Statement under federal securities laws, the base salary shall
thereafter be increased to the rate of $110,000 per annum during the
Initial Term. Thereafter, the amount of Executive's annual base salary
shall be subject to annual review by the Board of Directors of
Employer; provided, however, that in no event shall such base salary be
less than $110,000 per annum.
(b) In addition to the compensation set forth in Section 3(a), from and
after the effectiveness of the offering pursuant to the Registration
Statement referred to hereinabove, Executive shall receive a
semi-annual bonus, calculated from the time of effectiveness of the
Registration Statement. The first calculation period ("Calculation
Period") shall commence as of the first day of the month in which such
offering occurs and end six months thereafter, and each Calculation
Period shall run for a consecutive six month period, following
expiration of the prior Calculation Period. Such bonus shall only be
due if the Company, whose determination shall be final, as contained on
its internally prepared financial statements, evidences at least a 30%
increase in gross revenues during a Calculation Period in excess of the
gross revenues for the corresponding six month period in the prior
year. If such increase in gross revenues is achieved by the Company,
then Executive shall receive a bonus equal to 20% of the base
compensation payable to him during such six month Calculation Period.
If, at the termination or expiration of this Employment Agreement,
there is a Calculation Period through the date of termination or
expiration of less than six months, then the entitlement to bonus shall
be determined, and the bonus shall be calculated, on a pro rata basis,
by multiplying the gross revenues or bonus amount, as the case may be,
by a fraction whose numerator consists of the number of months from the
start of the Calculation Period to the termination or expiration of his
employment hereunder, and whose denominator shall be six months.
(c) All payments shall be made in equal monthly installments, in
arrears, or such other installments as may be consistent with the
payroll practices of Employer for its executives.
4. Additional Executive Benefits
(a) Employer shall reimburse Executive for all expenses reasonably
incurred by Executive in connection with the performance of Executive's
duties under this Agreement against Executive's pre-submitted
documented vouchers for such expenses, which must be approved in
writing prior to the incurrence of such expense. Such approval shall be
required by either the Chairman or Vice Chairman of the Board of
Directors.
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<PAGE>
(b) Executive shall be entitled to reasonable vacation periods each
year (which shall be in accordance with Employer's policy for
executives) and other general medical and Executive benefit plans
(including profit sharing or pension plans) as shall have been
established and are continuing for executives of Employer.
5. Termination
(a) Employer may terminate this Agreement for cause.
(b) "Cause" within the meaning of this Agreement shall mean:
(i) Executive's breach of the provisions of Section 6(c).
(ii) Executive's failure or refusal to follow any specific
written directions of the Board of Directors of
Employer (which directions include a statement to the
effect that failure or refusal to follow such
directions shall constitute cause for termination of
the employment of Executive hereunder).
(iii) Executive's failure or refusal to perform Executive's
duties in accordance with Section 1 hereof; provided,
however, that no discharge "for cause" under this
paragraph 5(b)(iii) shall be deemed effective unless
Executive shall have first received written notice
from the President or Board of Directors of Employer
advising Executive of the specific acts or omission
alleged to constitute a failure or refusal to perform
Executive's duties, and such failure or refusal
continues after Executive shall have had a reasonable
opportunity (which shall be defined as a period of
time consisting of at least ten (10) days from the
date Executive receives said notice from the Board of
Directors) to correct the acts or omissions so
complained of.
(iv) Failure by Executive to comply in any material
respect with the terms of this Agreement, if any, or
any written policies or directives of the Board as
determined by the Board in good faith in its sole
discretion, which has not been corrected by Executive
within 10 days after written notice from the Employer
of such failure.
(v) Physical incapacity or disability of Executive to
perform the services required to be performed under
this Agreement. For purposes of this Section 5(b)(v),
Executive's incapacity or disability to perform such
services for any cumulative period of one hundred
twenty (120) days during any twelve-month period, or
for any consecutive period of ninety (90) days, shall
be deemed "cause" hereunder.
(vi) Executive is convicted of, pleads guilty to,
confesses to any felony or any act of fraud,
misappropriation or embezzlement.
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<PAGE>
(vii) Executive engages in a fraudulent act or dishonest
act to the damage or prejudice of Employer and its
affiliates or in conduct or activities damaging to
the property, business or reputation of Employer and
its affiliates, all as determined by the Board in
good faith in its sole discretion.
(c) If Employer notifies Executive of its election to terminate this
Agreement for cause, this termination shall become effective at the
time notice is deemed to have been given in accordance with Section 9.
(d) This Agreement shall automatically terminate upon the death of
Executive.
6. Non-Competition and Non-Disclosure
(a) Notwithstanding any other provisions in this Agreement, nothing in
this Agreement shall prohibit Executive from acquiring or owning
without disclosure to the Employer less than 1% of the outstanding
securities of any class of any corporation that are listed on a
national securities exchange or traded in the over-the-counter market.
(b) During and after the Term of Employment and for a period of two
years thereafter, Executive covenants and agrees that Executive shall
keep strictly confidential all non-public proprietary information which
Executive may obtain during the course of Executive's employment with
respect to the business practices, finances, developments, marketing,
sales, customers, affairs, trade secrets and other confidential
information of Employer which shall remain the Employer's exclusive
property and the Executive shall not disclose the same, except solely
in the course of business on behalf of and for the benefit of Employer
pursuant to this Agreement. Executive further agrees that immediately
upon the termination of his employment (irrespective of the time,
manner or cause of termination), Executive will surrender and deliver
to Employer all (1) lists, books, records, memoranda and data, computer
discs, computer access codes, magnetic media, software, of every kind
relating to or in connection with Employer's Business and customers and
suppliers of Employer, and (2) all of Employer's personal and physical
property.
(c) During the Term of Employment and for a period of two years
thereafter, Executive covenants and agrees that Executive shall not
compete, directly or indirectly, with Employer in Employer's Business.
(d) During the Term of Employment and for a period of two years
thereafter, Executive covenants and agrees that Executive shall not,
alone or with others, directly or indirectly:
(i) solicit for Executive's benefit or the benefit of any
person or organization other than Employer, the
employment or other services of any Executive or
consultant of Employer; or
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<PAGE>
(ii) solicit for Executive's benefit or the benefit of any
person or organization other than Employer, the
employment of any Executive of any customer of
Employer, to compete in an area of business activity
similar to that conducted by Employer.
7. Representation and Indemnification
Executive hereby represents and warrants that he is not a party to any
agreement, whether oral or written, which would prohibit him from being employed
by Employer, and Executive further agrees to indemnify and hold Employer, its
directors, officers, shareholders and agents, harmless from and against any and
all losses, cost or expense of every kind, nature and description (including,
without limitation, whether or not suit be brought, all reasonable costs,
expenses and fees of legal counsel), based upon, arising out of or otherwise in
respect of any breach of such representation and warranty.
8. Injunctive Relief
The parties acknowledge that the services to be rendered hereunder by
Executive are special, unique and of extraordinary character, and that in the
event of a breach or a threatened breach of Executive of any of Executive's
obligations under this Agreement, Employer will not have an adequate remedy at
law. Accordingly, in the event of any breach or threatened breach of Executive,
Employer shall be entitled to such equitable and injunctive relief as may be
available to restrain Executive and any business, firm, partnership, individual,
corporation or entity participating in the breach of this agreement. Nothing in
this agreement shall be construed as prohibiting Employer from pursing any other
remedies available at law or in equity for such breach or threatened breach,
including the recovery of damages and the immediate termination of the
employment of Executive under this agreement.
9. Notices
All notices shall be in writing and shall be delivered personally
(including by courier), sent by facsimile transmission (with appropriate
documented receipt thereof), by overnight receipted courier service (such as UPS
or Federal Express) or sent by certified, registered or express mail, postage
prepaid, to the parties at their address set forth at the beginning of this
Agreement with Employer's copy being sent to Employer at its then principal
office. Any such notice shall be deemed given when so delivered personally, or
if sent by facsimile transmission, when transmitted, or, if mailed, forty-eight
(48) hours after the date of deposit in the mail. Any party may, by notice given
in accordance with this Section to the other party, designate another address or
person for receipt of notices hereunder. Copies of any notices to be given to
Employer shall be given simultaneously to: Hartman & Craven LLP, 460 Park
Avenue, New York, New York 10022, Attention: Edward I. Tishelman, Esq..
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10. Miscellaneous
(a) This Agreement shall be governed in all respects, including
validity, construction, interpretation and effect, by New York law.
(b) This Agreement may be amended, superseded, canceled, renewed or
extended, and the terms hereof may be waived, only by a written
instrument signed by authorized representatives of the parties or, in
the case of a waiver, by an authorized representative of the party
waiving compliance. No such written instrument shall be effective
unless it expressly recites that it is intended to amend, supersede,
cancel, renew or extend this Agreement or to waive compliance with one
or more of the terms hereof, as the case may be. No delay on the part
of any party in exercising any right, power or privilege hereunder
shall operate as a waiver thereof, nor shall any waiver on the part of
any party of any such right, power or privilege, or any single or
partial exercise of any such right, power or privilege, preclude any
further exercise thereof or the exercise of any other such right, power
or privilege. The rights and remedies herein provided are cumulative
and are not exclusive of any rights or remedies that any party may
otherwise have at law or in equity.
(c) If any provision or any portion of any provision of this Agreement
or the application of any such provision or any portion thereof to any
person or circumstance, shall be held invalid or unenforceable, the
remaining portion of such provision and the remaining provisions of
this Agreement, or the application of such provision or portion of such
provision as is held invalid or unenforceable to persons or
circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby and such provision or
portion of any provision as shall have been held invalid or
unenforceable shall be deemed limited or modified to the extent
necessary to make it valid and enforceable; in no event shall this
Agreement be rendered void or unenforceable.
(d) The headings to the Sections of this Agreement are for convenience
of reference only and shall not be given any effect in the construction
or enforcement of this Agreement.
(e) This Agreement shall inure to the benefit of and be binding upon
the successor and assigns of Employer, but no interest in this
Agreement shall be transferable in any manner by Executive.
(f) This Agreement constitutes the entire agreement and understanding
between the parties and supersedes all prior discussions, agreements
and undertakings, written or oral, of any and every nature with respect
thereto.
(g) This Agreement may be executed by the parties hereto in separate
counterparts which together shall constitute one and the same
instrument.
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<PAGE>
(h) In the event of the termination or expiration of this Agreement,
the provisions of Sections 4(d) and 6 hereof shall remain in full force
and effect, in accordance with their respective terms.
IN WITNESS WHEREOF, this Agreement has been executed as of the date
stated at the beginning of this Agreement.
INTERNET FINANCIAL SERVICES, INC.
By: /s/ Steven Malin
----------------------------------------------------
Steven Malin, Chairman and Chief Executive Officer
/s/ Eric Steinberg
----------------------------------------------------
Executive - Eric Steinberg
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<PAGE>
PCQUOTE
Co-Branding Agreement
This agreement is made effective Oct. 11,1996 by and between PC QUOTE, INC.
(hereinafter referred to as "PCQ"), a Delaware Corporation with its principal
place of business at 300 South Wacker Drive, Chicago, Illinois 60605 and AB
Wately, Inc, (hereinafter referred to as "ABW") with its principal place of
business at 33 West 17th Street, New York, NY 10011. This agreement shall apply
to said ABW and all of its subsidiaries and related companies.
Definitions:
Software
PC Quote 6.0(TM) for Windows on the Internet is a software application that
displays market data information, provided via the digital Hyperfeed, in the
form of quotes, charts, graphs, tables, board views, tickers and other
analytical tools.
Hyperfeed
The PC Quote proprietary digital data feed transmitted via satellite, land line,
or Internet with advanced compression technology, containing financial market
Information obtained by PCQ from the institutions and exchanges listed in
Section 5 of this Agreement. This market data includes stock quotes, futures and
options trading, commodities, and other related information.
Witnesseth:
NOW, THEREFORE, for good and valuable consideration, and in consideration of the
mutual covenants and conditions herein set forth, and with the intent to be
legally bound thereby, ABW and PCQ hereby agree to the following
1. The Co-Branded Service
A. PCQ agrees to allow ABW to co-brand the PCQ SOFTWARE in order to
provide a value added service on ABW's World Wide Web site. The co-branded
SOFTWARE will be made available via ABW servers housed at the ABW office listed
in this Agreement. The server will be accessed by all ABW subscribers in order
to download the SOFTWARE and receive the HYPERFEED.
B. PCQ will provide a continuous HYPERFEED to the ABW servers; however,
PCQ will control the receipt of the HYPERFEED by ABW clients via a remote access
server on PCQ's site that will authorize each new ABW account. ABW agrees to
sign up all new subscribers to the co-branded service including execution of all
applicable service and exchange agreements, will send to PCQ the executed
subscriber agreements before access to the quote servers will be provided to ABW
clients by PCQ. PCQ shall have the sole ability to authorize access to the
market data contained in the HYPERFEED by ABW clients.
D. PCQ and Townsend shall retain title and all copyrights or
proprietary rights to the SOFTWARE and HYPERFEED provided to ABW and ABW's
clients pursuant to this Agreement. ABW will not provide any unauthorized access
to the co-branded service, nor reproduce or redistribute the service in any way.
<PAGE>
E. ABW agrees to include the following in the co-branded pages
displaying quotes: "All quotes provided by PC Quote, Inc." ABW also agrees to
include the following disclaimer on the access page to the co-branded service:
"PC Quote is not subject to liability for truth, accuracy, or
completeness of the market data information nor is PC Quote liable for
errors, mistakes or omissions in the data or for any delays or
interruptions in the end user's receipt of the data. PC Quote does not
warrant that the data provided may be relied upon for trading
purposes."
2. Term
A. [*] The effective date for purposes of this Agreement is the
contract date as specified on the signature page of this Agreement. Neither PCQ
nor ABW shall terminate or alter this Agreement except as stated herein.
B. [*] Notice expressing a desire to terminate this Agreement will be sent by
certified mail to the address indicated above. Said termination will be
effective as of the last day of the month in which this anniversary occurs.
C. Notwithstanding the provisions of (A), and (B) above, should a party to this
Agreement be in material breach of the Agreement, the other party may terminate
the Agreement thirty (30) days after notice of said material breach is received,
and only if such material breach is not cured within thirty (30) days of receipt
of notice.
3. Payment For Service
A. Beginning with the date specified on the fee schedule attached
hereto as Schedule A, or upon completion of the installation and testing of all
equipment and services, which ever is later, ABW will commence payment of a
monthly fee for the right to permit access by ABW's clients to said SOFTWARE and
HYPERFEED.
B. The charges for the services set forth in this Agreement shall be
invoiced monthly. ABW agrees to pay said charges within thirty (30) days of the
monthly invoice date. ABW may issue a purchase order for billing purposes. The
invoices must reference the purchase order number and be sent to the "Bill To"
address stated on the purchase order. The terms of this negotiated Agreement
shall supercede those contained on that purchase order.
C. All payments will be made in US Dollars drawn on a US bank. ABW will
provide a complete list of all clients using the format described in Schedule B
with each payment.
D. Any payments which have not been received by PCQ within thirty (30)
days of the invoice date shall be subject to a FINANCE CHARGE of 1.0% per month
which is a corresponding ANNUAL PERCENTAGE RATE of 12% on the outstanding
balance.
F. Any invoice submitted by PCQ shall be deemed correct unless
ABW advises PCQ in writing, within thirty (30) days of the receipt of the
invoice, that it disagrees with the invoice and specifies the nature of the
disagreement.
G. Any sales, use, excise, value added and local property taxes will be
payable by ABW should such taxes be applicable.
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* Confidential Treatment Requested
<PAGE>
H. In the event that any invoice is not paid by ABW within forty-five
(45)days after receipt, and when no discrepency issues have been identified by
ABW which are in some stage of resolution, after giving notice to ABW, PCQ may
terminate this agreement and ABW's access to and use of SOFTWARE and HYPERFEED
provided hereunder unless ABW pays such invoice prior to the termination date
specified in the Termination Notice. The remedies contained herein are
cumulative and are in addition to all other rights and remedies available to PCQ
under this Agreement, by operation of law, or otherwise.
I. Upon termination as provided for in this Agreement, ABW will pay all
charges for services and fees for the entire month in which that termination
becomes effective.
4. Technical Support
A. ABW agrees to field all initial customer support requests and assist
its clients to the best of its knowledge and ability. If the support issue is of
a complex nature that ABW is unable to solve, ABW may forward the call on to the
PCQ technical support staff.
5. Exchange Authorization
A. The ABW hereby acknowledges and agrees that the HYPERFEED provided
under this Agreement contains market information obtained, selected and
consolidated by PCQ under the authority of various agencies, including but not
limited to, the New York Stock Exchange, American Stock Exchange, Pacific Stock
Exchange, Midwest Stock Exchange, Chicago Board Options Exchange, the Options
Price Reporting Authority, the Consolidated Tape Association, Chicago Board of
Trade, Chicago Mercantile Exchange/International Monetary Market, Kansas City
Board of Trade, Minneapolis Grain Exchange, Commodities Exchange Center, New
York Futures Exchange, Mid-America Commodity Exchange, and Consolidated Canadian
Group and that the ABW's use of the service for internal or external
redistribution of data is authorized and regulated by said agencies.
6. Limitations Of Liability, Remedies On Default
A. The information and data used in the HYPERFEED and SOFTWARE provided
under this Agreement, including option prices, stock prices, commodity prices
dividends, dividend dates, volatilities, deltas and other variables, are
obtained by PCQ from the various exchanges and other sources which are believed
to be reliable and PCQ agrees to run reasonable control checks thereon to verify
that the data transmitted by PCQ is the same as the data received from the
various exchanges and other sources. However, PCQ shall not be subject to
liability for truth, accuracy, or completeness of the information received by
PCQ from the various exchanges and other sources and conveyed to ABW or for
errors, mistakes or omissions therein or for any delays or interruptions of the
HYPERFEED or SOFTWARE from whatever cause. This agreement does not violate any
agency requirements and PCQ has the right to enter into this agreement from its
information providers.
B. PCQ shall not be responsible for, nor be in default under this
Agreement due to delays or failure of performance resulting from Internet
Service Provider delivery problems or failure, or any communication or delivery
problems associated with the Internet in general. Furthermore, PCQ and ABW shall
not be responsible for nor in default due to acts or causes beyond its control,
including but not limited to: acts of God, strikes, lockouts, communications
line or equipment failures, power failures, earthquakes, or other disasters.
Should such an occurrence render the HYPERFEED or SOFTWARE inoperable or
unavailable for a period over ten (10) days, then ABW shall have the right to
discount their billing in proportion to the delay.
<PAGE>
C. LIABILITY UNDER THIS AGREEMENT FROM ANY AND ALL CAUSES, INCLUDING, BUT NOT
LIMITED TO, PROGRAM MALFUNCTION OR OPERATIONAL NEGLIGENCE, SHALL BE LIMITED TO
GENERAL MONEY DAMAGES IN AN AMOUNT NOT TO EXCEED THE TOTAL CHARGES PAID BY ABW
FOR THE SERVICES DURING THE MOST RECENT TWELVE (12) MONTHS OF THE AGREEMENT.
SUCH LIMITATION SHALL BE THE EXTENT OF PCQ OR ABW'S LIABILITY REGARDLESS OF THE
FORM IN WHICH ANY LEGAL OR EQUITABLE ACTION MAY BE BROUGHT AGAINST PCQ OR ABW,
AND THE FOREGOING SHALL CONSTITUTE PCQ'S OR ABW'S SOLE REMEDY. IN NO EVENT WILL
EITHER PARTY BE RESPONSIBLE FOR LOST PROFITS OR SPECIAL INDIRECT, INCIDENTAL OR
CONSEQUENTIAL DAMAGES WHICH ABW OR PCQ INCUR OR EXPERIENCE ON ACCOUNT OF
ENTERING INTO OR RELYING ON THIS AGREEMENT, EVEN IF PCQ OR ABW HAS BEEN ADVISED
OF THE POSSIBILITY OF SUCH DAMAGES.
7. Exclusion Of Warranties
It is expressly understood and agreed to by the parties hereto that EXCEPT AS
SPECIFICALLY PROVIDED HEREIN, ALL WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING
ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE,
ARE HEREBY EXCLUDED.
8. Confidentially of Proprietary Information
A. ABW understands and acknowledges the proprietary nature of the
HYPERFEED and SOFTWARE provided by PCQ and that said HYPERFEED and SOFTWARE have
been developed as a trade secret of PCQ and at its expense. ABW agrees to hold
said information in the same manner as ABW deals with its own proprietary
information and trade secrets. Furthermore, ABW agrees not to attempt any
reverse engineering of the HYPERFEED to decode the signals used by PCQ in
transmitting the information.
B. PCQ understands the proprietary nature of any information belonging
to ABW and recognizes the harm that can be occasioned to user by disclosure of
information relative to ABW's activities. PCQ agrees to hold such information in
the same manner as PCQ deals with its own proprietary information and trade
secrets.
C. PCQ acknowledges the confidential nature of ABW's use of the
SOFTWARE and HYPERFEED during the initial term of this agreement. Due to the
unannounced platform on which ABW shall make available its electronic service to
its client during this initial term, PCQ shall in no way disclose to other
parties the substance nor acknowledge the existence of this agreement. Any
advertising or disclosure of the relationship between the parties, use of
either's marks, names or reference by the other shall be approved by both
parties prior to release.
9. Indemnification
A. ABW hereby agrees to defend, indemnify and hold harmless PCQ, its
employees, agents, successors and assigns, harmless, including reasonable
attorney's fees, from and against any of the following:
1 . Any and all claims, liabilities, and obligations claimed
by any third party or parties against PCQ and arising directly out of ABW's use
of the Service.
2. Any and all claims, liabilities, or obligations resulting
from ABW's misrepresentations, negligence, willful misconduct, breach of
warranty or non-performances of any of the covenants or obligations under this
Agreement or from any misrepresentations or omissions made by ABW to PCQ
including specifically, but not limited to, any authority required of ABW
pursuant to Section 6 hereof.
B. Such indemnification by ABW shall only be effective if the
claim, liability or obligation claimed by the third party is in no way related
to PCQ's negligence, willful misconduct or failure to perform any of its
obligations under this Agreement.
<PAGE>
C. PCQ hereby agrees to defend, indemnify and hold ABW
harmless, including reasonable attorney's fees, from and against any claim that
the SOFTWARE or HYPERFEED infringes on the patent, copyright or other
proprietary rights of another, including any and all claims, liabilities, or
obligations resulting from PCQ's negligence, willful misconduct,
misrepresentations, breach of warranty or non-performance of any of the
convenants or obligations under this Agreement.
D. Such indemnification by PCQ shall only be effective if:
1. The claim, liability or obligation claimed by the third
party is in no way related to ABW'S negligence, willful misconduct or failure to
perform any of its obligations under this Agreement.
2. ABW notifies PCQ promptly in writing of any claim or
threatened claim against ABW and thereafter cooperates with PCQ so that PCQ will
not be prejudiced in the defense, settlement or other handling thereof and ABW
permits PCQ, at PCQ's option and expense, to control the defense, settlement or
other handling of such claim.
10. Assignment
This Agreement or any rights or obligations granted hereunder
may not be assigned by ABW without the prior written consent of PCQ.
11. Applicable Law and Venue
This Agreement shall be interpreted, construed and enforced in
all respects in accordance with the laws of the State of Illinois, except with
regards to its rules regarding choice of law. Each party irrevocably consents to
the jurisdiction of the courts of the State of Illinois and the federal courts
situated in the State of Illinois, in connection with any action to enforce the
provisions of this Agreement, to recover damages or other relief for breach or
default under this Agreement, or otherwise arising under or by reason of this
Agreement.
12. Severability and Survival
A. Whenever possible, each provision of this Agreement shall
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement shall be prohibited by or invalid under
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement.
B. The provisions dealing with indemnification and
confidentiality and any other section of this Agreement,unless specifically
stated otherwise, which may reasonably be interpreted or construed as surviving
the completion, expiration, termination or cancellation of this Agreement, shall
survive the completion, expiration, termination or cancellation of this
Agreement.
<PAGE>
13. Miscellaneous Provisions
A. The parties to this Agreement are independent contractors with
requisite corporate power and authority to enter into the Agreement and carry
out the transactions contemplated hereby. Neither party is a ABW or
representative of the other party. Neither party shall have any right, power or
authority to enter into any agreement for or on behalf of, or incur any
obligation or liability of, or to otherwise bind, the other party. This
Agreement shall not be interpreted or construed to create an association, joint
venture or partnership between the parties or to impose any partnership
obligation or liability upon either party.
B. Any notice, approval, request, authorization, direction or other
communication under this Agreement shall be given in writing and shall be deemed
to have been delivered and given for all purposes, (i) on the delivery date if
delivered personally to the party to whom the same is directed, or (ii) three
business days after the mailing date, whether or not actually received, if sent
by registered U.S. mail postage and charges prepaid, to the address of the party
to whom the same is directed as set forth in the introductory paragraph of this
Agreement. Either party may change its address specified above by giving the
other party notice of such change in accordance with this Section 13.B.
All notices delivered to ABW shall be delivered to the address above,
attention:
Harry Simpson
AB Watley
C. The failure of either party to insist upon or enforce strict
performance by the other party of any provision of this Agreement or to exercise
any right under this Agreement shall not be construed as a waiver or
relinquishment to any extent of such party's right to assert or rely upon any
such provision of right in that or any other instance; rather, the same shall be
and remain in full force and effect.
14. Entire Agreement
A. As used herein, the term "Agreement" includes any written
amendments, modifications or supplements made in accordance herewith.
B. ABW and PCQ acknowledge that they have read this Agreement,
understand it, agree to be bound by its terms and further acknowledge and agree
that it constitutes the entire agreement of the parties hereto and supersedes
all other proposals, oral or written, and all other communications between the
parties relating to the subject matter hereof and this Agreement may not be
modified or terminated orally. No amendment to this Agreement shall be effective
unless it is in writing and signed by duly authorized representatives of both
parties.
IN WITNESS WHEREOF, the parties hereto hereby execute this Agreement.
AGREED TO:
PC QUOTE, INC.
By: /s/ Richard F. Chappetto
Name: Richard F. Chappetto
Title: Vice President of Sales
Date: 10/11/96
A.B. WATLEY, INC.
By: /s/ Steven Malin
Name: Steven Malin
Title: Director
Date: 10/11/96
<PAGE>
SCHEDULE A
To the Co-Branding Agreement between
PC Quote, Inc. and A.B. Watley, Inc. dated October 11, 1996
Schedule of Services and Fees
[*]
BY: PC QUOTE INC. BY: A.B. Watley, Inc.
/s/ signature illegible /s/ Steven Malin
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* Confidential Treatment Requested
<PAGE>
[A.B. WATLEY, INC. LETTERHEAD]
Amendment to Section 2, Part B of the Co-Branding Agreement
This amendment to Section 2 (titled "Term"), Part B of the Co-Branding Agreement
is made effective December 9, 1996 by and between PC Quote, Inc. (hereinafter
referred to as "PCQ") and A.B. Watley, Inc. (hereinafter referred to as
"ABW"),who are also the parties contracted in the aforementioned Co-Branding
Agreement. This Amendment shall apply to said PCQ and ABW and all of their
subsidiaries and related companies.
[*]
AGREED TO BY:
/s/ Steven Malin /s/ Howard Meltzer
A.B. Watley, Inc P.C. Quote, Inc.
Mr. Steven Malin Mr. Howard Meltzer
Director President
Date:12/5/96 Date:12/10/96
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* Confidential Treatment Requested
<PAGE>
[A.B. WATLEY, INC. LETTERHEAD]
SECOND AMENDMENT
TO
CO-BRANDING AGREEMENT
THIS SECOND AMENDMENT TO CO-BRANDING AGREEMENT (this "Amendment") is
made and entered into, effective for all purposes and in all respects as of the
23rd day of February,1998, by and between PC QUOTE, INC., with its principal
place of business at 300 South Wacker Drive, Chicago, Illinois 60605 ("PCQ") and
A.B. Watley, Inc., with its principal place of business at 33 West 17th Street,
New York, New York 10011 ("ABW").
WHEREAS, PCQ and ABW have executed that certain Co-Branding Agreement
dated October 11, 1996, as amended on December 10, 1996 (as so amended, the
"Agreement");
WHEREAS, the parties hereto desire to further amend the Agreement to
modify the provisions of the Agreement regarding [*] thereof; and
WHEREAS, the parties hereto desire to set forth herein the terms and
conditions of their agreements and understandings with respect to the foregoing.
NOW, THEREFORE, in consideration of the foregoing, of the mutual
promises of the parties contained herein and of other good valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending legally to be bound, hereby covenant and agree as
follows:
1. The preamble hereto is incorporated herein and, by this reference,
is made a substantive part hereof.
2. The text of Section 2. A. and B. of the Agreement is hereby deleted
in its entirety and the following language is inserted in its stead:
[*]
3. To the extent, if any, that a provision of this Amendment conflicts
with or differs from any provision of the Agreement, such provision of this
Second Amendment shall prevail and govern for all purposes and in all respects.
4. Except as modified hereby, the Agreement and its terms and
provisions are hereby ratified and confirmed for all purposes and in all
respects.
5. This Second Amendment may be executed in several counterparts, each of which
shall be deemed an original but all of which collectively shall constitute the
same instrument.
- --------
* Confidential Treatment Requested
<PAGE>
IN WITNESS WHEREOF, the undersigned parties have hereunto affixed their
signatures and seals as of the day and year first above written.
PC QUOTE, INC.
By: /s/ Scott [illegible]
Name: Scott [illegible]
Title:VP
A.B. WATLEY, INC.
By: /s/ Robert Malin
Name: Robert Malin
Title:President
<PAGE>
COMPUTER SOFTWARE LICENSE AGREEMENT
Townsend Analytics, Ltd. (100 So. Wacker Dr., Suite 2040, Chicago, IL 60606)
hereafter referred to as TAL, in consideration of the terms and conditions
herein set forth hereby grants to A.B. Watley, Inc. (33 West 17th Str., 10th
floor, NY, NY), hereafter referred to as "Customer", and Customer accepts, a
personal, nontransferable and nonexclusive license to use the Townsend
Analytics' software package RealTrade(TM), the security key, and any related
documentation (collectively known as the Licensed Product) subject to the
conditions below.
RealTrade is an order entry application that allows an end user to submit orders
for general order routing. RealTrade is an additional module to PC Quote for
Windows Version 6.0 which must be installed on each workstation that uses
RealTrade. PC Quote for Windows 6.0 is provided through a separate license
agreement with PC Quote. Some of the equipment necessary to run the Licensed
Software is provided by PC Quote and is provided subject to the Equipment
License that is attached. RealTrade can route orders and order information to
various electronic exchanges and back office systems. Customer is responsible
for contracting separately with those entities for their services and providing
any equipment and other items necessary. RealTrade requires various hardware
such as the network equipment and workstations and software products as
specified in the configuration list. Customer is responsible for providing such
compatible hardware and software licenses. Customer is responsible for assuring
that no other programs operate on the hardware running the Licensed Product
except those expressly approved by TAL. Customer is responsible for providing
network personnel familiar with customer's local area network and hardware as a
primary contact with TAL during the installation and thereafter. TAL will not
provide network advice. Customer is required to provide a continuously available
phone line connected to a modem on the RealTrade order server for remote
communication with TAL.
1. LICENSE. The Licensed Product contains computer programs and related
documentation which are copyrighted and remain the property of Townsend
Analytics, Ltd. The Licensed Product is supplied by TAL and is intended solely
for Customer's internal business purposes. The Number of Licenses granted to
Customer is specified in Schedule A below. The Customer agrees to use no more
than the number of licenses granted. No right, title or interest in or to the
Licensed Product is conveyed to the Customer by this Agreement. The license
granted hereunder shall not be assigned, sublicensed or otherwise transferred by
Customer. Customer shall not alter or modify the Licensed Product.
2. LIMITED PERMISSION TO COPY LICENSED FORMAT. Customer shall not copy, in whole
or in part, the software of the Licensed Product in machine readable form except
that Customer has limited permission to (a) make one copy of the Licensed
Product for archive or emergency backup purposes and (b) install the Licensed
Product on a single computer hard disk. Customer agrees not to allow the
Licensed Product to be subjected to reverse engineering, decompiling,
disassembling or modification. Customer agrees that it must not make copies for
use or sale to others. Customer agrees that the software and related material
constitute trade secrets of Townsend Analytics, Ltd., and are protected by
copyright law and are very valuable to Townsend Analytics. Customer agrees that
unauthorized copies or disclosure of the License Product will cause great damage
to Townsend Analytics, Ltd., and that this damage is far greater than the value
of the copies involved.
<PAGE>
3. TERM. The term of this agreement shall be for a Minimum Term as described in
Schedule A below commencing on the Effective Date. The Effective Date shall be
defined as the date upon which the licensed software is authorized by TAL.
Neither TAL nor Customer shall terminate this Agreement except as follows. This
agreement shall automatically renew at the end of each period for another
Minimum Term, unless either party sends written notice expressing desire to
terminate the agreement. Notice of termination must be received at least thirty
days before the end of the term. TAL may at its sole discretion, terminate this
agreement, without further notice, upon (a) failure of Customer to pay any
charges as described in Schedule A below or (b) the material failure of Customer
to comply with any of the other terms and conditions of this Agreement if
Customer's failure to so comply for items other than payment default shall not
be substantially cured within 10 days after written notice is given to customer
specifying the default. Upon any such termination, TAL shall not be held liable
for any damages which may be sustained by Customer, including but not limited
to, loss of business profits, business interruption, loss of data or pecuniary
loss. Upon termination of this Agreement for any reason, all unpaid charges due
TAL shall become immediately due and payable. Upon termination, Customer agrees
to return the Licensed Product to TAL.
4. FEES
A. The monthly software license fee will be composed of a License Fee
based on the modules selected which is Schedule A and a Trade Processing Fee
also specified in Schedule A.
B. The Final Month's Fee set forth in Schedule A below must be paid in
advance of installation. C. Thereafter the Customer will be billed the License
Fee in arrears of service, for the Lease Period, for the duration of the Minimum
Term set forth in Schedule A.
D. The Trade Processing Fee will be charged at the beginning of the
month for the previous month's processed trades. TAL will produce trade reports
as a basis of billing from the Licensed Product. Customer agrees to provide TAL
with access to the Licensed Product via modem at all times and access through on
site visits with 24 hour notice. Should trade reports not be available from the
Licensed Product for whatever reason, Customer will be required to produce
acceptable reports from other sources.
E. The charges set forth in Schedule A on the reverse side shall remain
unchanged during the Minimum Term. Thereafter, TAL may change any and all
charges upon prior written notice to Customer at least 30 days prior to the end
of the Minimum Term.
F. All charges billed will be due and payable in full within 10 days of
receipt of invoice. If Customer fails to pay any amount due under this
Agreement, Customer shall upon demand pay interest on the unpaid balances at a
rate of 2% per month on such delinquent balances from the due date.
G. Customer agrees to pay all PC Quote fees, exchange fees,
communication fees, personal property taxes, sales taxes, lease taxes, value
added taxes, and other third party charges which are Customer's legal
responsibility to pay.
<PAGE>
5. ADDITIONAL CHARGES
A. The Customer is responsible to obtain exchange approval for the
integration of the Licensed Product where necessary. All charges and fees
including exchange fees, NASDAQ testing and communication charges, sales and use
taxes and services charges are the responsibility of the Customer.
B. Certain hardware will be provided for use with the Licensed Product
as listed in the addendum to the Equipment License. No other software except
components of RealTrade and the required operating systems should be installed
or run on the provided hardware without express permission of TAL. Customer
using nonauthorized software shall pay TAL for any support services provided on
a time and materials basis.
C. The Customer is responsible for providing other compatible equipment
and software to be used with the Licensed Product as specified in the
configuration requirements. Customer using nonauthorized hardware or software
configurations shall pay TAL for any support services provided on a time and
materials basis.
6. MAINTENANCE. TAL, or its agent, shall be available to provide phone and fax
support during the hours 7:00AM to 7:00 PM CST Monday through Friday excluding
trading holidays. Emergency-only support will be provided via pager in other
hours.
Customers will receive normal maintenance upgrades during the term of
the lease at no additional charge. Customers who have unusual support
requirements such as the need for on-site support shall contract separately for
those requirements.
7. DATA AUTHORIZATION. Customer acknowledges that TAL maybe required to report
data related to the number of users and which electronic information providers
services they have available for use to various agencies from whom the
information is received. To enable TAL to meet its obligation in this regard,
Customer agrees to inform TAL in writing whenever its usage of the data changes
materially. Such changes shall include but not be limited to an increase in the
number of simultaneously operable computers with access to the data feed.
8. DISCLAIMER TAL expressly disclaim all warranties, express or implied with
respect to the Licensed Product and related materials, or their quality of
performance including warranties of merchantability and fitness for a particular
purpose. TAL makes no representation concerning the likelihood of profitable
trading using the Licensed Product. The Licensed Product is licensed "as is" and
"with all faults". The end user accepts full liability for any investment
decisions or stock purchases made with the Licensed Product. The sales
personnel, employees, and dealers of TAL are not authorized to make warranties
binding on TAL about the Licensed Product. Accordingly, additional oral
statements do not constitute warranties and should not be relied upon and are
not part of the License agreement.
<PAGE>
9. LIMITS OF LIABILITY.
A. TAL shall not have any liability under this agreement for any money damages
resulting from claims made by Customer or third party for errors, omissions,
interruptions or delays in the Licensed Product or for the unavailability of the
services provided or to be provided regardless of the cause. In no event will
TAL or PC Quote be responsible for special, direct, indirect, incidental,
exemplary or consequential damages which Customer may incur on account of
entering into this agreement even if TAL has been advised of the possibility of
such damages. Customer waives all claims against TAL, their directors, officers
and employees for special, indirect, or consequential damages arising out of or
in connection with the use or performance of the Licensed Product.
B. If the foregoing disclaimer and waiver of liability should be deemed invalid
or ineffective, TAL, their directors, officers and employees shall not be liable
in any and all events beyond the amount of five hundred dollars paid by Customer
for the Licensed Product. Such disclaimer and indemnification shall survive the
termination of this agreement.
10. GENERAL This agreement shall be governed by the laws of the State of
Illinois of the United States. If any provision of this Agreement shall be
invalid under applicable law, that shall not invalidate the remaining
provisions.
/s/ Robert Malin 12/10
- ------------------------------ ---------------------
Customer Signature Date
Name Robert Malin
- ------------------------------
Title President
Company A.B. Watley
- ------------------------------
/s/ signature illegible 12/8/96
- ---------------------------------------- ---------------------
Vice President, Townsend Analytics, Ltd. Date
<PAGE>
SCHEDULE A
Licensed Product: RealTrade
(Please indicate items ordered)
[*]
I understand and agree to the above license agreement:
/s/ Robert Malin 12/10/96
- ------------------------------ ---------------------
Customer Signature Date
/s/ illegible 12/8/96
- ---------------------------------------- ---------------------
Vice President, Townsend Analytics, Ltd. Date
- ---------------------
*Confidential treatment has been requested for the remainder of Schedule.
<PAGE>
EQUIPMENT LICENSE
This Agreement made effective on the date below by and between PC Quote, Inc.
(hereinafter referred to as "PCQ", a Delaware Corporation with its principal
place of business at 300 S. Wacker, Chicago, Illinois 60606, and
A.B. Watley (hereinafter referred to as "Customer") at:
33 West 17th Street
NY, NY 10011
PC Quote (PCQ) to facilitate Customer's use of the Licensed Product, may provide
to Customer computer hardware or other equipment that may be required. PCQ shall
retain title to any equipment it furnishes. Customer as lessor and user of such
equipment, agrees to be responsible for it and shall reimburse PCQ for all
damages sustained by the equipment of for the cost of replacing the equipment in
the event that it is lost, stolen, or destroyed while in the possession of
Customer. In the event that the LICENSE AGREEMENT is terminated by either party,
Customer shall remain responsible for the safety of the equipment and shall
reimburse PCQ for any damages sustained or its replacement cost if lost, stolen
or destroyed, from the date that the Agreement is canceled until such time that
PCQ repossesses such equipment. Customer agrees to insure all equipment owned by
PCQ which is provided the Customer incident to the services purchased in a sum
equal to its replacement value under a commercial multi-peril policy or its
equivalent. Customer further agrees to name PCQ as a additional insured under
said policy and to furnish PCQ with a certificate of insurance evidencing such
coverage if so requested by PCQ. Customer agrees to provide access to the
equipment for purposes of installation, removal, maintenance, or repaid during
reasonable business hours.
Upon termination of the LICENSE AGREEMENT Customer shall, within thirty (30)
days following the effective date of termination, return all property of PCQ
held and used by the Customer and Customer shall pay all removal cost incurred.
Agreed to:
/s/ Robert Malin
- ---------------------------------------
Customer
A.B. Watley
Name
Robert Malin
Title
President
- ---------
Date 12/10/96
<PAGE>
FULLY DISCLOSED CLEARING AGREEMENT
This Fully Disclosed Clearing Agreement (the "Agreement") is
executed and entered into by and between Penson Financial Services, Inc.
("Penson"), a division of Service Asset Management Company, a North Carolina
corporation, and A.B. Watley, Inc. ("Correspondent").
WHEREAS, Correspondent is in the process of registering or is
registered with the Securities Exchange Commission ("SEC") as a broker-dealer of
securities in accordance with Section 15(b) of the Securities and Exchange Act
of 1934 (the "Act") and is applying for membership or is a member of the
National Association of Securities Dealers, Inc. ("'NASD"), and desires for
Penson to act as a clearing broker for Correspondent; and
WHEREAS, Penson meets all requirements of the SEC to function
as a clearing broker, and desires to enter into an agreement to clear and
maintain cash, margin, option or other accounts ("Accounts") for Correspondent
or customers ("Customers") of Correspondent.
NOW, THEREFORE, in consideration of the mutual covenants
contained herein, and of the guarantee of this Agreement by any guarantor(s),
and for other good and valuable consideration the receipt and sufficiency of
which is hereby acknowledged, the parties agree as follows:
1. REPRESENTATIONS AND WARRANTIES
Correspondent represents and warrants to Penson that:
(a) Correspondent is a corporation duly organized, validly existing and in
good standing under the laws of the state of its incorporation.
(b) Correspondent has all the requisite authority in conformity with all
applicable laws and regulations to enter into this Agreement and to
retain the services of Penson in accordance with the terms hereof.
(c) Correspondent shall employ as a manager of its brokerage operation only
a person who has all requisite licenses and experience in compliance
with applicable securities laws and regulations.
(d) Correspondent shall duly employ personnel ("Registered
Representatives") who have the requisite licenses and experience in
compliance with applicable securities laws and regulations.
(e) Correspondent has advised Penson of any clearing arrangements that have
been made or are expected to be made with any other clearing broker or
dealer.
Penson represents and warrants to Correspondent that:
(a) Penson is a corporation duty organized, validly existing and in good
standing under the laws of the state of North Carolina.
(b) Penson is registered as a broker-dealer with the SEC and is in
compliance with the rules and regulations thereof.
(c) Penson is a member corporation in good standing of the NASD and is in
compliance with the rules and regulations thereof
(c) Penson is in compliance with the rules and regulations of each national
securities exchange of which it is a member.
1
<PAGE>
2. CUSTOMER AND CORRESPONDENT ACCOUNTS
Responsibility for compliance with the provisions of the NASD Rules of
Fair Practice regarding opening, approving and monitoring Customer accounts
shall be allocated between Penson and Correspondent as set forth in this Section
2.
(a) Account Documentation. Correspondent will be responsible for obtaining
and verifying all required information about, and the identity of, each
potential Customer. Correspondent will be responsible for obtaining all
documents related to customer accounts, and for the transmission of all
required documents to Penson on a timely basis. Penson may, in its
discretion, receive Documents directly from the Customer. Correspondent
acknowledges the obligation to retain all documents in an easily
accessible place in accordance with SEC rules and agrees to provide the
original application by overnight delivery or a legible copy by
facsimile transmission within 24 hours of a request from Penson.
Correspondent will be responsible for complying with the requirement of
SEC Rule 15g-9, if applicable.
(b) Knowledge of Customer and Customer's Investment Objectives.
Correspondent will be responsible for learning and documenting all the
required information relating to each and every Customer in order to
insure compliance by Correspondent with applicable rules and
regulations. This required information includes, but is not limited to,
all of the information and instructions submitted to Penson pursuant to
Section 2(a), any additional facts relative to the Customer's
investment objectives, and every person holding power of attorney over
any Customer Account. It shall be the responsibility of Correspondent
to ensure that those of its Customers who open Accounts hereunder shall
not be minors. Correspondent shall be solely responsible for any issues
regarding the suitability of any investments for its Customers.
(c) Acceptance of Accounts. Prior to any Customer Account being opened with
Penson, it must be approved by Correspondent. Penson reserves the right
to withhold acceptance of, or to reject, for any reason, any Customer,
Customer Account, Correspondent Account or any transaction for any
Account and to terminate any Account previously accepted by Penson.
Initial acceptance of each Account shall be conditioned upon Penson's
receipt of completed forms as required by Section 2(a). Correspondent
shall not submit such forms with respect to any Customer Account unless
Correspondent has in its possession the documentation of all
information required pursuant to Section 2(b). Penson shall be under no
obligation to accept any Account as to which any documentation required
to be submitted to Penson or maintained by Correspondent pursuant to
Sections 2(a) and 2(b) is incomplete, Prior to acceptance of any
Account, no action taken by Penson or any of its employees, including,
without being limited to, executing or clearing a trade in any Account,
shall be deemed to be or shall constitute acceptance of such Account.
2
<PAGE>
(d) Supervision of Orders and Accounts. Penson will execute orders for
Correspondent's Customers after Correspondent's appropriate principals
have accepted and approved said Accounts. Correspondent will be
responsible for the review and supervision of, and the suitability of,
investments made by each and every one of its Customers and Penson
shall have no responsibility. Correspondent shall be responsible for
insuring that all transactions in and activities related to all
Accounts opened by it with Penson, including discretionary Accounts,
will be in compliance with all applicable laws, rules and regulations
of the United States, the several states, governmental agencies,
securities exchanges and the NASD, including any laws relating to
Correspondent's fiduciary responsibilities to Customers, either under
the Employee Retirement Income Security Act of 1974 or otherwise.
Correspondent shall diligently supervise the activities of its
officers, employees and representatives with respect to all Accounts.
Penson will perform the clearing services provided for in this
Agreement for Accounts accepted by it in accordance with the terms of
this Agreement, as it may be amended from time to time, and otherwise
in accordance with its best business judgment. To the extent, if any,
that Penson accepts from Correspondent orders for execution in
accordance with Section 7(a),Correspondent shall be responsible for
informing Penson of the location of the securities that are the subject
of the order so that Penson may comply with the provisions of Art. III,
Sec. 21 of the NASD Rules of Fair Practice.
(e) Accounts of Associated Persons. Correspondent will not accept Accounts
for any persons that come within the express provisions of Art. III,
Sec. 28 of the NASD Rules of Fair Practice unless Correspondent has
complied with the provisions of said Rule and, if applicable, provided
evidence of employer approval as required by said Rule.
(f) Account Responsibility for Certain Purposes. Notwithstanding anything
herein to the contrary, for purposes of the Securities Investment
Protection Act of 1970 and the financial responsibility rules of the
Securities and Exchange Commission, the Customer Accounts are the
responsibility of Penson. For all other purposes, the Customer Accounts
shall be the full, total and sole responsibility of Correspondent.
3. EXTENSION OF CREDIT
Responsibility for compliance with the provisions of Regulation T issued by
the Board of Governors of the Federal Reserve System pursuant to the Securities
Exchange Act of 1934 ("Regulation 7) and all other applicable rules, regulations
and requirements of any exchange or regulatory agency affecting the extension of
credit shall be allocated between Penson and Correspondent as set forth in this
Section 3.
(a) Margin Agreements. At the time of opening of each margin account,
Correspondent will furnish Penson with a Penson Customer Margin and Short
Account Agreement, executed by the Customer, on the form furnished to
Correspondent by Penson. Correspondent may use a substitute form upon written
approval by Penson.
3
<PAGE>
(b) Margin and Margin Maintenance. Correspondent is responsible for
assuring Customer's payment of Customer's initial margin requirements and of all
amounts necessary to meet subsequent maintenance calls in each Customer Account,
in order to insure compliance with Regulation T and the house rules of Penson.
Such payment may be collected by Correspondent on Penson's behalf, or made
directly to Penson at Correspondent's option. Correspondent is responsible for
the payment of initial margin and of all amounts necessary to meet subsequent
margin calls in each Correspondent Account. Penson shall have the unlimited
right to buy in or sell out positions in Accounts whenever Penson, in its sole
discretion, deems such action appropriate and deso7ite whether, if the Account
is a Margin Account, any such Account is then in compliance with applicable
margin maintenance requirement or has requested an extension of time to make any
payment required by Regulation T. Correspondent acknowledges that Penson has the
right to demand payment on any debit balance and that Correspondent is
responsible to Penson for any unsecured debit balance resulting from any failure
of a Customer to make any such payments upon demand.
(c) Margin Requirements. Initial margin and margin maintenance requirements
applicable to any margin account shall be in accordance with the house rules of
Penson, rather than in accordance with any lower requirement of any law, any
exchange or any regulatory agency. Penson may change the margin requirements
applicable to any Account or class of accounts, as described in its house rules;
Correspondent shall be responsible for advising its Customer of the changed
requirements and for the payment by the Customer of any additional margin
necessary to insure compliance with such increased requirements.
(d) Losses. In addition to, and not in limitation of, Correspondent's
agreement to indemnify Penson pursuant to the provisions of Section 10,
Correspondent indemnifies and holds harmless Penson from and against any and all
loss, cost, expense and liability (including legal and accounting fees and
expenses) sustained by Penson arising out of any of the following:
(i) any failure by any Customer to comply with the terms of its Customer
Margin and Short Account Agreement with Penson;
(ii) The failure of Correspondent or any Customer to comply with
Regulation T;
(iii) the failure of Correspondent to satisfy its obligations under this
Section 3; or
(iv) The failure of delivery of securities sold or failure of payment for
securities purchased in accordance with the provisions of Regulation
T; the return to Penson unpaid of any check given to Penson by
Correspondent or any Customer; or the payment for and/or delivery of
all "when issued" transactions which Penson may accept or execute for
the Accounts.
4. MAINTENANCE OF BOOKS AND RECORDS
Penson will maintain stock records and other records on a basis consistent
with generally accepted practices in the securities industry and will maintain
copies of such records in accordance with the NASD and SEC guidelines for record
retention in effect from time to time. Penson and Correspondent shall each be
responsible for preparing and filing the reports required by the governmental
and regulatory agencies that have jurisdiction over each and Penson and
Correspondent will each provide the other with such information, if any, which
is in the control of one party but is required by the other to prepare any such
report.
4
<PAGE>
5. RECEIPT, DELIVERY AND SAFEGUARDING OF FUNDS AND SECURITIES
(a) Receipt and Delivery in the Ordinary Course of Business. Penson, acting
on behalf of Correspondent, will receive and deliver all funds and
securities in connection with transactions for Customer Accounts in
accordance with the Customer's instructions to Correspondent.
Correspondent shall be responsible for advising Customers of their
obligations to deliver funds or securities in connection with each such
transaction. Correspondent shall be responsible for any failure of any
Customer to fulfill such obligation. Penson shall be responsible for
the safeguarding, of all funds and securities delivered to and accepted
by it, subject to count and verification by Penson. However, Penson
will not be responsible for any funds or securities delivered by a
Customer or Correspondent, its agents or employees, until such funds or
securities are physically delivered to Penson's premises and accepted
by Penson or deposited in bank accounts maintained in Penson's name. It
is expressly understood and agreed, however, that Correspondent is
responsible for compliance with the Currency and Foreign Transactions
Reporting Act (31 U.S.C. Section 5311. et seq.) and the rules and
regulations promulgated thereunder (31 C.F.R. Section 103 ).11, as
amended, et seq.).
(b) Custody Services. Whenever Penson has been instructed to act as
custodian of the securities in any Correspondent or Customer Account,
or to hold such securities in "safekeeping," Penson may hold the
securities in the Customer's name or may cause such securities to be
registered in the name of Penson or its nominee or in the names of
nominees of any depository used by Penson. Penson will perform the
services required in connection with acting as custodian for securities
in Correspondent and Customer Accounts, such as (1) collection and
payment of dividends; (ii) transmittal and handling (through
Correspondent) of tenders or exchanges pursuant to tender offers and
exchange offers; (iii) transmittal of all proxy materials and other
shareholder communications; and (iv)handling of exercises or
expirations of rights and warrants, and of redemptions of securities.
(c) Receipt and Delivery Pursuant to Special Instruction. Upon instruction
from Correspondent or a Customer, Penson will make such transfers of
securities or Accounts as may be requested. Correspondent shall be
responsible for determining if any securities held in Correspondent or
Customer Accounts are "restricted securities" or "control stock" as
defined by the rules of the SEC and that orders executed for such
securities are in compliance with applicable laws, rules and
regulations.
(d) Draft-Issuing Authority. At its discretion Penson may authorize certain
of Correspondent's employees to sign drafts as drawer payable to
Correspondent's Customers in amounts and pursuant to conditions as may
be determined by Penson from time to time. Correspondent agrees that it
will not request Penson to authorize someone to sign drafts who is not
an employee of Correspondent. Correspondent agrees to fully indemnify
Penson from the negligence, fraud, or mistakes of Correspondent or
Correspondent's employees in connection with any draft Issuing
authority granted to them and Correspondent authorizes Penson to charge
any Correspondent Account or any other assets of Correspondent held by
Penson with the amount of any such losses. Notwithstanding Section
5(a), Penson will not be responsible for the safeguarding of funds
withdrawn by Correspondent or Correspondent's employees pursuant to
such draft issuing authority. Penson may withdraw this draft issuing
privilege without notice at any time during the term of this Agreement.
Notwithstanding anything herein to the contrary, Penson may at any
time, at its sole discretion, despite any prior authorization, refuse
payment on any draft for which Correspondent is drawer and Penson is
drawee.
5
<PAGE>
6. CONFIRMATIONS AND STATEMENTS
(a) Preparation and Transmission. Penson will prepare and send to Customers
monthly statements of account (or quarterly statements if no activity
occurs in an account during any quarter covered by such statement),
which statements shall meet Penson's requirements as to format and
quality and will indicate that Correspondent is the introducing broker
for the Account. Penson will be responsible for preparing and
transmitting confirmations. Upon prior written approval from Penson,
Correspondent may assume the responsibility of preparing and
transmitting confirmations, including the responsibility for compliance
with the provisions of Art. III, Section 12 of the NASD Rules of Fair
Practice. Copies of all monthly or quarterly statements sent by Penson
to Customers will be send to Correspondent. Penson will also provide to
Correspondent monthly statements of clearing services performed by
Penson for Correspondent and Customer Accounts showing the fees charged
for such services during the month, as provided in Section 8.
(b) Examination and Notification of Errors. Correspondent shall examine
promptly all monthly statements of account, monthly statements of
clearing services and other reports provided to Correspondent by
Penson. Correspondent shall notify Penson of any error claimed by
Correspondent in any Account in connection with (i) any transaction
prior to the settlement date of such transaction,(ii) information
appearing on daily reports within seven days of such report, and
(iii)information appearing on monthly statements or reports within 30
days of Correspondent's receipt of any monthly statement or report. Any
notice of error shall be accompanied by such documentation as may be
necessary to substantiate Correspondent's claim. Correspondent shall
provide promptly upon Penson's request any additional documentation
which Penson reasonably believes is necessary or desirable to determine
and correct any such error.
7. ACCEPTANCE OF ORDERS, EXECUTION OF TRANSACTIONS, OTHER SERVICES
(a) Customers' orders. Orders received by Correspondent can be executed By
Correspondent or forwarded to Penson for execution. The party executing
the order shall be responsible for errors in execution. Acceptance of
orders from Customers shall be the responsibility of Correspondent, and
Correspondent shall be responsible for the authenticity of all orders.
Correspondent shall advise each of its Customers that its relationship
with Penson is solely that of an introducing broker to a clearing
broker and that, except as set forth in Section 2(f) above,
Correspondent bears all responsibility for the Customer's Account.
Penson is not obligated to accept for execution any orders placed
directly with Penson by a Customer. In addition, Penson is not
obligated to accept any orders from Correspondent if Penson determines
in good faith that it should not. Correspondent assumes the risk of
failure by an over-the-counter dealer with which Correspondent executes
an order in the event such dealer fails to perform, and will reimburse
Penson for any loss incurred by it in the transaction.
(b) Transactions clearing. During the term of this Agreement, Penson will
clear transactions on a fully disclosed basis for Accounts of
Correspondent and the Customers that Correspondent introduces and
Penson accepts as provided in Section 2(b); provided, however, that
Penson is not obligated to clear any transactions for Correspondent or
Correspondent's Customers if Penson determines in good faith that it
should not.
(c) Other Services. Penson will perform such other services, upon such
terms and at such prices, as Penson and Correspondent may from time to
time agree.
6
<PAGE>
8. FEES AND SETTLEMENTS FOR SECURITIES TRANSACTIONS
(a) Commissions: Fees for Clearing Services.
(i) Correspondent has provided to Penson its basic commission
schedule and Penson will charge each Customer the commission
shown on such schedule or which Correspondent otherwise directs
Penson to charge on each transaction. Correspondent's basic
commission schedule may be amended from time to time by written
instructions to Penson from Correspondent. Penson shall be
required to implement such changes only to the extent that they
are within the usual capabilities of Penson's data processing
and operations systems and only over such reasonable time as
Penson may deem necessary or desirable to avoid disruption of
Penson's normal operational capabilities. Penson may charge
Correspondent for changes in the basic commission schedule.
Correspondent's basic commission schedule shall be within the
format of Penson's computer system.
(ii) Penson will charge Correspondent for clearing services according
to the fee schedule set forth in Schedule A attached hereto and
incorporated herein for all purposes. Clearing charges may be
modified from time to time by Penson without re-execution of
this Agreement. To implement new charges, Penson will mail or
telecopy a new Schedule A to Correspondent. If Correspondent
does not object to the new charges within ten (10) days of such
mailing or telecopying, as provided below, the new charges shall
become effective and the new Schedule A shall become a part of
and modify this Ageement without any further action by the
parties. Upon such event, Penson and Correspondent shall replace
the previous Schedule A with the new Schedule A. Correspondent
may object to new charges by giving notice canceling this
Agreement as provided under Sections 12 and 19(m). During the
pendency of such notice period, the previous charges shall
continue to be effective until termination.
7
<PAGE>
(b) Settlements. Penson will collect commissions from Customers on behalf
of Correspondent and through Correspondent. Penson may make payments to
Correspondent against such commissions in advance of the monthly
settlement contemplated by this Section 8(b), the amount of such
payments to be determined in Penson's sole discretion based upon
Penson's experience with Correspondent.
As soon as practicable after the end of each month, Penson will
forward to the Correspondent a statement showing the amount of
commissions and other amounts collected by Penson on Correspondent's
behalf, and all amounts due to Penson from Correspondent (including,
without being limited to, clearing charges, other charges, other fees
and Customer's unsecured debit items, however arising), together with
the amount by which the total owed Correspondent exceeds the total owed
Penson. If such statement indicates that Correspondent owes monies to
Penson, Correspondent shall promptly pay Penson the amount by which the
total owed Penson exceeds the total owed Correspondent. If
Correspondent fails to make such payment on a timely basis, Penson
shall have the right to charge any other Account maintained by Penson
for Correspondent or any other assets of Correspondent held by Penson
(including the deposit required pursuant to Section 9 and positions and
balances in Correspondent Accounts) for the net amount due Penson. Any
failure by Penson to charge any Account or assets of Correspondent held
by Penson shall not act as a waiver of Penson's right to demand payment
of, or to charge Correspondent's Accounts for, the full amount due at
any time.
9. DEPOSIT
Contemporaneously with the signing of this Agreement, Correspondent
will deliver cash or securities to Penson, as specified in Schedule A attached,
for deposit in an account maintained by Penson. If at any subsequent time
Penson, in its sole discretion, requires an additional deposit, Correspondent
will deposit additional cash or securities in an amount specified by Penson.
Instead of making, such additional deposit, Correspondent may reduce
Correspondent's business volume or modify the nature of the securities involved
in the Correspondent's transactions ("business mix") as specified by Penson. Any
failure by Penson to demand compliance with the requirement that Correspondent
either deposit additional amounts or modify Correspondent's business mix shall
not act as a waiver of Penson's right to demand compliance with such
requirements at any time. If the deposit is not adequately funded as required by
Penson, Penson may, in addition to all other rights under this Agreement,
transfer cash or securities of Correspondent held by Penson to the deposit
account. Correspondent agrees that if Penson, at its sole discretion, determines
it to be necessary, Penson shall accept only liquidating transactions for
Customer Accounts and that Correspondent will give notice of such fact to
Customers. If such notice is not given to Customers by Correspondent,
Correspondent agrees that Penson may give such notice to Customers. Penson shall
be entitled to set-off against any deposit in addition to any and all other
rights or remedies Penson may have under this Agreement or otherwise.
Correspondent agrees that if this Agreement is terminated for any reason, Penson
may liquidate securities deposited and deduct from such deposit any amounts
Correspondent owes Penson because of failure to meet any of Correspondent's
obligations under this Agreement.
8
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10. INDEMNIFCATION
(a) Indemnity.
(i) Correspondent agrees to indemnify and hold harmless Penson, each
person who controls Penson within the meaning of the Securities
Exchange Act of 1934 and any directors, officers, employees, agents and
attorneys of Penson ("Penson Indemnified Persons") from and against all
claims, demands, proceedings, suits and actions and all liabilities,
losses, expenses and costs (including any legal and accounting fees and
expenses) relating to Penson's defense of any failure, for any reason,
fraudulent or otherwise, by Correspondent, Correspondent's employees,
independent agents or contractors, or Customers to comply with any
obligation under this Agreement or any other agreement executed and
delivered to Penson in connection with Penson's performance of services
hereunder and any act or failure to act by Penson Indemnified Persons,
except any act or failure to act which is the result of gross
negligence or willful misconduct on the part of any such Penson
Indemnified Person. Without limiting the generality of the foregoing,
such failure is explicitly intended by the parties to include failure
resulting from (i) suspension of trading or bankruptcy or insolvency of
any company, securities of which are held in a Customer's Accounts;
(ii) failure by any Customer to maintain adequate margin; or (iii)
breach of any obligation existing between Correspondent and a Customer
of Correspondent or any law, rule or regulation of the United States, a
state or territory thereof, the SEC, the Federal Reserve Board or other
authority, applicable to any transaction contemplated by this
Agreement.
(ii) Penson shall indemnify and hold Correspondent harmless against any
losses, claims, damages, liabilities or expenses including without
limitation those asserted by Customers (which shall include, but not be
limited to, all costs of defense and investigation and all attorney's
fees) to which Correspondent may become subject, insofar as such
losses, claims, damages, liabilities or expenses arise out of, or are
based upon the gross negligence or willful misconduct of Penson or its
employees in providing the services contemplated hereunder.
(iii) Upon receipt by any indemnified party under this Section of
notice of the commencement of any action, if a claim is to be made
against the indemnifying party under this Section, the indemnified
party will promptly notify the indemnifying party. The omission to
notify the indemnifying party will not relieve it from any liability
that it may have to any indemnified party otherwise than under this
Section 10(a)(iii). In any such action brought against any indemnified
party, the indemnifying party will be entitled to participate in and,
to the extent that it may wish, to assume the defense thereof, subject
to the provisions herein stated, with counsel satisfactory to such
indemnified party. After notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under
this Section for any legal or other expense subsequently incurred by
such indemnified party in connection with the defense thereof other
than reasonable costs of investigation. The indemnified party shall
have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such
counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel
satisfactory to the indemnified party.
9
<PAGE>
(b) Security Interest and Authorization to Charge. Correspondent grants to
Penson a first lien and security interest in any Correspondent Account
maintained by Penson and any other assets of Correspondent now or
hereafter held by Penson and authorizes Penson to discharge such lien
by charging such Account and assets with all amounts owing to Penson
including, but not limited to, (i) any cost or expense resulting from
failures to deliver or failures to receive, (ii) any losses resulting
from unsecured debit balances in any Customer or Correspondent Account
and (iii) any amounts to which Penson is otherwise entitled pursuant to
the provisions of Section 10(a). Penson shall have discretion to
liquidate or sell any securities without notice to Correspondent, and
to determine which securities to sell. Such charge may be made against
Correspondent Account or assets at any time and in such amount as
Penson deems appropriate. No delay in charging any Correspondent
Account or asset shall operate as a waiver of Penson's right to do so
at any future time as and when Penson deems appropriate. Penson shall
have the unlimited right to set-off any indebtedness or other
obligations of Correspondent under this Agreement or otherwise
(absolute or contingent, matured or unmatured) against any obligations
of Penson to Correspondent, including from the Deposit (as described in
Section 9 and/or any other money, securities, or other property of
Correspondent in Penson's possession).
(c) Reserves. In connection with any claim that does or could give rise to
a claim for indemnification under this Section 10 for Penson or an
Penson Indemnified Person, Penson may, in its discretion, in addition
to any and all other rights and remedies under this Agreement, reserve
and retain any money, securities or other property of Correspondent
pending a detennination of such claim. The money, securities or other
property of Correspondent set aside in such a reserve shall be subject
to Penson's standard lien and security interest described in Section
10(b)above.
11. UNDERTAKINGS OF CORRESPONDENT
(a) Financial Statements and Other Reports. Correspondent will furnish to
Penson as soon as possible a copy of Correspondent's balance sheet and
statement of earnings for the current fiscal year and for each of
Correspondent's subsequent fiscal years. Each such balance sheet and
statement of earnings shall be certified by independent public
accountants. Correspondent also shall furnish Penson with copies of its
monthly and quarterly Focus filings promptly after filing.
10
<PAGE>
(b) Other Clearing Services. During the term of this Agreement,
Correspondent will not sign a clearing agreement with another clearing
broker or dealer without prior written approval by Penson.
(c) Suspension or Restriction. In the event that Correspondent or any
employee of Correspondent shall become subject to suspension or
restriction by any regulatory body having jurisdiction over
Correspondent and Correspondent's securities business, Correspondent
will notify Penson immediately and Correspondent authorizes Penson to
take such steps as may be necessary for Penson to maintain compliance
with the rules and regulations to which Penson is subject.
Correspondent further authorizes Penson, in any event, to comply with
directives or demands made upon Penson by any exchange or regulatory
body relative to Correspondent and Customers. In connection with such
directives or demands, Penson may seek advice or legal counsel and
Correspondent will reimburse Penson for reasonable fees and expenses of
such counsel.
(d) Fixed Price Offerings. Correspondent agrees that in making sales of
Securities, as a part of a fixed price offering, it will comply with
all applicable rules of the NASD, including, without limitation, the
NASD's Interpretations with respect to Free-Riding and Withholding
under Article III, Sections I and 24, of the NASD's Rules of Fair
Practice.
(e) Customer Orders. Correspondent represents that all orders received by
Penson will be in accordance with its Customers' instructions. The
parties hereto expressly agree that Penson shall not be responsible for
investigation into the facts surrounding any transaction that it may
have with Correspondent, or that Correspondent may have with its
Customers or other persons, nor shall Penson be under any
responsibility for compliance by Correspondent with any laws or
regulations which may be applicable to Correspondent.
(f) Inquiries on Certificates. Penson agrees to act as Correspondent's
direct inquirer under the Lost and Stolen Securities Program under Rule
l7f-1 (17CFR 240.17f-1).
12. TERMINATION OF AGREEMENT: TRANSFER OF ACCOUNTS
(a) Effectiveness. This Agreement shall remain in force for two years from
the date that Correspondent first processes trades with Penson.
Subsequent to this initial term, either party may terminate this
Agreement by giving thirty (30) days prior written notice to the other
party.
(b) Termination by Penson. Notwithstanding Section 12(a), Penson may
terminate this Agreement at any time on five (5) days written notice to
Correspondent in the event that Correspondent:
(i) fails to comply with the terms of this Agreement and upon
notification by Penson fails to begin compliance within 10 days
from said notification; or
(ii) is enjoined, prohibited or suspended, as a result of an
administrative or judicial proceeding, from engaging in
securities business activities constituting all or portions of
Correspondent's securities business, which injunction,
prohibition or suspension in Penson's judgment makes
impracticable the fully disclosed clearing relationship
established in this Agreement.
11
<PAGE>
(c) Automatic Termination. In addition to any other provisions for
termination herein, this Agreement shall terminate immediately in the
event that either Correspondent or Penson ceases to conduct its
business or that Penson:
(i) is no longer registered as a broker/dealer with the SEC; or
(ii) is no longer a member in good standing of the NASD; or
(iii) is suspended by any national securities exchange of which Penson
is a member for failure to comply with the rules and regulations
thereof.
(d) Conversion of Accounts. In the event that this Agreement is terminated
for any reason, it shall be Correspondent's responsibility to arrange
for the conversion of Correspondent and Customer Accounts to another
clearing broker. Correspondent will give Penson notice (the "Conversion
Notice") of:
(i) the name of the broker that will assume responsibility for
clearing services for Customers and Correspondent;
(ii) the date on which such broker will commence providing such
services;
(iii) Correspondent's undertaking, in form and substance satisfactory
to Penson, that Correspondent's agreement with such broker
provides that such broker will accept on conversion all
Correspondent and Customer Accounts, then maintained by Penson;
and
(iv) the name of an individual within that organization who Penson
can contact to coordinate the conversion. The Conversion Notice
shall accompany Correspondent's notice of termination given
pursuant to Section 12(a) or within thirty (30) days of the
occurrence of an event specified in Section 12(c).
If Correspondent fails to give the Conversion Notice to Penson,
Penson may give to Customers such notice as Penson deems appropriate of
the termination of this Agreement and may make such arrangements as
Penson deems appropriate for transfer or delivery of Customer and
Correspondent Accounts. Correspondent will pay to Penson $3,000.in
programming charges to process the conversion. In addition,
Correspondent shall pay any costs incurred by Penson as billed by any
third party vendors such as transfer agents, etc.
12
<PAGE>
(e) Survival. Termination of this Agreement shall not affect Penson's
rights or liabilities relating to business transacted prior to the
effective date of such termination. From the date of termination until
transfer or delivery of all Customer and Correspondent Accounts,
Penson's rights and liabilities relating to business transacted after
such termination shall be governed by the same terms as those set forth
in this Agreement.
(f) No Obligation to Release. Penson shall not be required to release to
Correspondent any securities or cash held by Penson for Correspondent
in one or more Correspondent Accounts until any amounts owing to Penson
pursuant to the provisions of this Agreement are paid; and
Correspondent's outstanding obligations hereunder to Penson are
determined, including determination of any disputed amounts, and
satisfied; and any property of Penson in the possession of
Correspondent is returned to Penson.
13. CONFIDENTIAL NATURE OF DOCUMENTS
All agreements, documents, papers, and data in any form, supplied by
Correspondent concerning Correspondent's business or Customers shall be treated
by Penson as confidential. To the extent such documents or data are retained by
Penson, they shall be kept in a safe place and shall be made available to third
parties only as authorized by Correspondent in writing or pursuant to any order
or request of a court or regulatory body having appropriate jurisdiction. Penson
shall give Correspondent prompt notice of the receipt by Penson of any such
order or subpoena, unless prohibited from doing so by the issuing authority
which notice shall be given prior to Penson's compliance therewith. Such
documents shall be made available by Penson for inspection and examination by
Correspondent's auditors, by properly authorized agents or employees of any
regulatory bodies or commissions or by such other persons as Correspondent may
authorize in writing. Notwithstanding anything herein to the contrary,
Correspondent expressly authorizes Penson to supply any information requested
relating to Correspondent, its business, or its Customers to any regulatory body
having appropriate authority.
14. NOTICE TO CUSTOMERS
Subject to the requirements of the NASD Rules of Fair Practice,
Correspondent shall provide, or cause to be provided to every Customer upon the
opening of a Customer Account, notice of the existence and general terms of this
Agreement.
15. CUSTOMER COMPLAINT PROCEDURES
Correspondent will be responsible for the initial handling of all
Customer complaints. Any Customer who initiates a complaint with Penson will be
referred by Penson to Correspondent. If any such complaint is based upon an
alleged act or failure to act by Penson, Correspondent will notify Penson
promptly of such complaint and the basis therefor; and will consult with Penson;
and the parties will cooperate in determining the validity of such complaint and
the appropriate action to be taken.
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16. REMEDIES CUMULATIVE
The enumeration herein of specific remedies shall not be exclusive of
any other remedies. Any delay or failure by any party to this Agreement to
exercise any right, power, remedy or privilege herein contained, or now or
hereafter existing under any applicable statute or law, shall not be construed
to be a waiver of such right, power, remedy or privilege, nor to limit the
Exercise of such right, power, remedy or privilege, or shall preclude the
further exercise thereof or the exercise of any other night, power, remedy or
privilege.
17. GUARANTEE
The corporation or individual(s) who guarantee the obligations of
Correspondent under this Agreement by executing the signature lines designated
for such purpose at the end of this Agreement (the "Guarantor(s)"), in
consideration of Penson's entering into the Agreement, do(es) hereby personally
guarantee(s) (jointly and severally, if more than one) the performance by
Correspondent of the provisions of the Agreement (including without limitation
the indemnification provisions of Section 10) and shall promptly pay any amount
that is not paid by Correspondent to Penson under the Agreement. This is an
absolute, unconditional and unlimited guarantee of payment and may be proceeded
upon by Penson or a Penson Indemnified Person before filing any action against
Correspondent or after any action against Correspondent has been commenced.
Guarantor(s) grants to Penson a first lien and security interest on any and all
money and securities of a Guarantor(s) held by Penson. Penson shall have the
unlimited right to set-off any amounts owed to it by Guarantor(s) against any
obligation of Penson to Guarantor(s). Penson also shall have the unlimited right
to set-off any amounts owed to it by Guarantor(s) against any obligation of
Penson to Guarantor(s). Penson also shall have the absolute and unlimited right
to sell, transfer, or liquidate any of the assets in any of Guarantor(s)'
accounts with Penson for any amounts owed to it by Correspondent or
Guarantor(s). The obligations of the Guarantor(s) shall not be discharged or
impaired or otherwise affected by the failure of Penson or a Penson Indemnified
Person to assert, claim, demand or enforce any remedy under this Agreement, nor
by waiver, modification or amendment of this Agreement or any compromise,
settlement or discharge of obligations of Correspondent under this Agreement, or
any release or impairment of any collateral by Penson or a Penson Indemnified
Person.
18. RESPONSIBILITY FOR ERRORS; LIMIT ON LIABILITY; NO CONSEQUENTIAL DAMAGES
In the general course of business, Penson and Correspondent shall each
be responsible for correcting their own errors. In any action by Correspondent
against Penson for any claim arising out of the relationship created by this
Agreement, Penson shall only be liable to Correspondent in cases of gross
negligence or willful misconduct, and in such cases Penson shall only be liable
for the amount or actual monetary losses suffered by Correspondent.
Correspondent, shall not, in any such action or proceeding, or other-wise,
assert any claim against Penson for consequential damages on account of any
loss, cost, damage or expense which Correspondent may suffer or incur related to
transactions in connection with this Agreement or otherwise, including, but not
limited to, any lost opportunity claims.
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19. MISCELLANEOUS
(a) Tax Reporting. Penson shall be responsible for providing IRS Form 1099
and other information required to be reported by federal, state or
local tax laws, rules or regulations, to Accounts solely with respect
to events subsequent to the effective date of this Agreement and for
the mailing of same at Penson's expense,
(b) Scope of Services. Penson shall limit its services pursuant to the
terms of this Agreement to those services expressly set forth herein
and related thereto.
(c) Modification. This Agreement may be modified only by a writing signed
by both parties to this Agreement. Such modification shall not be
deemed as a cancellation of this Agreement. Subject to the NASD Rules
of Fair Practice, this agreement and all modifications may be required
to be submitted to the NASD for approval prior to effectiveness. It is
expressly understood that brokerage services cannot be provided by
Correspondent under this Agreement until such approval, if required, is
received.
(d) Assignment This Agreement shall be binding upon all successors, assigns
or transferees of both parties hereto, irrespective of any change with
regard to the name of or the personnel of Correspondent or Penson. Any
assignment of this Agreement shall be subject to the requisite review
and/or approval of any regulatory or self-regulatory agency or body
whose review and/or approval must be obtained prior to the
effectiveness and validity of such assignment. No assignment of this
Agreement shall be valid unless the non-assigning party, in its sole
discretion consents to such an assignment in writing. Neither this
Agreement nor any operation hereunder is intended to be, shall not be
deemed to be, and shall not be treated as a general or limited
partnership, association or joint venture or agency relationship
between Correspondent and Penson.
(e) Account Documentation. Applicable laws and regulations require that
Penson must have proper documentation and support for any Account
opened on its books. If, after reasonable requests, the necessary
documents to enable Penson to comply with such account documentation
requirements of the laws and regulations have not been received by
Penson, Correspondent shall receive notification that no further orders
will be accepted for the Account involved.
(f) Construction. The construction and effect of every provision of this
Agreement, the rights of the parties hereunder and any questions
arising out of the Agreement, shall be subject to the statutory and
common law of the state of Texas.
(g) Arbitration. In the event of a dispute between the parties, such
dispute shall be settled by arbitration before arbitrators sitting in
Dallas, Texas, in accordance with the rules of the Arbitration
Committee of the NASD then in effect. The arbitrators may allocate
attorneys' fees and arbitration costs between parties and such award
shall be final and binding between the parties and judgment thereon
maybe entered in any court of competent jurisdiction.
(h) Headings. The headings preceding the text, articles and sections hereof
have been inserted for convenience and reference only and shall not be
construed to affect the meaning, construction or effect of this
Agreement.
(i) Entire Agreement. This Agreement shall cover only the types of services
set forth herein and is in no way intended nor shall it be construed to
bestow upon Correspondent or Penson any special treatment regarding any
other arrangements, agreements or understandings that presently exist
between Correspondent and Penson or that may hereinafter exist.
Correspondent shall be under no obligation whatsoever to deal with
Penson or any of its subsidiaries or any companies controlled directly
or indirectly by or affiliated with Penson, in any capacity other than
as set forth in this Agreement. Likewise, Penson shall be under no
obligation whatsoever to deal with Correspondent or any of its
affiliates in any capacity other than as set forth in this Agreement.
15
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(j) Severability. If any provision or condition of this Agreement shall be
held to be invalid or unenforceable by any court, or regulatory or
self-regulatory agency or body, such invalidity or unenforceability
shall attach only to such provision or condition. The validity of the
remaining provisions and conditions shall not be affected thereby and
this Agreement shall be carried out as if any such invalid or
unenforceable provision or condition were not contained herein.
(k) Force Majeure. In addition to any excuse provided by applicable law,
all parties hereto shall be excused for liability for non-performance
of this Agreement arising from any event beyond any party's control,
whether or not foreseeable by either party, including but not limited
to, labor disturbance, war, fire, accident, adverse weather, inability
to secure transportation, governmental act or regulation, inability to
obtain raw materials or other causes or events beyond either party's
control, whether or not similar to those enumerated above.
(l) Interpleader. If Penson receives conflicting claims from Correspondent,
a Customer and/or other persons regarding money, securities or other
property held by Penson, Penson may, in its sole discretion, tender
such money, securities or other property to a court of competent
jurisdiction and institute an action in interpleader or other
appropriate legal proceeding to determine the rights of the respective
claimants. Penson shall have no liability to Correspondent or Customers
in connection with any such action, and shall be entitled to
reimbursement for its costs and expenses in connection with such action
from Correspondent.
(m) Notice. For the purposes of any and all notices, consents, directions,
approvals, restrictions, requests or other communications required or
permitted to be delivered hereunder, Penson's address shall be:
Attention: Daniel P. Son
President
Penson Financial Services, Inc.
8080 N. Central, Suite 1010
Dallas, Texas 75206
and Correspondent's address shall be:
Mr. Robert Malin
A.B. Watley, Inc.
33 West 17 Street
New York, NY 10011-5511
Either party may provide such notice or change its address for notice
purposes by giving written notice pursuant to registered or certified
mail, return receipt requested, of the new address to the other party.
(n) Counterparts: NASD Approval. This Agreement may be executed in one or
more counterparts, all of which taken together shall constitute a
single agreement. When each party hereto has executed and delivered to
the other a counterpart, this Agreement shall become binding on both
parties, subject only to any required approval by the NASD. If required
by the NASD, Penson will submit this Agreement to the NASD promptly
following execution and will notify Correspondent, or cause
Correspondent to be notified promptly upon receipt of such approval.
16
<PAGE>
MADE AND EXECUTED AT __________THIS 3RD DAY OF October, 1996.
Penson: Penson Financial Services, Inc.
By: /s/ David P. Son
---------------------------
Daniel P. Son, President
8080 N. Central, Suite 1010
Dallas, Texas 75206
CORRESPONDENT:
INDIVIDUAL: _______________________________
[Signature]
_______________________________
[Print Name]
_______________________________
[Address]
ENTITY: A.B. Watley, Inc.
-------------------------------
[Name]
Corporation
-------------------------------
[Type of Entity, i.e.,
corporation, partnership,
etc.]
By: /s/ Robert Malin
---------------------------
Its: President
---------------------------
33 W . 17th St. 10th flr.
---------------------------
[Address]
New York, NY 10011
---------------------------
17
<PAGE>
GUARANTEE: The undersigned individual(s) or corporation hereby guarantee(s) the
obligations of Correspondent under the Agreement as provided in Section 17 of
the Agreement.
INDIVIDUAL GUARANTOR(S): ______________________________________________________
[Signature]
______________________________________________________
[Print name]
______________________________________________________
[Signature]
______________________________________________________
[Print name]
______________________________________________________
[Signature]
______________________________________________________
[Print name]
CORPORATE GUARANTOR:
______________________________________________________
[Name of Corporation]
By:___________________________________________________
Its: _________________________________________________
[Address]
18
<PAGE>
FULLY DISCLOSED CLEARING AGREEMENT
AMENDMENT
This amendment modifies and changes certain provisions of the Fully Disclosed
Clearing Agreement ("Agreement") between A,B. Watley, Inc. ("Correspondent) and
Penson Financial Services, Inc. ("Penson"), a division of Service Asset
Management Company, a North Carolina corporation.
The modifications are as follows:
Paragraph 12(a) is modified to read "This Agreement shall
remain in force until December 31,2000. Subsequent to this initial term, either
party may terminate this Agreement by giving thirty (30) days written notice to
the other party."
Paragraph 12(g) is added as follows: Notwithstanding any other
provision in this section, Correspondent may terminate this Agreement by giving
Penson one hundred eighty (180) days written notice in the event that
Correspondent begins clearing its own transactions, or begins clearing its
transactions through a clearing broker wholly owned by Correspondent or its
parent or wholly owned subsidiary.
The Schedule A attached to this amendment is adopted and
replaces any prior Schedule A to the Agreement.
All the remaining provisions of the Agreement between
Correspondent and Penson remain unchanged and in full force and effect.
Date: June 8, 1998 Agreed and Accepted
By: /s/ David P. Son
Daniel P. Son
President
Penson Financial Services, Inc.
8080 N. Central Expressway
Suite 1010
Dallas, TX 75206
By: /s/ Robert Malin
Robert Malin
President
A.B. Watley, Inc.
33 W. 17th Street, 10th Floor
New York, NY 10011
<PAGE>
[WEISS, PECK & GREER LETTERHEAD]
ONE NEW YORK PLAZA
NEW YORK, NY 10004-1950
(212) 908-95OO
November 18, 1996
Mr. Robert Malin
President
A.B. Watley, Inc.
33 West 17th Street
New York, NY 10011-5511
Dear Mr. Malin:
You have requested that we serve as clearing broker with respect to
transactions in securities and options introduced by you for your customers on
the New York Stock Exchange, other principal securities and options exchanges
and in the Over-the-Counter Market. You have requested that we maintain customer
accounts introduced by you on a fully disclosed basis.
This Agreement will confirm our understanding as follows:
1. Introduced Customer Accounts
You will introduce to us the executed securities business originating
with your customers ("Introduced Customers") and we will cause such business to
be cleared and carried on the terms and conditions hereinafter set forth.
You will introduce your customers to us and we will carry their
accounts on a fully disclosed basis. This shall include maintenance of the stock
record, safeguarding of funds and securities, and subject to our receiving
timely instructions from you, transfer of securities and accounts, payment of
dividends and receipt and delivery of funds and securities in connection with
exchange or tender offers, rights, warrants and redemptions. For purposes of the
Securities and Exchange Commission's financial responsibility rules and SIPC,
Introduced Customers will be considered customers of Weiss, Peck & Greer ("WPG")
and not customers of your firm. Nothing herein shall cause such Introduced
Customers to be construed or interpreted as customers of WPG for any other
purpose, or to negate the intent of any other section of this Agreement,
including, but not limited to the delineation of responsibilities as set forth
elsewhere in this Agreement. All confirmations and records pertaining to the
accounts of customers introduced by you shall indicate prominently thereon that
their account was introduced by you.
<PAGE>
Page 2
2. The Introduced Account
(a) You are responsible for the supervision of all orders and accounts
including learning the essential facts about each proposed Introduced Customer
and you are solely responsible for determining the suitability of any
transaction (whether for a discretionary or non-discretionary account). If you
wish to open any Introduced Account you or your Designee will furnish us on
forms which we shall specify (i) all financial and personal information about
the proposed Introduced Customer which you have or which we may reasonably
require, (ii) your written approval for the opening of the Introduced Account
executed by an approved officer of your organization, (iii) an executed
agreement with the Introduced Customer in form acceptable to us, (iv) with
evidence of delivery to the Customer of any disclosure statements, prospectuses
or other information and materials as may be required under applicable rules of
regulatory authorities and (v) such other information and executed documents as
we may reasonably require including any required consents in connection with
accounts maintained for employees or officers of broker dealers or other
financial institutions. In addition, you shall insure that any transactions
involving restricted or control securities comply with all applicable laws and
regulations and shall provide copies of all documents required in connection
with our review or clearance of such transactions. You are responsible for
maintaining timely records of all materials contemplated by this section for
review by us or any regulatory authority and for providing copies of same upon
request.
(b) You are responsible for (i) determining the legal capacity of the
Introduced Customer including, but not limited to, determining that the
Introduced Customer is not a minor or a person prohibited from being an
Introduced Customer by law, governmental regulation or rule of any securities
exchange or self-regulatory body of which we are a member and of which we have
notified you in writing, (ii) ownership of the Introduced Account by the
Introduced Customer, (iii) proper authorization for the Introduced Account, (iv)
the accuracy of all information supplied to us with respect to an Introduced
Customer, and (v) keeping current all information previously supplied to us with
respect to an Introduced Customer.
Without limiting the foregoing, it is understood that you will maintain
any Broker-Dealer, Investment Adviser, Agent or other securities registrations
that may be required under federal, state or other law or regulation as well as
any corporate registration or qualification that may be required by any
jurisdiction in which you conduct business.
You will conduct your business in compliance with the applicable
federal securities laws, governmental regulations, and rules of federal
regulatory agencies, securities exchanges and self-regulatory organizations,
including, without limitation, in connection with any arrangement involving the
payment of fees by a fiduciary or other party for brokerage and/or research
services, under section 28(e) of the Securities Exchange Act of 1934.
<PAGE>
Page 3
(c) For cause we may deem proper, we may refuse to open any proposed
Introduced Account or terminate any Introduced Account. Agreement to open or
continue an account shall not be unreasonably withheld.
(d) Any transaction effected by you for an Introduced Customer will be
considered a cash transaction until such time as you or your Designee have
furnished us with an executed customer's margin agreement in a form acceptable
to us.
3. Transactions in Introduced Accounts
(a) We will not exercise our function with respect to a transaction in
an Introduced Account unless (i) the Introduced Customer has placed an order
with you for the purchase or sale of a security and you have forwarded to us the
details of the transactions, or (ii) the Introduced Customer has placed an order
directly with us for the purchase or sales of a security, you have authorized us
in writing to accept direct orders from that Introduced Customer, and we, in our
reasonable discretion accept the direct order from that Introduced Customer.
(b) You are responsible for (i) accuracy and due authorization by the
Introduced Customer of all orders and instructions transmitted by you to us; and
(ii) assuring that the Introduced Customer and any order or instruction given by
you to us complies with all applicable Federal, State and local laws and
regulations and the constitution, rules, procedures and customs of the
applicable market or securities exchanges, and its clearing house, if any. In
any event of financial losses caused by your customer's errors or omission, the
customer's account will be charged unless you instruct us to charge your
account. However, it is further agreed that in the event of any losses resulting
from your customer's error or omission, you shall indemnify us for any such loss
where it reasonably appears to us that the customer will not meet its obligation
voluntarily.
(c) We will confirm, on your behalf, each transaction in an Introduced
Account and forward monthly statements to the Introduced Customer. Each such
confirmation or statement will be prepared on forms with indication that we are
acting as your correspondent pursuant to the terms of this agreement. We will
send a copy of such confirmation and statement to you.
(d) You will cooperate with us to assure that any transaction for an
Introduced Customer is cleared in a timely fashion. To that end, an Introduced
Customer will forward his payment for securities purchased, or deliver
securities sold, directly to us. On any settlements involving delivery against
payment, we will forward in a timely fashion securities purchased by an
Introduced Customer or payment for securities sold by such Introduced Customer.
It is understood, however, that you are responsible for timely payment by the
Introduced Customer of securities sold including the validity of all signature
witnessed, certified or guaranteed in connection therewith. However, we agree to
exercise due diligence and will take reasonable steps to assist you in clearing
transactions for the Introduced Customer. It is further understood that we are
<PAGE>
Page 4
responsible for timely payment to Introduced Customers for securities sold and
good delivery to Introduced Customers of securities purchased, including the
validity of all signatures witnessed, certified or guaranteed in connection
therewith. You also are responsible for all deposits required by us in
connection with any transaction or net position in a cash Introduced Account
resulting from a contract for a "when issued" security.
4. Margin Introduced Accounts
At our discretion we shall maintain Margin Introduced Accounts subject
to the provisions of this paragraph. The amount of any margin required for each
transaction in, or for the maintenance of, any Margin Introduced Account shall
be determined by us in our sole discretion. A statement of our current margin
requirements is provided as an Exhibit in this Agreement. However, it is
understood that these requirements may be revised from time to time in our sole
discretion subject to (c) below.
(a) You will be responsible for the collection from the Introduced
Customer of the initial margin we may require to support each new securities
transaction or commitment.
(b) You will cooperate with us in obtaining from an Introduced Customer
such additional margin as we in our sole discretion may require for the
maintenance of a Margin Introduced Account.
(c) In the event a Margin Introduced Account becomes deficient in
margin and requests in writing that we withhold temporarily for a stipulated
period of time any action we contemplate to "sell out" or "buy in" such account
we shall decide, in our sole discretion, whether to comply with such request,
provided nevertheless, (i) we will consider such request only when our house
call is involved and not when any maintenance margin rules of any exchange or
market or any applicable rules or law or regulation are involved and (ii) we
reserve the right to take the contemplated action even after we have agreed to
comply with your request if, in our sole judgment, changing conditions render
such action necessary. However, we agree not to unreasonably refuse such
requests. Should we comply in whole or in part with any such request you are
responsible for any loss which we may incur by reason of such compliance.
(d) The interest charge for all debit balances in Margin Introduced
Accounts shall be 1% above the Brokers Call Rate.
(e) As provided in the Customer's Margin Account Agreement required for
all such accounts, we shall have the right to rehypothecate or lend customer's
excess margin securities.
<PAGE>
Page 5
5. Errors, Controversies and Indemnities
(a) Errors with respect to an Introduced Account or controversies with
an Introduced Customer which arise out of your acts or omissions without fault
on our part are your responsibility. In the event that by reason of such error
or controversy, we, in our sole discretion, deem it advisable to commence an
action or proceeding, or such error or controversy shall result in the bringing
of an action or proceeding against us, you will continue to be responsible
therefore.
(b) Errors with an Introduced Customer with respect to an Introduced
Account or controversies which shall arise out or our acts or omissions without
fault on your part are our responsibility. In the event that by reason of such
error or controversy, you, in your sole discretion, deem it advisable to
commence an action or proceeding, or such error or controversy shall result in
the bringing of an action of proceedings against you, we will continue to be
responsible therefore.
(c) In the event either party to this agreement commences or becomes a
party to an action or proceeding pursuant to section (a) or (b) of this
paragraph, the other party shall have the right to participate, at his own
expense, in such action or proceeding.
(d) Each of us agrees to indemnify the other and hold it harmless from
and against any loss, liability, damage or expense (including attorney's fees)
incurred, sustained, arising out of, relating to, or connected with any act or
omission by the indemnifying party or its officers, agents or employees, as to
any matter or thing as to which the indemnifying party has the responsibility or
obligation under this agreement.
(e) Any interest costs which we incur due to your errors will be
charged to your account.
6. Charges
Our charges for our services rendered to you pursuant to this agreement
shall be as described in Schedule A.
7. Miscellaneous
(a) This Agreement shall be binding upon and inure to the benefit of
our respective successors and assigns. Neither this agreement nor the dealings
between us pursuant hereto shall be deemed to create a partnership or joint
venture between us.
(b) This Agreement shall be governed by the laws of the State of New
York.
<PAGE>
Page 6
(c) Any controversy or claim arising out of or relating to this
Agreement, or any transaction effected pursuant thereto, or any breach thereof,
shall be settled by arbitration in accordance with the Constitution and Rules
then obtaining of the New York Stock Exchange.
(d) Any legal, regulatory, or customer inquiries or complaints received
by you in connection with any account subject to this Agreement, or with respect
to any aspect of the general securities business conducted by you shall be
promptly transmitted to Weiss, Peck & Greer. You shall be responsible for
providing complete and accurate information as may be required by us to prepare
any responses to such inquiries.
(e) Any legal, regulatory, or customer inquiries or complaints received
by us in connection with any account subject to this Agreement, or with respect
to any aspect of the general securities business conducted by you shall be
promptly transmitted to you. We shall be responsible for providing complete and
accurate information as may be required by you to prepare any responses to such
inquiries.
(f) This Agreement is subject to the prior approval of the New York
Stock Exchange and will terminate upon the expiration of 90 days' notice by
either party, without cause.
If the foregoing correctly sets forth our understanding, please sign
and return to us a copy of this letter.
Very truly yours,
WEISS, PECK & GREER, L.L.C.
By: /s/ signature illegible
------------------------
Title: Principle
AGREED BY:
/s/ Robert Malin
- -----------------
Title: President
<PAGE>
LICENSE AGREEMENT
This Agreement ("Agreement") is made and entered into as of October 1, 1998
("Effective Date") by and between Ethos Corporation ("Stockpoint"), a California
corporation, and a wholly owned subsidiary of Neural Applications Corporation, a
Delaware corporation, located at 475 Sansome, San Francisco, CA 94111 and A.B.
Watley, Inc. ("Client"), a New York corporation located at 33 West 17th Street,
New York, NY 10011.
1. Content and Services: Stockpoint shall perform such development and
customization services required to deliver the content ("Content") described in
Exhibit A attached hereto.
2. License: Subject to payment under Section 3 and to the other terms of this
Agreement, Stockpoint hereby grants to Client a non-exclusive license to display
for the term of this Agreement the Content described in Exhibit A on Client's
web site for the sole purpose of displaying said Content to Client's web site
users. Client may not otherwise distribute, transmit, or in any other way
provide Content to another entity. No other right or license with respect to any
trademark, trade name or other designation of Stockpoint is granted under this
Agreement.
Client agrees to include Stockpoint's copyright and other notices, which appear
on or in the Content and services provided hereunder, on pages of Client's site
that displays Content.
The Stockpoint logo shall be prominently branded on each page of the Client's
site that displays Stockpoint Content, and "hot-mapped" to
http://www.stockpoint.com or another URL designated by Stockpoint.
3. License Fee, Consideration: The license provided by Stockpoint hereunder is
provided in consideration of payment of all rates or amounts set forth in the
Exhibit B attached hereto. Client shall be responsible for all governmental
taxes (including, without limitation, sales, use, import, export and excise
taxes), tariffs, assessments, duties or levies of any kind or nature relating to
or arising from the license of the Content or otherwise from this Agreement.
Client shall reimburse Stockpoint for any mutually agreed upon expenses incurred
in performance of the services, including travel and lodging approved in advance
by Client.
4. Payment: Except (i) as otherwise specified in Exhibit B attached hereto and
(ii) where there is a good faith dispute over an amount due, all fees shall be
payable by Client within thirty (30) days after the end of each month in which
services are provided hereunder. All delinquent accounts shall be subject to a
service charge of 1 1/2% per month of the amount then delinquent.
5. Term and Termination: This Agreement shall commence on the Effective Date and
shall remain in full force and effect (unless terminated earlier as provided
below) for an initial term of one (1) year. This Agreement shall be
automatically renewable for additional one-year periods, unless a party gives
written notice of termination at least sixty (60) days prior to the expiration
of the initial term or the then current term.
This Agreement may be terminated by a party for cause immediately by written
notice upon the occurrence of any of the following events:
i) If the other ceases to do business, or otherwise terminates its business
operations or if there is a material change in control of the other (excluding
an initial public stock offering); or
ii) If the other shall fail to promptly secure or renew any license,
registration, permit, authorization or approval for the conduct of its business
in the manner contemplated by this Agreement or if any such license,
registration, permit, authorization or approval is revoked or suspended and not
reinstated within sixty (60) days; Stockpoint shall make every reasonable effort
to replace the loss of data or Content essential to the performance of this
Agreement with data or content equal in quality and subject to that lost; or
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iii) If the other breaches any provision of this Agreement and fails to
substantially cure such breach within thirty (30) days of receiving written
notice describing the breach; or
iv) If the other becomes insolvent or seeks protection under any bankruptcy,
receivership, trust deed, creditors arrangement, composition or comparable
proceeding, or if any such proceeding is instituted against the other (and not
dismissed within 90 days).
This Agreement may be terminated by Client for cause immediately by written
notice if the services provided hereunder do not meet the standards of the
Service Level Agreement for a period of three (3) consecutive weeks.
6. Express Warranty. Stockpoint represents and warrants to Client that for the
term of this Agreement and any renewal thereof (the "Warranty Period") all goods
and services will be free from defects in material and workmanship under normal
installation, use and service. This warranty does not include, and Stockpoint
disclaims any warranty with respect to, errors in, damage to or failures,
defects or other problems in or with the Content arising in any way from (i)
fire; (ii) flood, lightning or other acts of God or other force majeure; (iii)
accident or a computer virus; (iv) Client's misuse or negligence; (v) Client's
improper handling or operation by any person or entity other than Stockpoint;
(vi) Client's repair, maintenance, alteration, modification, customization or
tampering of or by any person or other entity other than Stockpoint; (vii)
failure to use, maintain or operate the same as provided or in accordance with
any documentation provided; or (viii) ordinary wear and tear or depreciation
arising from lapse of time.
If the goods or services should fail to confirm to the above warranty during the
warranty period and subject to the conditions below, Stockpoint shall at its
option either (i) refund to Client the fee(s), in which event this Agreement
shall be deemed terminated and Stockpoint shall have no further obligation or
liability to Client whatsoever; (ii) bring services into compliance with this
Agreement and repair or replace any goods and materials.
In addition to any contingency set forth above, the above warranty is contingent
upon Client notifying Stockpoint in writing of any alleged breach of said
warranty within ten (10) days of the date on which Client discovers such breach
and in all events within the Warranty Period.
7. LIMITATION OF EXPRESS WARRANTIES: THE WARRANTIES SET FORTH IN PARAGRAPH 6
ABOVE ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, WHICH ARE HEREBY
DISCLAIMED AND EXCLUDED BY STOCKPOINT, INCLUDING WITHOUT LIMITATION ANY WARRANTY
OF MERCHANTIBILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE AND ALL
OBLIGATIONS OR LIABILITIES ON THE PART OF STOCKPOINT FOR DAMAGES ARISING OUT OF
OR IN CONNECTION WITH THE USE, FUNCTIONALITY, REPAIR OR PERFORMANCE OF THE
CONTENT AND SERVICES.
8. LIMITATION OF REMEDIES: STOCKPOINT SHALL NOT BE LIABLE FOR ANY SPECIAL,
INCIDENTAL, OR CONSEQUENTIAL DAMAGES OF ANY CHARACTER ARISING OUT OF OR
INCLUDING, BUT WITHOUT LIMITATION, DAMAGES FOR LOST PROFITS, BUSINESS
INTERUPTION, LOSS OF BUSINESS INFORMATION OR INABILITY TO USE THE SOFTWARE, EVEN
IF STOCKPOINT WAS ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
9. Infringement Indemnity
a. Each party ("Provider") will defend and indemnify and hold harmless the
other party ("Recipient") against all losses related to, resulting from, or
arising out of any claim that any information, design, specification,
instruction, software, data, or material furnished by the Provider
("Material") and used by the Recipient for the services provided hereunder
infringes a United States copyright or patent provided that: (a) the
Recipient notifies the Provider in writing within ten (10) days of the
claim; (b) the Provider has sole control of the defense and all related
settlement negotiations; and (c) the Recipient provides the Provider with
the assistance, information, and authority reasonably necessary to perform
the above. Reasonable out-of-pocket expenses incurred by the Recipient in
providing such assistance will be reimbursed by the Provider. Recipient may
participate in the defense of such claim using legal counsel of its own
choice at its expense.
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b. The Provider shall have no liability for any claim of infringement
resulting from: (a) the Recipient's use of a superseded or altered release
of some or all of the Material if infringement would have been avoided by
the use of a subsequent unaltered release of the Material which has been
provided to the Recipient; or (b) any information, design, specification,
instruction, software, data, or material not furnished by the Recipient.
c. In the event some or all of the Material is held or is believed by the
Provider to infringe, the Provider shall have the option, at its expense,
(a) to modify the Material to be non-infringing; (b) to obtain for the
Recipient a license to continue using the Material; or (c) to require
return of the infringing Material and all rights thereto from the
Recipient. If Stockpoint is the Provider and such return materially effects
Client's ability to meet its obligations under this Agreement, then Client
may, at its option and upon thirty days prior written notice to Stockpoint,
terminate this Agreement and shall be entitled to recover the fees paid by
Client for that portion of the Material prorated over then current term of
this Agreement. If Client is the Provider and such return materially
effects Stockpoint's ability to meet its obligations under the relevant
Work Order, then Stockpoint may, at its option and upon thirty days prior
written notice to Client, terminate this Agreement and Client shall pay
Stockpoint for the Services rendered through the date of termination on a
time and material or percent of completion basis as applicable.
10. Trademarks, Service Marks. Stockpoint(TM), Stockpoint(R) and Neural
Applications Corporation(R) are trademarks of Neural Applications Corporation.
Nothing in this Agreement is intended nor shall be interpreted as granting
Client a license or other rights in or to, or to use any trade names, trade or
service marks, copyrights or patents or other intellectual or other properties
of Neural Applications Corporation for any purpose unless otherwise provided in
this Agreement.
11. Proprietary Rights. Other than the license herein granted, all right, title
and interest in and to the Content, its enhancements, modifications, or
alterations are the property of Stockpoint or its providers. Nothing herein
shall be construed to otherwise give the Client or its end-users any proprietary
rights thereto.
12. Confidential Information. Each party agrees to keep confidential and not
disclose or use except in performance of its obligations under this Agreement,
confidential or proprietary information related to the other party's technology
or business that it learns in connection with this Agreement and any other
information received from the other provided that such other information or
material is clearly marked confidential (or preceded by a statement that such
information is confidential, if provided in oral form, which statement must be
confirmed in writing promptly after disclosure thereof; all of the foregoing,
"Confidential Information"). "Confidential Information" shall not include
information (i) already lawfully known to or independently developed by the
receiving party without access to or use of the other party's Confidential
Information, (ii) disclosed in published materials, (iii) generally known to the
public, (iv) lawfully obtained from any third party, or (v) required to be
disclosed by law.
13. Miscellaneous
(a) Relationship. Stockpoint is an independent contractor; nothing in this
Agreement shall be construed to create a partnership, joint venture, or agency
relationship between the parties.
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<PAGE>
(b) Ownership. Client agrees that the Content is the sole and exclusive property
of Stockpoint and/or its licensors and independent third party information and
content providers and agrees not to infringe or violate its or their copyrights
and other proprietary rights therein. Ownership of all copyrights and other
proprietary rights in the services provided hereunder is retained by Stockpoint
and its licensors and information and content providers. Except as expressly
provided herein, Stockpoint does not convey and Client does not obtain any right
in the Content or any data or materials utilized or provided by Stockpoint in
connection with the delivery of the services/information enumerated in Exhibit A
and Exhibit C. All rights not granted hereunder are expressly reserved to
Stockpoint and its licensors and information and content providers.
(c) Ownership of Portfolio User Information and Portfolio Data
Stockpoint agrees that all portfolio user, registered user information and
portfolio data stored on Stockpoint servers for Client's behalf is owned by
Client and is Confidential Information under Section 12 hereof without any
further identification at the time such information is made available to
Stockpoint.
(d) Assignment. Neither party may assign or otherwise transfer its rights under
this Agreement without the prior written consent of the other, which consent
shall not be unreasonably withheld.
(e) Notices. Notices permitted or required to be given under the terms of this
Agreement shall be deemed sufficient if given by (a) registered or certified
mail, postage prepaid, return receipt requested or (b) Federal Express,
addressed to the respective parties at the addresses shown on the first page
hereof, or such other addresses as they may from time to time designate. Notices
shall be effective upon receipt by the party to which notice is given.
(f) Arbitration. Any claim, dispute, controversy or other matter in question
with regard to this Agreement shall exclusively be subject to final binding
arbitration in accordance with the commercial arbitration rules and regulations
of the American Arbitration Association (AAA), excluding any claim, dispute or
controversy regarding proprietary rights for which injunctive relief may be an
appropriate remedy. The parties or the arbitrators, as appropriate, shall
undertake the duties of the AAA under the AAA rules. Arbitration shall be
conducted in the city of San Francisco, California for claims made by Client and
in the city of New York for claims made by Stockpoint.
(g) Attorney's fees. The unsuccessful party in any action or proceeding shall
pay for all costs, expenses and reasonable attorneys' fees incurred by the
prevailing party in enforcing the terms and conditions of the Agreement. The
term "prevailing party" as used herein shall include without limitation a party
who utilizes legal counsel and brings an action against the other party by
reason of the other party's breach or default and obtains substantially the
relief sought, whether by compromise, settlement or judgment.
(h) Severability. If any provision of this Agreement is found unenforceable,
such invalidity or unenforceability shall not invalidate any other provision of
this Agreement.
(i) Counterparts. This Agreement may be executed in two or more counterparts,
and each such counterpart shall be deemed an original thereof.
(j) Waiver. No failure of either party to take any action or assert any right
hereunder shall be deemed to be a waiver of such right in the event of the
continuation or repetition of the circumstances giving rise to such rights.
(k) Governing law. This Agreement shall be governed by the laws of the state of
California.
(l) Entire Agreement; Amendment. This Agreement, including the exhibits hereto,
constitutes the entire agreement of the parties. This Agreement may not be
modified, amended, rescinded, canceled or waived, in whole or on part, except by
written amendments signed by both parties hereto.
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IN WITNESS WHEREOF, each party hereto has executed this Agreement as of
the day and year first above written.
ETHOS CORPORATION A.B. WATLEY, INC.
Signature: /s/ William E. McNally Signature: /s/ Robert Malin
---------------------- ----------------------------
Name: William E. McNally Name: Robert Malin
Title: Vice President - Operations Title: President
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<PAGE>
EXHIBIT A
"Content "
- --------------------------------------------------------------------------------
1. Content
Financial Content Syndication Package
o Stock Quote Server (Delayed and Real Time Quotes)
o Portfolio Tracking System- Stockpoint will provide a login screen,
portfolio setup screen, and portfolio menu screen. The portfolio also
features a data export feature.
o Personal Desktop Ticker
o Local Index
o Major Indices
Additional Content
o Full Text News (COMTEX)
o Daily HTML Charts
o Company Profiles, by MarketGuide
o Zack's Analyst Data
o Stock Screener (up to 50k queries per month)
o Mutual Fund Data, by ValueLine
o Options Data
2. Delivery
Stockpoint will build, host and maintain a customized, co-branded web site. The
web site will retain the "look and feel" of Client's web site including logos,
navigation and background. Delivery of Content will be subject to terms outlined
in the Service Level Agreement attached.
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EXHIBIT B
"Fees"
- --------------------------------------------------------------------------------
[*]
- -------------------
*Confidential treatment requested.
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<PAGE>
Stockpoint/AB Watley
Service Level Agreement
1. Performance
a) Average less than 3 second response time for 90% of the users during
the hours of 5:00 A.M. to 2:00 P.M. (Pacific Time) on market trading
days. The performance requirements set forth in this paragraph apply
to server response time only, not network transmission time, and
shall be measured on a daily basis.
b) Average less than 4-second response time for 90% of requests during
all other hours of operation besides the hours previously listed in
paragraph 1a. above. The performance requirements set forth in this
paragraph apply to server response time only, not network
transmission time, and shall be measured on a daily basis.
c) Average 98% Network up time during business hours (6:00 A.M. to 3:00
P.M. Pacific Time) and shall be measured on a daily basis.
d) Average 95% Network up time during non-business hours. This shall be
measured on a daily basis. The average up time shall not include any
down time for regularly scheduled maintenance. Scheduled maintenance
is defined as maintenance for which 48 hours advance written notice
has been given for the required down time.
e) Post an approved message in the event of a system outage.
2. Escalation Procedures
a) Notify client at the following numbers in case of a service outage:
Between 6:00 A.M. to 7:00 P.M. (Pacific Time), contact:
--------------------------------------------------------------------
For all other hours of operation, contact:
--------------------------------------------------------------------
b) Notification of any service outage must be made to Client within 20
minutes during business hours and 45 minutes after business hours.
Stockpoint's notification should include the following:
o The reason for the outage
o ETA for service restoration
c) Continue to notify Client with updated status for the duration
of the outage.
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3. Revenue Impact Recoupment
a) In the event that Stockpoint fails to meet the performance
objectives in Section 1 of this Service Level Agreement, the
following penalties will apply:
o Items 1.a and 1.c - Stockpoint shall pay AB Watley $250 per
occurrence (with a maximum of one occurrence on any single day)
up to a maximum of $2,500 in any given month.
o Items 1.b, 1.d and 1.e - Stockpoint shall pay AB Watley $100
per occurrence (with a maximum of one occurrence on any single
day) up to a maximum of $1,000 in any given month.
AGREED:
/s/ Robert Malin
- ------------------------- ----------------------------
Signature Signature
Robert Malin, President
- ------------------------- ----------------------------
Name, Title Name, Title
11/9/98
- ------------------------- ----------------------------
Date Date
A.B. WATLEY, INC. ETHOS CORPORATION
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<PAGE>
COMSTOCK SERVICE MARKETING
REPRESENTATIVE AGREEMENT
AGREEMENT, made as of January 29, 1998 ("Effective Date"), by and
between S&P ComStock, Inc. ("SPC"), a New York corporation with offices at 600
Mamaroneck Avenue, Harrison, New York 10528, and A.B. Watley, Inc.
(Representative"), having an office at 33 W. 17th St. New York, N.Y. 10011-5511
WHEREAS, SPC desires to grant a license to Representative to market
SPC's proprietary ComStock on the Net Internet Service to subscribers to such
Service which are located in the United States and Canada.
WHEREAS, Representative desires to obtain such license on the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, the parties mutually agree as follows:
1. Definitions.
In this Agreement, the following terms shall have the meanings set
forth herein:
(a) "SPC Datafeed": SPC's proprietary real-time broadcast data feed of
commodities, futures, options, securities and other financial information, in
the SPC format, and described in Schedule 2, attached hereto and incorporated
herein.
(b) "ComStock Service": The SPC Datafeed distributed through the Internet,
distributed as a package service under the name "S&P ComStock".
(c) "Sources": All exchanges and other third party sources of
information included in the SPC Datafeed.
(d) "The Territory": The United States, Canada and International users.
(e) "Subscribers": End-users of the ComStock Service located in the
Territory who have executed SPC's Subscription Agreement.
<PAGE>
2. Marketing License.
(a) Subject to the terms and conditions of this Agreement,
Representative is hereby granted for the term of this Agreement a nonexclusive,
nontransferable right and license to market ComStock on the Net solely to
offices of Subscribers, provided that such offices are located in the Territory.
Representative agrees and understands that it is not permitted to market, sell,
or support the ComStock Service or any component thereof to any third party
which is not a Subscriber as defined herein nor is it permitted to market, sell,
or support the ComStock Service or any component thereof to any Subscriber's
offices which are located outside the Territory without the express prior
written permission of SPC. Representative agrees and understands that it is not
permitted to market, sell or support the ComStock Service to any SPC customer.
Representative further agrees and understands that it is not permitted to
sublicense, transfer, or assign its rights hereunder.
(b) Prior to the receipt of access to the S&P ComStock Service by each
Subscriber, Representative shall obtain from each such Subscriber an executed
copy of the Subscription Agreement for a minimum subscription term of one (1)
month, and shall promptly forward the same to SPC for acceptance by SPC together
with any applicable Source agreements executed by Subscribers; it is understood
by Representative that no access to the ComStock Service shall be provided to a
Subscriber until Representative is notified in writing by SPC that such
acceptance has been granted and that all necessary Source permissions for such
Subscriber have been obtained. The granting of any and all entitlements to
components of the SPC Datafeed to each and every Subscriber are at the sole
discretion of SPC and its Sources. Representative agrees and understands that it
is not authorized to make any material alterations or amendments to the
Subscription Agreement without the express prior written consent of SPC. SPC
shall provide Representative with an adequate supply of copies of its
then-current Subscription Agreement; Representative shall promptly destroy any
unused copies of versions of the Subscription Agreement which are subsequently
superseded.
(c) Representative understands that the equipment which is comprised of
the dedicated phone line, network connection, and any other equipment needed for
said service shall be installed at Representatives site and such equipment and
service management and support shall be performed by A.B. Watley
(d) Representative shall notify SPC of any action by any Subscriber
which comes to its attention which is a material breach of any of the provisions
of the license from Representative or the Subscription Agreement. Representative
shall honor all reasonable requests by SPC to protect SPC's rights in the
ComStock Service in the event of a breach of any of such provisions which
threatens such rights. Representative shall not institute legal proceedings
against any Subscriber relating to SPC's proprietary rights in the ComStock
Service without the prior written permission of SPC, such permission not to be
reasonably denied.
<PAGE>
(e) Representative shall be responsible at its own expense for all
billings to and collections from Subscribers, in accordance with the terms and
conditions of the applicable licenses and such reasonable instructions as it may
receive from SPC from time to time. At Representative's expense, SPC shall honor
all reasonable requests by Representative to protect Representative's rights
vis-a-vis subscribers in the event of a breach of any provision of a
subscriber's contract with the Representative, such obligation shall be limited
to Representative's services at the subscribers location.
3. Permissions from Sources.
(a) Representative shall obtain, or require its Subscribers to obtain
any necessary permissions and licenses and shall have executed in advance any
and all necessary documents, which may be required of Representative or its
Subscribers by the various Sources with respect to the Representative's
marketing of the ComStock Service; SPC shall advise Representative in this
regard, upon request. Representative shall obtain from Subscribers and forward
to SPC executed copies of all necessary Source agreements/permissions as may be
required; it shall be the responsibility of SPC to determine what Source
agreements/permissions are necessary in each case. SPC may discontinue provision
of the SPC Datafeed (or portions thereof) hereunder, without notice, whenever
the terms of SPC's agreements with the Sources require such discontinuance. If
in its reasonable judgment SPC finds a breach by Representative or its
Subscribers of any of the provisions of this Agreement, then SPC may discontinue
provisions of the SPC Datafeed (or portions thereof) hereunder, provided
Representative entitled to a ten (10) business day cure period prior to any
termination by SPC pursuant to foregoing.
(b) It shall be the sole obligation of Representative to determine the
requirements for and to obtain any necessary permissions and licenses, and to
execute any necessary documents which may be required of Representative or its
Subscribers by the various Sources with respect to Representative's Software.
4. Indemnifications and Representations.
(a) Representative agrees to indemnify and hold SPC and its affiliates
harmless from and against any and all losses, damages, liabilities, costs,
charges and expenses, including reasonable attorneys' fees, arising out of: any
failure on the part of Representative with respect to any obligations to obtain
prior approvals from appropriate Sources and to comply with any applicable
conditions, restrictions or limitations imposed by such Sources.
<PAGE>
(b) SPC represents and warrants that it has the rights and licenses
necessary to transmit the SPC Datafeed to Representative and its Subscribers as
provided hereunder, subject to paragraph 5(c) below, and that the license
granted to Representative hereunder does not infringe any proprietary right of
any third party. Each party shall indemnify and hold harmless the other party
with respect to any and all losses, damages, liabilities, costs, charges and
expenses, including reasonable attorneys' fees, arising out of any breach of the
foregoing warranties respectively made by such party.
(c) SPC makes no representation that all portions of the SPC Datafeed
may be distributed to any given Subscriber. It shall be the responsibility of
SPC to confirm with the applicable Sources whether or not all or such portions
of the SPC Datafeed as are selected by each Subscriber pursuant to its
Subscription Agreement may in fact be provided to such Subscriber.
5. Transmission of ComStock Service to Subscribers.
(a) During the term of the Agreement SPC shall distribute the SPC
Datafeed to Subscribers via the Internet, such Data Delivery Equipment to be
installed at A.B. Watley. S&P ComStock shall not be responsible for any Data
Delivery Equipment failures that may occur while in the direct control of A B.
Watley.
(b) Representative shall assist SPC in obtaining any permissions,
licenses, or approvals required in connection with deliveries of the SPC
Datafeed by SPC to Subscribers directly or via third party delivery systems.
(c) A bona fide order must include a fully executed Subscription
Agreement, an advance payment as described herein at paragraph 6(c), and a
completed order form substantially similar to Exhibit A.
(d) Representative shall inform SPC in writing of any changes requested
by Subscribers regarding access to the S&P ComStock Service or access to Sources
provided through the S&P ComStock Service.
(e) Representative understands and agrees that it will take a minimum
of one (1) business day upon receipt of an Executed Subscriber Agreement and/or
notice of a change in service for installing a Subscriber and/or making changes
to Subscriber or Representative service, as long as signed Source agreements
have been received by SPC.
<PAGE>
6. Payments.
In consideration for the license granted to Representative by SPC under
this Agreement, Representative shall make the following payments to SPC:
(a) Representative shall pay to SPC a monthly service charge, payable
on the l5th day of the service month, for a minimum of one (1) month for each
subscriber (client service representatives (Watley) not included), for access to
the ComStock Service as set forth in Exhibit A. The fees set forth at Exhibit A
are exclusive of any fees or charges which may be imposed by any Sources, (if
any) which fees shall be paid by Representative or its Subscribers directly to
any Sources which request such direct payment or, alternatively, billed by SPC
to Representative as set forth at paragraph 6(c) below. It is understood and
agreed that Source fees are subject to change at any time, without notice. SPC
will make every reasonable effort to notify Representative of any such change
within 15 days following the receipt of such fee change notice by SPC.
Representative shall be responsible for the collection and payment to SPC or
directly to the Sources of any and all applicable fees charged to Subscribers by
Sources for such Subscribers' access to the SPC Datafeed. Representative shall
be responsible for payment of any Subscriber's Source fees to SPC or directly to
the Sources in the event of any default by any Subscriber, if any source fees
are applicable.
(b) Representative shall not have to pay to SPC an Advance Fee of
$1,000 for each Subscription location at which the ComStock Service is to be
installed as long as Representative submits payment on a timely basis to SPC. If
Representative becomes delinquent with payments to SPC, then SPC reserves the
right to request direct agreements with Subscribers for payment of SPC's
services. Furthermore, SPC reserves the right to institute an Advance Fee in the
event that Representative becomes delinquent to SPC. This fee shall be remitted
by Representative to SPC at the time of placing any new order, and shall be
applied as a credit against the payments otherwise owing for the installation
and first month's service at that Subscribers location as determined and set
forth at paragraph 6 (a) above.
(c) SPC shall invoice Representative on a monthly basis in advance, for
all fees owing under paragraph 6 (a), including any fees owed to any Sources
which do not bill Representative or Subscriber directly. SPC will be informed in
writing of any charges disputed by Representative within fifteen (15) days from
receipt of invoice by Representative. Both parties will make every reasonable
effort to resolve any disputes related to the invoice within twenty-five (25)
days from receipt of invoice by Representative. Invoices will be due and payable
on the 15th day of the service month noted on the invoice.
<PAGE>
(d) Any amounts payable to SPC by Representative hereunder which are
more than thirty (30) days past due shall bear interest at the rate of 1-1/2%
per month. Any invoice submitted by SPC shall be deemed correct unless
Representative advises SPC in writing or e-mail within 30 days of receipt of
invoice that it disagrees with the invoice and specifies the nature of the
disagreement. While such invoice is under documented dispute interest shall be
suspended until such dispute is resolved. In addition, in the event invoices are
not paid within 30 days of receipt, and such payment is not received by SPC
within five (5) days of notice by SPC to Representative, not withstanding
written notice submitted by Representative disputing such invoice SPC may
discontinue ComStock Service to Representative and all Subscribers. SPC reserves
the right to impose and collect security deposits for any new orders submitted
by Representative to SPC subsequent to any such discontinuance and restoration
of ComStock Service for nonpayment as set forth herein.
(e) Representative shall be responsible for any sales, use, property,
value added, or other similar taxes imposed on any transactions hereunder,
except for taxes based upon income and taxes if the Representative furnishes an
exception certificate. Representative shall be responsible for any customs and
import duties imposed by any U.S. or foreign governmental agency on any
transactions hereunder.
7. Disclaimers; Limitation of Liability.
(a) NEITHER SPC, NOR ANY OF ITS AFFILIATES, NOR ANY SOURCES, MAKE ANY
EXPRESS OR IMPLIED WARRANTIES (INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE) WITH RESPECT TO THE
S&P COMSTOCK SERVICE OR ANY COMPONENTS THEREOF. NEITHER SPC, NOR ANY OF ITS
AFFILIATES, NOR ANY SOURCES WARRANT THAT THE S&P COMSTOCK SERVICE OR ANY OF ITS
COMPONENTS WILL BE UNINTERRUPTED OR ERROR-FREE. REPRESENTATIVE EXPRESSLY AGREES
THAT ITS USE AND ITS SUBSCRIBERS USE OF THE S&P COMSTOCK SERVICE IS AT THE SOLE
RISK OF REPRESENTATIVE AND ITS SUBSCRIBERS. SPC, ITS AFFILIATES, AND ALL SOURCES
INVOLVED IN CREATING OR PROVIDING THE S&P COMSTOCK SERVICE OR ANY OF ITS
COMPONENTS WILL IN NO WAY BE LIABLE TO REPRESENTATIVE OR ANY SUBSCRIBERS OR
OTHER THIRD PARTIES FOR ANY INACCURACIES, ERRORS OR OMISSIONS, REGARDLESS OF
CAUSE, IN THE SPC DATAFEED OR FOR ANY DEFECTS OR FAILURES IN THE TID HARDWARE OR
THE TID SOFTWARE, OR FOR ANY DAMAGES (WHETHER DIRECT OR INDIRECT, OR
CONSEQUENTIAL, PUNITIVE OR EXEMPLARY, EVEN IF SPC HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES) RESULTING THEREFROM. THE LIABILITY OF SPC AND ITS
AFFILIATES IN ANY AND ALL CATEGORIES, WHETHER ARISING FROM CONTRACT, WARRANTY,
NEGLIGENCE, OR OTHERWISE SHALL, IN THE AGGREGATE, IN NO EVENT EXCEED THE AVERAGE
MONTHLY SERVICE CHARGE (AS SET FORTH IN EXHIBIT C) WHICH IS PAID BY
REPRESENTATIVE TO SPC DURING THE TERM OF THIS AGREEMENT. REPRESENTATIVE AGREES
THAT ITS USE AND ITS SUBSCRIBERS USE OF TAL REAL TRADE ORDER ENTRY SERVICE SHALL
IN NO WAY BE AFFILIATED WITH S&P COMSTOCK AND ITS COMSTOCK ON TO NET SERVICE AND
USE OF TAL'S REAL TRADE ORDER ENTRY SERVICE IS AT THE SOLE RISK OF
REPRESENTATIVE AND ITS SUBSCRIBER.
(b) The provisions of this Section shall survive any termination of
this Agreement.
8. Term.
(a) This Agreement shall take effect upon its execution by an
authorized representative of SPC and of Representative.
<PAGE>
(b) The initial term of this Agreement shall expire on February 1,
2000. Neither SPC nor Representative shall terminate or alter this Agreement
except as stated herein unless written notice of non-renewal is given by one
party to other not later than November l, 1999, this Agreement shall be
automatically renewed until February 1, 2001. Thereafter, unless written notice
of non-renewal is given by one party to the other not later than each one year
anniversary of November 1, 1999, this Agreement shall be automatically renewed
for a further two (2) year term. By way of example (i) if notice of non-renewal
is not received by November l, 2000, this Agreement shall be in full force and
effect through February 1, 2002 and (ii) if notice of non-renewal is not
received by November 1, 2001, this Agreement shall be in full force and effect
through February 1, 2003 and so on. Notice expressing a desire to terminate this
Agreement at the end of the then-current term will be sent by certified mail to
the address specified in this Agreement.
(c) Watley has the right to terminate contract up to 60 days after
installation if service is not satisfactory. Service pertains to accuracy of
data, delivery speed of data, and overall performance of S&P ComStock's
datafeed.
9.Termination; Right to Injunctive Relief.
(a) Either party shall have the right to terminate this Agreement for
material breach by the other party by giving thirty (30) days prior written
notice, such termination to take effect unless the breach is cured or corrected
within such notice period.
(b) If a receiver is appointed for either party's business or if either
party petitions under any bankruptcy and is adjudicated a bankrupt, declared an
insolvent, or makes an assignment for the benefit of creditors, then the other
party shall, upon thirty (30) days prior written notice, have the right to
terminate this Agreement.
(c) In addition to and notwithstanding the above, if Representative, or
any of its employees, agents or representatives, shall attempt to use or dispose
of the S&P ComStock Service or any component thereof, or any confidential
information of SPC, in a manner contrary to the terms of this Agreement, SPC
shall have the right, in addition to such other remedies as may be available to
it, to injunctive relief enjoining such acts or attempt, it being acknowledged
by Representative that legal remedies are inadequate.
10. Prevention of Performance.
Neither party shall have any liability for any default or delay
resulting from force majeure, which shall be deemed to include any circumstances
beyond its control. Such circumstances shall include, but are not limited to,
acts of the government, fires, flood, strikes, power failures or communications
line or network failures.
11. Assignment.
This Agreement may not be assigned, sublicensed or otherwise
transferred by either party, except to a wholly owned subsidiary, without the
written consent of the other party, such consent not to be unreasonably
withheld, provided, however, that no such consent shall be required with respect
to any assignment by SPC to its parent company, or to any SPC affiliates.
<PAGE>
12. General.
(a) This Agreement and its Exhibits embodies the entire agreement
between the parties hereto. There are no promises, representations, conditions
or terms other than those herein contained. No modification, change or
alteration of this Agreement shall be effective unless in writing and signed by
the parties hereto.
(b) The failure of either party to exercise any of its rights under
this Agreement for a breach hereof shall not be deemed to be a waiver of such
rights nor shall the same be deemed to be a waiver of any subsequent breach.
(c) All notices under this Agreement shall be given in writing to the
parties as follows:
To: S&P ComStock, Inc.
600 Mamaroneck Avenue
Harrison, NY 10528
Attn: Paul Zinone
Vice President
To: A B. Watley, Inc.
33 W. 17th St
New York, N.Y. 10011-5511
Attn.: Robert Malin
President
(d) This Agreement shall be governed by the laws of the State of New
York and shall be subject to the jurisdiction of the courts of that State.
IN WITNESS WHEREOF, Representative and SPC have caused this Agreement
to be executed by their duly authorized respective officers, as of the day and
year above written.
S&P COMSTOCK, INC. REPRESENTATIVE
By: /s/ Paul Zinzonc By: /s/ Robert Malin
Title: V.P. of Sales Title: President
Date: 2/19/98 Date: 1/28/98
<PAGE>
SCHEDULES AND EXHIBITS
Schedule 1: S&P ComStock Subscriber Agreement
Schedule 2: Information Definition
Exhibit A: Monthly Service Charge
SCHEDULE I
SCHEDULE 2
Exhibit B. Addendums
<PAGE>
DATA COVERAGE
NORTH AMERICA
Equity Exchanges -
Alberta Stock Exchange
American Stock Exchange (AMEX)
Canadian OTC Automated Trading System
(COATS)
Montreal Stock Exchange
NASDAQ
(NMS, OTC Bulletin Board, Mutual Funds, Money Markets, Level II*)
New York Stock Exchange (NYSE)
(Boston, Philadelphia, Cincinnati, Instinet, Midwest, NASD, NYSE
Toronto Stock Exchange
Vancouver Stock Exchange
Future Exchanges -
Chicago Board of Trade (CBT)
Chicago Mercantile Exchange (CME)
Commodities Exchange Center (CEC)
Kansas City Board of Trade
Mid-America Commodity Exchange
Minneapolis Grain Exchange
New York Mercantile Exchange (NYMEX)
New York Commodity Exchange (COMEX)
Winnipeg Commodity Exchange
Option Exchanges -
Option Price Reporting authority
(Equities & Indices: AMEX, CBOE
NYSE, Pacific, Philadelphia, Foreign Currency: Philadelphia)
<PAGE>
INTERNATIONAL
Equity Exchanges -
Amsterdam Stock Exchange
Basle Stock Exchange
Berlin Stock Exchange
Bremen Stock Exchange
Dusseldorf Stock Exchange
Frankfurt Stock Exchange
Hamburg Stock Exchange
Hanover Stock Exchange
Geneva Stock Exchange
London Stock Exchange
Milan Stock Exchange
Munich Stock Exchange
Paris Stock Exchange
SEAQ International
Stutgart Stock Exchange
Zurich Stock Exchange
Future Exchanges -
Amsterdam Futures Association
Hong Kong Futures
International Petroleum Exchange (IPE)
London Commodities Exchange (LCE)
London Int'l Financial Futures Exchange & London Traded Options
(LIFFE)(LTO)
London Metals Exchange (LME)
Mase Westpac Ltd.
MATIF
Rudolf Wolff
Singapore Int'l Monetary Exchange (SIMEX)
Swiss Options & Financial Futures (SOFFEX)
Sydney Futures Exchange
Zurich Futures Exchange
Option Exchanges
Deutsche Terminborse
(DTB)
<PAGE>
News Sources
Equity Analysis -
S&P MarketScope
S&P MarketScope Europe
S&P Fundamental Data
S&P Index Alert
Fixed Income
Bear Stearns/Street Software
Equity News -
Dow Jones Broadtape
S&P MarketScope Alert
Energy Analysis -
Platt's Global Alert
Future News -
Futures World News
Foreign Currency -
S&P ComStock FOREX
MMS Currency
<PAGE>
EXHIBIT A
MONTHLY FEES:
MONTHLY FEES:
- -------------
[*]
ONE-TIME FEES:
Installation $ 0
Dial Backup Installation $ 0
Shipping $ 0
Equipment Deposit $ 0
- ----------------------
*Confidential treatment requested.
<PAGE>
EXHIBIT B
Addendum
Revenue Sharing
For each client transferred or referred from ComStock on the Net, A.B. Watley
agrees to pay ComStock an additional fee of $50.25 per trade executed by the
transferred/referred client ("transfer fee").
Mutual Marketing Agreement
S&P ComStock agrees to the following marketing commitments with A.B. Watley
(Internet Financial Services).
1. Reciprocal site Links and Registration Pages- Watley will provide
ComStock with a link (upon S&P ComStock web site completion) to
registration page that ComStock constructs in order to most
accurately track individuals interested in ComStock's service.
Watley will prominently display the ComStock link on A.B. Watley's
site. In reciprocity, ComStock will provide Watley with a prominent
position on their site (upon S&P ComStock web site completion), such
position to be decided by S&P ComStock, also featuring a process, if
possible, by which potential clients may receive information on
Watley and our products.
2. Contacting existing clients- Watley will provide brochures and
information packets outlining products and services. Brochures and
other collateral material should reflect the current co-branding
relationship and highlight the benefits. This information will be
included in a direct mail piece to be sent to S&P ComStock's
ComStock on the Net clients.
3. Joint Participation in Trade Shows- Watley will have the
opportunity to display with ComStock at (2) two trade shows. The
shows will be determined by Watley but advance notice is required
for any given show. S&P ComStock's responsibility at such shows is
to provide its brand name, representation and marketing literature.
4. Marketing Collateral- Watley will create a one page fact sheet
describing their services to be included in our outgoing materials.
<PAGE>
EXHIBIT 10.20
LOAN AGREEMENT
INTERNET FINANCIAL SERVICES INC. ("IFSI"), a Delaware corporation
authorized to do business in the State of New York and A.B. WATLEY, INC.
("A.B."), a New York corporation, having their offices at 33 West 17th Street,
New York, New York 10011 (hereinafter collectively referred to as "Borrowers")
and NEW YORK COMMUNITY INVESTMENT COMPANY L.L.C., a Delaware limited liability
company, having an office at 120 Broadway, New York, New York 10271 (hereinafter
referred to as "Lender") hereby enter into a Loan Agreement ("Agreement")
pertaining to the $400,000. loan (the "Loan") to be made by Lender to Borrowers.
1. LOAN.
Lender has agreed to loan Borrowers the sum of FOUR HUNDRED THOUSAND
DOLLARS ($400,000.) to be funded on February 1, 1999 subject to the terms and
conditions set forth in this Agreement. The Loan is to be evidenced by one (1)
promissory note (hereinafter referred to as the "Note") to be dated the day of
disbursement. Interest and principal shall be payable under the terms set forth
in the Note, which Note matures on February 1, 2004.
2. USE OF PROCEEDS.
Borrowers will use the proceeds of the Loan as working capital and to
further its corporate purposes. Borrowers shall not use any Loan proceeds for
any purpose contrary to the purposes contemplated herein, such prohibited uses
include repayment of any of Borrowers' indebtedness for borrowed money and the
redemption of any outstanding equity interest.
<PAGE>
3. DOCUMENTS TO BE EXECUTED AT CLOSING.
Borrowers will deliver or cause to be delivered to Lender each of the
following documents, all of which have been executed by Borrowers. They are:
A. The Note in the amount of $400,000.;
B. Directors Resolutions of Borrowers authorizing the making of the
Loan; C. UCC-1 Financing Statements and Security Agreements whereby
Borrowers shall grant Lender a
security interest in its accounts receivable, tangible assets including their
machinery, equipment, inventory, and fixtures, subordinate to New York Small
Business Venture Fund LLC, G.E. Capital Corp. and Borrowers' clearing agents,
Penson Financial Services, Inc. and Weiss, Peck & Greer, L.L.C.;
D. Warrant to purchase 80,000 shares of common stock of IFSI; and
E. Negative Pledge by Borrowers re: general intangibles, proprietary
software and other related technology (the "Intangibles"). 4. Also to be
delivered to Lender at the time of the Closing of the Loan are:
A. Certificate of Insurance or insurance policy for all risk and
contents insurance on the business assets of Borrowers naming Lender as loss
payee;
B. Opinion Letter of Borrowers' Counsel; and
C. Collateral Assignment of Life Insurance on the lives of Steven
Malin, Robert Malin and Harry Simpson in a total amount of not less than
$400,000.
5. COLLATERAL.
The Loan shall be secured by the collateral listed below:
<PAGE>
A. A security interest in Borrowers' accounts receivable, tangible
assets including its machinery, equipment, inventory, and fixtures subordinate
to New York Small Business Venture Fund LLC, G.E. Capital Corp. and Borrowers'
clearing agents, Penson Financial Services, Inc. and Weiss, Peck & Greer, L.L.C.
B. Negative pledge on Borrowers' Intangibles.
C. Collateral Assignment of Life Insurance as described in Paragraph
4(C), provided, however, that in the event IFSI consummates an initial public
offering ("IPO") or private placement of equity which nets IFSI $5 million or
more (any such private placement of equity or IPO shall be referred to as a
"Qualified Financing"), Lender shall release the Collateral Assignment of Life
Insurance.
6. REPRESENTATIONS AND WARRANTIES.
A. To induce Lender to make the above mentioned Loan,
Borrowersrepresent and warrant, as it pertains to the Borrowers individually
and not collectively, that: (1) Borrower, IFSI, validly exists and is
in good standing under the laws of the State of Delaware and
is authorized to do business in the State of New York and Borrower, A.B.,
validly exists and is in good standing under the laws of the State of New York .
(2) Borrowers have the power to enter into this Agreement, to borrow
money as contemplated hereby, to issue the Note described herein, and to execute
and deliver each of those documents described within this Agreement.
(3) All representations made by Borrowers in any instrument described
in this Agreement to Lender are true and correct as of this date, including any
financial statements delivered to Lender by Borrowers.
<PAGE>
(4) Borrowers, to the best of their knowledge, have not been made a
party to or threatened by any suits, actions, claims, or investigations by any
governmental body or legal, administrative or arbitration proceeding where an
adverse determination would have a material adverse effect on Borrowers.
Borrowers do not know of any basis or grounds for any other suit or proceeding,
and there are no outstanding orders, judgments, writs, injunctions or decrees of
any court, governmental agency, or arbitrational tribunal against or affecting
them or their respective properties, assets and business.
(5) Borrowers are not parties to or bound by any contract or instrument
which would be in breach as a result of this Loan.
(6) Borrowers are not in breach of, in default under or in violation of
any applicable law, decree, order, rule or regulation which may materially and
adversely affect them, or any material indenture, contract, agreement, deed,
lease, loan agreement, commitment, bond, note, deed of trust, restrictive
covenant, license or any instrument or obligation to which they are a party or
by which they are bound, or to which any of their assets are subject. The
execution, delivery and performance of this Agreement and the issuance and
delivery of the Note, and the other documents contemplated herein will not
constitute any such breach, default or violation, or require consent or approval
of any court, governmental agency, or body, except as contemplated herein.
(7) Borrowers have complied and\or will comply with all laws,
ordinances, regulations, federal, state and local, applicable to them and to
their business, including without limitation, all material federal and state
securities laws and ordinances.
(8) Borrowers have and will maintain fire and extended coverage
insurance on the business assets of Borrowers in amounts satisfactory to Lender.
7. AFFIRMATIVE COVENANTS.
While the Note is outstanding, Borrowers will:
<PAGE>
A. Promptly make all payments of the principal and interest on the Note
when due.
B. Comply with the terms and conditions of this Agreement, including
those incorporated herein by reference.
C. Keep accurate and complete books and records and maintain the same
at its offices.
D. Forward, during the term of the Loan, annual audited and semi-annual
review or compiled financial statements prepared by Borrowers' independent
certified public accountant or a firm acceptable to Lender. In addition,
quarterly statements prepared by Borrowers' Chief Financial Officer shall be
provided to Lender. Each statement shall be accompanied by a certification
letter from the President or Chief Financial Officer of Borrowers, stating that,
to the best of his knowledge and belief, said statements accurately and fairly
represent the financial condition of the Company. Borrowers shall also provide
monthly reports regarding sales and other relevant data as reasonably requested
by Lender. In the event of an IPO, Lender agrees to accept Borrowers' Form 10K
or 10KSB and Form 10Q or 10QSB in lieu of the above, provided same is forwarded
within five (5) days of filing with the Securities and Exchange Commission.
E. Permit and facilitate such independent outside audits of Borrowers'
books and records as may be reasonably requested by Lender, not more than two
(2) times per year, in addition to those in Item D above, provided Lender pays
the cost of same. In the event, however, of a Qualified Financing, Lender shall
thereafter waive the terms of the within Paragraph 7(E).
<PAGE>
F. Permit any authorized representative of Lender and its attorneys and
accountants to inspect, examine and make copies and abstracts of the books of
account and records of Borrowers at reasonable times during normal business
hours, and to inspect the collateral given as security for the Loan provided,
however, that in the event of a Qualified Financing, Lender shall thereafter
waive the terms of the within Paragraph 7(F).
G. Notify Lender of (1) litigation involving amounts of $25,000. or
more to which Borrowers are parties by mailing to Lender by certified mail
within ten (10) days of receipt thereof a copy of the complaint, motion for
judgment, or other such pleadings served on or by Borrowers and (2) to the
extent Borrowers are aware of same, litigation to which Borrowers are not
parties but which could substantially adversely affect the operation of
Borrowers' business or the collateral pledged for this Loan by mailing to Lender
by certified mail a copy of all pleadings obtained by Borrowers regarding such
litigation, or if no pleadings are obtained, a letter setting out the facts
known about the litigation within ten (10) business days of receipt thereof.
Mailings under this paragraph shall be addressed as follows:
New York Community Investment Company L.L.C.
120 Broadway
New York, New York 10271,
provided, however, that in the event of a Qualified Financing, Borrowers shall
thereafter notify Lender of litigation involving amounts of $250,000. or more.
<PAGE>
H. Continue its business and maintain, preserve and keep all its
property, buildings, equipment and fixtures necessary for the operation of its
business in working order, make all needful and proper repairs and replacements
thereof, and promptly pay and discharge or cause to be paid and discharged when
due any and all income taxes, federal or otherwise, lawfully assessed and
imposed upon it, and any and all lawful taxes, rates, levies and assessments
whatsoever upon its property and every part thereof provided however that
nothing contained herein shall be construed as prohibiting Borrowers from
contesting in good faith the validity of any such income taxes, federal or
otherwise or such other taxes, rates, levies or assessments.
I. Defend at all times any claim involving amounts of $50,000. or more
by a third party relating to the possession of or interest in the assets of
Borrowers.
J. Make all payments to creditors as shall be necessary to preserve
Lender's rights and Lender's security interests in the collateral set out at
Paragraph 5 above.
K. Execute, either before or after disbursement of the Loan, all
documents necessary to perfect Lender's security interests in the collateral
listed at Paragraph 5.
M. Maintain a minimum tangible net worth of $4 million during the term
of the Loan.
N. Maintain debt service coverage (net income plus depreciation and
amortization to the current portion of all long term debt) of 1.2 during the
term of the Loan.
Borrowers' compliance with covenants M and N shall be required on a
semi-annual basis beginning with September 30, 1999.
O. Maintain employment agreements during the term of the Loan with
Steven Malin, Robert Malin, Anthony Huston, Eric Steinberg and Harry Simpson on
an individual basis (each referred to individually as the "Employee"), which
contain standard covenants not to compete and confidentiality clauses, provided
each Employee does not breach his or her employment agreement and each Employee
agrees to such employment by the Borrowers.
<PAGE>
P. Submit a semi-annual certification by the President or Chief
Financial Officer of Borrowers that to the best of his knowledge and belief,
Borrowers are in compliance with all the terms and provisions, conditions and
covenants set forth in this Agreement.
Q. Maintain a legally constituted Board of Directors or equivalent
oversight committee.
8. NEGATIVE COVENANTS.
Except with the prior written consent of Lender, Borrowers will not:
A. Make any material change in organization or management or the manner
in which Borrowers' businesses are conducted, except an IPO.
B. Become party to any merger or consolidation where the Borrowers are
not the surviving entities with any corporation, company or entity of any kind
whatsoever or where more than fifty (50%) percent of the Borrowers' ownership is
transferred, or sell substantially all of its assets, liquidate or dispose of
its business.
C. Become a guarantor of obligations of any other person, firm,
corporation or entity, except (i) in connection with depositing checks and other
instruments for the payment of money acquired in the normal course of its
business; and (ii) IFSI and its present and future subsidiaries may guarantee
obligations of one or more of such companies.
D. Transfer, sell, lease or in any other manner convey any equitable,
beneficial or legal interest in any of the collateral set out herein to any
person, except for purchase money security interests granted in the ordinary
course of business and leases for equipment needed for Borrowers' current
businesses.
<PAGE>
E. Knowingly permit any judgment obtained against Borrowers in an
amount exceeding fifty thousand ($50,000.) dollars to remain unpaid for a period
of thirty (30) days following the entry thereof, without obtaining a stay of
execution or bonding or causing such judgment to be bonded. In the event,
however, of a Qualified Financing, the amount shall be increased to two hundred
thousand ($200,000.) dollars.
F. Permit the payment of any salary to the Employees in the event same
will prevent Borrowers from fulfilling any of their obligations to Lender
hereunder.
G. Pay any dividends, make any distributions or sell any assets which
will prevent Borrowers from fulfilling their obligations to Lender hereunder.
9. SUBORDINATION
Lender shall subordinate its lien against Borrower's assets in favor of
a financial institution providing senior debt in an amount not greater than
$600,000. to Borrower on terms reasonable and customary for such financing,
provided Borrower is in full compliance with the terms, covenants and conditions
of this Loan. Such subordination shall not include releasing possession of the
Note or the assignment of any rights thereunder to the senior lender.
Subordination in an amount in excess of $600,000. shall require the consent of
Lender, which consent shall not be unreasonably withheld, provided, however,
that in the event of a Qualified Financing, Lender shall subordinate its lien as
described hereinabove to an amount not greater than $2 million.
10. REFERRAL FEES.
Borrowers agree to hold Lender harmless with respect to any claims for
referral fees made by any broker in connection with this Loan resulting from the
actions of Borrowers or Lender.
11. LOAN EXPENSES
<PAGE>
Borrowers agree to pay all expenses arising out of the Loan, which are
the Lender's commitment fee of $8,000. and Lender's legal fees of $10,000. plus
disbursements.
12. EXHIBITS.
Attached hereto and made a part hereof are various exhibits which are
listed under Addendum to Loan Agreement, and the terms and conditions of each
are incorporated herein by reference.
13. PARTIES AFFECTED.
This Agreement shall be binding upon and shall inure to the benefit of
Borrowers and Lender and their successors and assigns.
14. ADVANCES SECURED BY COLLATERAL.
In the event Borrowers are in default in accordance with Paragraph 15
hereunder and all applicable cure periods have expired and Lender then advances
any sums to pay any prior liens, taxes, insurance premiums or the like in
connection with any items of collateral owned by Borrowers, said sums shall be
added to the obligations due and owing from Borrowers to Lender at the time of
the making of the Loan and shall bear interest at the rate set forth in the
Note. Lender is hereby authorized to make any such advances it deems necessary
from time to time, which in the reasonable opinion of Lender are necessary or
desirable in order to protect Lender's interest in such collateral. 15. DEFAULT.
<PAGE>
15. DEFAULT
If any of the following events occur while any portion of the Note
remains unpaid then a default may be declared at the option of the holder of the
Note, without presentment, demand, protest or further notice of any kind (all of
which are hereby expressly waived); and the holder shall be entitled to be paid
in full; and in such case, the balance of the unpaid principal sum, plus accrued
interest and any costs thereof, including reasonable attorneys' fees, shall then
be accelerated so that they are immediately due and payable:
A. The occurrence of any default under the Note or other documents
executed in connection with the Loan including the breach of any of Borrowers'
covenants set forth in said documents or the breach in the payment of money due
thereunder following the expiration of all applicable grace and cure periods, if
any.
B. Any representation made by Borrowers in this Agreement or its
exhibits shall be untrue. C. Borrowers shall fail to pay when due any insurance
policy premiums affecting the business assets of
C. Borrowers, or the premiums for any life insurance policies as
described in Paragraph 4C.
D. Borrowers shall fail to comply with this Agreement and such failure
shall continue for a period of ten (10) days after receipt of mailing (or other
personal delivery) of written notice from Lender or the holder of the Note in
the event of a non-monetary default only.
E. Borrowers shall commit an act of bankruptcy within the meaning of
the Federal Bankruptcy Code, or bankruptcy, receivership, insolvency,
reorganization, dissolution, liquidation, or other similar proceedings shall be
instituted by or against Borrowers and they shall consent thereto, or shall fail
to cause the same to be discharged within ninety (90) days.
F. Borrowers shall be in default on any debt for borrowed money or
obligation greater than $200,000. of the Borrowers, whether or not secured by
any of the collateral for this Loan.
G. Borrowers' current control group officers, each individually, shall
cease, for any reason, to be stockholders, officers or directors of Borrowers,
except in the event of death or disability and as set forth in Paragraph 7(O),
provided, however, that in the event of a Qualified Financing, Lender shall
thereafter waive the terms of the within Paragraph 15G.
<PAGE>
16. CHOICE OF LAW.
The parties hereto stipulate and agree that the laws of the state of
New York shall govern this transaction and the Loan made hereunder.
17. ALL MODIFICATIONS IN WRITING.
This Agreement may not be modified except in writing, which writing
shall be signed by each of the parties hereto.
18. LENDER'S OBLIGATION TO TERMINATE LIENS
Upon payment in full by Borrowers of all sums due and owing in
accordance with the Note described in Paragraph 3A herein, Lender agrees to
deliver to Borrowers UCC-3 termination statements and the Note marked "Paid".
19. NOTICES
All notices, requests, demands and other communications provided for in
this Agreement shall be in writing, and, unless otherwise specifically provided
for herein, shall be deemed to be given at the time when mailed at any general
or branch United States post office in a certified postpaid envelope return
receipt requested or by recognized express mail delivery addressed to the
address of the party set forth above, or to such change of address as such party
may have fixed by notice, if notice is sent to Borrowers, a copy of same will
also be sent by first class mail to Hartman & Craven LLP, 460 Park Avenue, New
York, New York 10022, Attn: Edward I. Tishelman, Esq., and if notice is sent to
Lender, a copy of same will also be sent by first class mail to Granoff, Walker
& Forlenza, P.C., 747 Third Avenue, New York, New York 10017, Attention Ellen M.
Walker, Esq., provided, however, that any notice of change of address shall be
effective only upon receipt.
<PAGE>
IN WITNESS WHEREOF, Borrowers and Lender have executed or caused to be
duly executed this Agreement and
affixed or caused to be duly affixed hereto their seals.
Dated: New York, New York
January 28, 1999
INTERNET FINANCIAL SERVICES INC.
By: /s/ Steven Malin
Steven Malin,
--------------------------------
Chief Executive Officer
A.B. WATLEY, INC.
By: /s/ Robert Malin
--------------------------------
Robert Malin, President
NEW YORK COMMUNITY INVESTMENT
COMPANY L.L.C.
By: /s/ Howard Sommer
--------------------------------
Howard Sommer, President
<PAGE>
PROMISSORY NOTE
January 28, 1999
MAKER: INTERNET FINANCIAL SERVICES INC. and
A.B. WATLEY, INC.
ADDRESS OF MAKER: 33 West 17th Street
New York, New York 10011
FACE AMOUNT: $400,000.
MONTHLY INSTALLMENTS (in order of maturity):
24 installments of interest only each in the amount of $4,000. commencing March
1, 1999 and on the first day of each month thereafter up to and including
February 1, 2001, based upon an interest rate of twelve (12%) percent per annum.
35 installments of principal each in the amount of $6,667. plus interest on the
unpaid principal balance outstanding commencing March 1, 2001 and on the first
day of each month thereafter up to and including January 1, 2004, based upon an
interest rate of twelve (12%) percent per annum.
1 installment of principal in the amount of $166,665. plus interest on the
unpaid principal balance outstanding at that time on February 1, 2004, provided
all Monthly Installments have been made on their scheduled due dates.
MAKER'S BANK: ________________________
NUMBER OF INSTALLMENTS: 60
FOR VALUE RECEIVED, the above Maker hereby promises to pay to
the order of New York Community Investment Company L.L.C., a Delaware limited
liability company having its principal place of business at 120 Broadway, New
York, New York 10271 ("Payee"), at Maker's Bank, the Face Amount payable in the
above Number of Installments each in the amount of the Monthly Installment.
<PAGE>
This Note shall bear interest computed from the date hereof at
the rate of twelve (12%) percent per annum (the "Contract Rate") except that
post-maturity interest (which interest shall accrue at the end of the term of
the Note) shall accrue and be payable at the rate of three (3%) percent per
annum above the Contract Rate on each Monthly Installment due hereunder not paid
when due. In addition, interest shall be computed on the unpaid principal amount
at the rate of three (3%) percent per annum above the Contract Rate during any
period in which a Monthly Installment is not paid when due.
The indebtedness evidenced by this Note is secured by certain
collateral more fully described in the Loan Agreement by and between Maker and
Payee pertaining to the $400,000. loan and related documents of even date
herewith executed by Maker, inter alia, the terms and conditions of which are
incorporated herein by reference.
The Maker hereby waives presentment for payment, demand,
notice of dishonor, protest and notice thereof. If the Maker or any endorser or
guarantor becomes subject to the jurisdiction of any federal or state debtor
relief statute, or if any such party fails to pay their debts as they mature, or
calls a meeting of their creditors, or if a receiver or trustee of their
property is appointed, then this Note and all other obligations now or hereafter
owing by said obligor to the Payee may become immediately due and payable
without notice as to the Maker, but upon notice to any endorser or guarantor.
The Maker may prepay this Note, in whole or in part, at any
time and from time to time, by paying the principal in increments of not less
than $25,000., or the remaining principal amount if less than $25,000. is then
outstanding at the time of such prepayment, with interest to the date of
prepayment. The Maker shall provide Payee with thirty (30) days prior written
notice of its intention to prepay.
If any Monthly Installment due hereunder is not paid when due
and is placed with an attorney for collection, the Maker as well as all
endorsers and guarantors agree to pay all costs of collection, including
reasonable attorney's fees, all of which shall be added to the amount due
hereunder.
If any Monthly Installment hereunder is not made within ten
(10) days of its due date, a late charge of fifty ($50.) dollars or five (5%)
percent of each Monthly Installment so overdue, whichever is greater, may be
charged by the Payee for the purpose of defraying the expenses incident to
handling such delinquent payment to the extent such payment is then permitted by
law. In the event any payment is not made within the grace period provided
hereinabove, same shall constitute an event of default and Payee may accelerate
the entire outstanding indebtedness due and owing hereunder.
<PAGE>
This Note has been executed and delivered and shall be
construed and enforced in accordance with the laws of the State of New York,
including but not limited to matters of construction, validity and performance.
ATTEST: INTERNET FINANCIAL SERVICES INC.
By: /s/ Steven Malin
----------------------------------
(CORPORATE SEAL) Steven Malin,
Chief Executive Officer
A.B. WATLEY, INC.
By: /s/ Robert Malin
----------------------------------
Robert Malin, President
STATE OF NEW YORK,
COUNTY OF NEW YORK.
Steven Malin and Robert Malin, being duly sworn, depose and
say:
That they are the Chief Executive Officer and President
respectively of the Maker in the within Note and that they executed same and the
papers pertinent thereto; that they affirm and reaffirm the warranties and
representations made therein; that they make this affidavit knowing full well
that the Payee has advanced the sum of $400,000. relying upon the statements
herein contained and upon the warranties and representations contained in the
Loan Agreement by and between Maker and Payee pertaining to the $400,000. loan
of even date, and that this affidavit is made for the sole purpose of inducing
the Payee to make said advance.
/s/ Steven Malin
----------------------------------
Steven Malin,
Chief Executive Officer of
Internet Financial Services Inc.
/s/ Robert Malin
----------------------------------
Robert Malin, President of
A.B. Watley, Inc.
Sworn to before me this
28th day of January, 1999
/s/ Linda J. Malin
- --------------------------
Notary Public
<PAGE>
SECURITY AGREEMENT
(Chattel Mortgage)
AGREEMENT made on January 28, 1999 under the laws of the State of New
York, by and between A.B. WATLEY, INC., a New York corporation (the "Debtor"),
whose business address is 33 West 17th Street, New York, New York 10011 and NEW
YORK COMMUNITY INVESTMENT COMPANY L.L.C., a Delaware limited liability company
with its office at 120 Broadway, New York, New York 10271 (the "Secured Party").
WITNESSETH:
To secure the payment of an indebtedness in the amount of $400,000.,
with interest at the rate of twelve (12%) percent per annum, for five (5) years,
due from Debtor and Internet Financial Services Inc. to Secured Party, payable
in the accordance with the terms of a certain promissory note executed in
connection therewith, and also to secure any other indebtedness or liability of
the Debtor to the Secured Party, direct or indirect, absolute or contingent, due
or to become due, now existing or hereafter arising, including all future
advances or loans which may be made at the option of the Secured Party (all
hereafter called the "obligations"), Debtor hereby grants and conveys to the
Secured Party a security interest in, and mortgages to the Secured Party: (a)
the property described in the schedule herein which the Debtor represents will
be used primarily in business or other use; (b) all property, goods and chattels
of the same classes as those scheduled, acquired by the Debtor subsequent to the
execution of this agreement and prior to its termination; (c) the proceeds
thereof, if any; (d) all increases, substitutions, replacements, additions, and
accessions thereto (the foregoing (a), (b), (c), and (d) hereinafter called the
"collateral").
1. Debtor warrants, covenants, and agrees as follows:
(a) To pay and perform all of the obligations secured by this
agreement according to their terms.
(b) To defend the title to the collateral against all persons
and against all claims and demands whatsoever, which collateral, except for the
security interest granted hereby, is lawfully owned by the Debtor and is now
free and clear of any and all liens, security interests, claims, charges,
encumbrances, taxes, and assessments, except for New York Small Business Venture
Fund LLC, G.E. Capital Corp. and the Debtor's clearing agents, Penson Financial
Services Inc, and Weiss, Peck & Greer, L.L.C.
(c) On demand of the Secured Party to do the following:
furnish further assurance of title, execute any written agreement or do any
other acts necessary to effectuate the purposes and provisions of this
agreement, execute any instrument or statement required by law or otherwise in
order to perfect, continue or terminate the security interest of the Secured
Party in the collateral and pay all costs of filing in connection therewith.
<PAGE>
(d) To retain possession of the collateral during the
existence of this agreement and not to sell, exchange, assign, loan, deliver,
lease, mortgage, or otherwise dispose of same without the written consent of the
Secured Party, except for purchase money security interests granted in the
ordinary course of business.
(e) To keep the collateral at the location specified in the
schedule and not to remove same (except in the usual course of business for
temporary periods) without the prior written consent of the Secured Party, which
shall not be unreasonably withheld.
(f) To keep the collateral free and clear of all liens,
charges, encumbrances, taxes, and assessments, except New York Small Business
Venture Fund LLC, G.E. Capital Corp. and the Debtor's clearing agents, Penson
Financial Services Inc. and Weiss, Peck & Greer, L.L.C.
(g) To pay, when due, all taxes, assessments and license fees
relating to the collateral.
(h) To keep the collateral, at Debtor's own cost and expense,
in good repair and condition and available for inspection by the Secured Party
at all reasonable times upon prior notice.
(i) To keep the collateral fully insured against loss by fire,
theft, and other casualties, and to name Secured Party as a loss payee in the
event of any loss, and Debtor shall give immediate written notice to the Secured
Party and to insurers of loss or damage to the collateral and shall promptly
file proofs of loss with insurers.
2. The parties further agree:
(a) Waiver of or acquiescence in any default by the Debtor, or
failure of the Secured Party to insist upon strict performance by the Debtor of
any warranties or agreements in this agreement, shall not constitute a waiver of
any subsequent or other default or failure.
(b) The Uniform Commercial Code shall govern the rights,
duties, and remedies of the parties, and any provisions herein declared invalid
under any law shall not invalidate any other provision of this agreement.
<PAGE>
(c) The following shall constitute a default by the Debtor:
Failure to pay any installment called for in the promissory note of even date in
the amount of $400,000. when due. Failure by Debtor to comply with or perform
any provision of this agreement or any other agreement executed between Debtor
and Secured Party. If any false or misleading representations or warranties are
made or given by Debtor in connection with this agreement. Subjection of the
collateral to levy or execution or other judicial process. Commencement of any
insolvency proceeding by or against the Debtor beyond any cure provisions
described in the Loan Agreement by and between Debtor and Secured Party of even
date. Any reduction in the value of the collateral or any act of the Debtor
which imperils the prospect of full performance or satisfaction of the Debtor's
obligations herein.
(d) Upon any default of the Debtor, and at the option of the
Secured Party, the obligations secured by this agreement shall immediately
become due and payable in full without notice or demand, and the Secured Party
shall have all the rights, remedies, and privileges with respect to
repossession, retention, and sale of the collateral, and disposition of the
proceeds accorded by the applicable sections of the Uniform Commercial Code
respecting "Default". Upon any default and upon written demand, Debtor shall
assemble the collateral and make it available to the Secured Party at the place
and at the time designated in the demand. Upon any default, the Secured Party's
reasonable attorneys' fees and the legal and other expenses for pursuing,
searching for, receiving, taking, keeping, storing, advertising, and selling the
collateral, and for any other efforts to collect the debt secured hereby shall
be chargeable to the Debtor. The Debtor shall remain liable for any deficiency
resulting from a sale of the collateral and shall pay any such deficiency
forthwith on written demand. If the Debtor shall default in the performance of
any of the provisions of this agreement on the Debtor's part to be performed,
Secured Party may perform same for the Debtor's account, and any monies expended
in so doing shall be chargeable with interest to the Debtor and added to the
indebtedness secured hereby.
(e) The Secured Party is hereby authorized to file a financing
statement and any amendments, continuation statements or termination statements
it may deem necessary, without the Debtor's signature, or by executing the
Debtor's name thereto and for such limited purpose Debtor grants Secured Party,
and its agents, a power of attorney to execute any such financing statements as
may be necessary to perfect Secured Party's interest in the collateral.
Notwithstanding the foregoing, the Secured Party shall have no obligation to
comply with any recording, re-recording, filing, refiling or other legal
requirements, necessary to establish or maintain the validity, priority, or
enforceability of, or the Secured Party's right in and to the collateral or any
part thereof.
(f) The terms, warranties, and agreements herein contained
shall bind and inure to the benefit of the respective parties hereto, and their
respective legal representatives, successors, and assigns. The gender and number
used in this agreement are used as a reference term only and shall apply with
the same effect whether the parties are of the masculine or feminine gender,
corporate or other form, and the singular shall likewise include the plural.
This agreement my not be changed orally.
(g) All communications and notices hereunder shall be in
writing and shall be deemed to have been duly given if sent by recognized
overnight mail, with a copy to Hartman & Craven LLP, 460 Park Avenue, New York,
New York 10022, Attn: Edward I. Tishelman, Esq. and Granoff, Walker & Forlenza,
P.C., 747 Third Avenue, New York, New York 10017, Attention Ellen M. Walker,
Esq., to the parties at the address first above written, or at such other place
or places as the party addressed may have designated by written notice to the
other.
<PAGE>
(h) This agreement is being executed and delivered in the
State of New York and shall be construed and enforced in accordance with the
laws of that State.
(i) In the event that any word, sentence, paragraph or article
of this agreement is found to be void or voidable, the balance of this agreement
shall nevertheless be legal and binding with the same force and effect as though
the void or voidable parts were deleted.
IN WITNESS WHEREOF, the parties have respectively signed and sealed
these presents the day and year first above written.
DEBTOR:
A.B. WATLEY, INC.
By: /s/ Robert Malin
---------------------------------
Robert Malin, President
SECURED PARTY:
NEW YORK COMMUNITY INVESTMENT
COMPANY L.L.C.
By: /s/ Howard Sommer
---------------------------------
Howard Sommer, President
<PAGE>
SCHEDULE OF COLLATERAL TO SECURITY AGREEMENT
MADE BY A.B. WATLEY, INC. IN FAVOR OF
NEW YORK COMMUNITY INVESTMENT COMPANY L.L.C.
(a) All Debtor's right, title and interest in and to all inventory, accounts
receivable, contract rights, instruments and all other obligations for the
payment of monies due Debtor, machinery and equipment, whether now owned or
existing, or hereafter created or acquired; (b) all property, goods and chattels
of the same classes as the foregoing, acquired by the Debtor subsequent to the
execution of the Security Agreement and prior to its termination; (c) the
proceeds of the foregoing, if any; and (d) all increases, substitutions,
replacements, additions and accessions to the foregoing. No security interest is
granted in any of Debtor's general intangibles. For purposes hereof, the term
"Security Agreement" refers to the Security Agreement dated January 28, 1999,
between the Debtor and the Secured Party.
<PAGE>
SECURITY AGREEMENT
(Chattel Mortgage)
AGREEMENT made on January 28, 1999 under the laws of the State of New
York, by and between INTERNET FINANCIAL SERVICES INC., a Delaware corporation,
authorized to do business in the State of New York (the "Debtor"), whose
business address is 33 West 17th Street, New York, New York 10011 and NEW YORK
COMMUNITY INVESTMENT COMPANY L.L.C., a Delaware limited liability company with
its office at 120 Broadway, New York, New York 10271 (the "Secured Party").
WITNESSETH:
To secure the payment of an indebtedness in the amount of $400,000.,
with interest at the rate of twelve (12%) percent per annum, for five (5) years,
due from Debtor and A.B. Watley, Inc. to Secured Party, payable in the
accordance with the terms of a certain promissory note executed in connection
therewith, and also to secure any other indebtedness or liability of the Debtor
to the Secured Party, direct or indirect, absolute or contingent, due or to
become due, now existing or hereafter arising, including all future advances or
loans which may be made at the option of the Secured Party (all hereafter called
the "obligations"), Debtor hereby grants and conveys to the Secured Party a
security interest in, and mortgages to the Secured Party: (a) the property
described in the schedule herein which the Debtor represents will be used
primarily in business or other use; (b) all property, goods and chattels of the
same classes as those scheduled, acquired by the Debtor subsequent to the
execution of this agreement and prior to its termination; (c) the proceeds
thereof, if any; (d) all increases, substitutions, replacements, additions, and
accessions thereto (the foregoing (a), (b), (c), and (d) hereinafter called the
"collateral").
1. Debtor warrants, covenants, and agrees as follows:
(a) To pay and perform all of the obligations secured by this
agreement according to their terms.
(b) To defend the title to the collateral against all persons
and against all claims and demands whatsoever, which collateral, except for the
security interest granted hereby, is lawfully owned by the Debtor and is now
free and clear of any and all liens, security interests, claims, charges,
encumbrances, taxes, and assessments, except for New York Small Business Venture
Fund LLC, G.E. Capital Corp. and the Debtor's clearing agents, Penson Financial
Services Inc, and Weiss, Peck & Greer, L.L.C.
(c) On demand of the Secured Party to do the following:
furnish further assurance of title, execute any written agreement or do any
other acts necessary to effectuate the purposes and provisions of this
agreement, execute any instrument or statement required by law or otherwise in
order to perfect, continue or terminate the security interest of the Secured
Party in the collateral and pay all costs of filing in connection therewith.
<PAGE>
(d) To retain possession of the collateral during the
existence of this agreement and not to sell, exchange, assign, loan, deliver,
lease, mortgage, or otherwise dispose of same without the written consent of the
Secured Party, except for purchase money security interests granted in the
ordinary course of business.
(e) To keep the collateral at the location specified in the
schedule and not to remove same (except in the usual course of business for
temporary periods) without the prior written consent of the Secured Party, which
shall not be unreasonably withheld.
(f) To keep the collateral free and clear of all liens,
charges, encumbrances, taxes, and assessments, except New York Small Business
Venture Fund LLC, G.E. Capital Corp. and the Debtor's clearing agents, Penson
Financial Services Inc, and Weiss, Peck & Greer, L.L.C.
(g) To pay, when due, all taxes, assessments and license fees
relating to the collateral.
(h) To keep the collateral, at Debtor's own cost and expense,
in good repair and condition and available for inspection by the Secured Party
at all reasonable times upon prior notice.
(i) To keep the collateral fully insured against loss by fire,
theft, and other casualties, and to name Secured Party as a loss payee in the
event of any loss, and Debtor shall give immediate written notice to the Secured
Party and to insurers of loss or damage to the collateral and shall promptly
file proofs of loss with insurers.
2. The parties further agree:
(a) Waiver of or acquiescence in any default by the Debtor, or
failure of the Secured Party to insist upon strict performance by the Debtor of
any warranties or agreements in this agreement, shall not constitute a waiver of
any subsequent or other default or failure.
(b) The Uniform Commercial Code shall govern the rights,
duties, and remedies of the parties, and any provisions herein declared invalid
under any law shall not invalidate any other provision of this agreement.
<PAGE>
(c) The following shall constitute a default by the Debtor:
Failure to pay any installment called for in the promissory note of even date in
the amount of $400,000. when due. Failure by Debtor to comply with or perform
any provision of this agreement or any other agreement executed between Debtor
and Secured Party. If any false or misleading representations or warranties are
made or given by Debtor in connection with this agreement. Subjection of the
collateral to levy or execution or other judicial process. Commencement of any
insolvency proceeding by or against the Debtor beyond any cure provisions
described in the Loan Agreement by and between Debtor and Secured Party of even
date. Any reduction in the value of the collateral or any act of the Debtor
which imperils the prospect of full performance or satisfaction of the Debtor's
obligations herein.
(d) Upon any default of the Debtor, and at the option of the
Secured Party, the obligations secured by this agreement shall immediately
become due and payable in full without notice or demand, and the Secured Party
shall have all the rights, remedies, and privileges with respect to
repossession, retention, and sale of the collateral, and disposition of the
proceeds accorded by the applicable sections of the Uniform Commercial Code
respecting "Default". Upon any default and upon written demand, Debtor shall
assemble the collateral and make it available to the Secured Party at the place
and at the time designated in the demand. Upon any default, the Secured Party's
reasonable attorneys' fees and the legal and other expenses for pursuing,
searching for, receiving, taking, keeping, storing, advertising, and selling the
collateral, and for any other efforts to collect the debt secured hereby shall
be chargeable to the Debtor. The Debtor shall remain liable for any deficiency
resulting from a sale of the collateral and shall pay any such deficiency
forthwith on written demand. If the Debtor shall default in the performance of
any of the provisions of this agreement on the Debtor's part to be performed,
Secured Party may perform same for the Debtor's account, and any monies expended
in so doing shall be chargeable with interest to the Debtor and added to the
indebtedness secured hereby.
(e) The Secured Party is hereby authorized to file a financing
statement and any amendments, continuation statements or termination statements
it may deem necessary, without the Debtor's signature, or by executing the
Debtor's name thereto and for such limited purpose Debtor grants Secured Party,
and its agents, a power of attorney to execute any such financing statements as
may be necessary to perfect Secured Party's interest in the collateral.
Notwithstanding the foregoing, the Secured Party shall have no obligation to
comply with any recording, re-recording, filing, refiling or other legal
requirements, necessary to establish or maintain the validity, priority, or
enforceability of, or the Secured Party's right in and to the collateral or any
part thereof.
(f) The terms, warranties, and agreements herein contained
shall bind and inure to the benefit of the respective parties hereto, and their
respective legal representatives, successors, and assigns. The gender and number
used in this agreement are used as a reference term only and shall apply with
the same effect whether the parties are of the masculine or feminine gender,
corporate or other form, and the singular shall likewise include the plural.
This agreement my not be changed orally.
(g) All communications and notices hereunder shall be in
writing and shall be deemed to have been duly given if sent by recognized
overnight mail, with a copy to Hartman & Craven LLP, 460 Park Avenue, New York,
New York 10022, Attn: Edward I. Tishelman, Esq. and Granoff, Walker & Forlenza,
P.C., 747 Third Avenue, New York, New York 10017, Attention Ellen M. Walker,
Esq., to the parties at the address first above written, or at such other place
or places as the party addressed may have designated by written notice to the
other.
<PAGE>
(h) This agreement is being executed and delivered in the
State of New York and shall be construed and enforced in accordance with the
laws of that State.
(i) In the event that any word, sentence, paragraph or article
of this agreement is found to be void or voidable, the balance of this agreement
shall nevertheless be legal and binding with the same force and effect as though
the void or voidable parts were deleted.
IN WITNESS WHEREOF, the parties have respectively signed and sealed
these presents the day and year first above written.
DEBTOR:
INTERNET FINANCIAL SERVICES INC.
By: /s/ Robert Malin
----------------------------------
Steven Malin,
Chief Executive Officer
SECURED PARTY:
NEW YORK COMMUNITY INVESTMENT
COMPANY L.L.C.
By: /s/ Howard Sommer
----------------------------------
Howard Sommer, President
<PAGE>
SCHEDULE OF COLLATERAL TO SECURITY AGREEMENT MADE
MADE BY INTERNET FINANCIAL SERVICES INC. IN FAVOR
OF NEW YORK COMMUNITY INVESTMENT COMPANY L.L.C.
(a) All Debtor's right, title and interest in and to all inventory, accounts
receivable, contract rights, instruments and all other obligations for the
payment of monies due Debtor, machinery and equipment, whether now owned or
existing, or hereafter created or acquired; (b) all property, goods and chattels
of the same classes as the foregoing, acquired by the Debtor subsequent to the
execution of the Security Agreement and prior to its termination; (c) the
proceeds of the foregoing, if any; and (d) all increases, substitutions,
replacements, additions and accessions to the foregoing. No security interest is
granted in any of Debtor's general intangibles. For purposes hereof, the term
"Security Agreement" refers to the Security Agreement dated January 28, 1999,
between the Debtor and the Secured Party.
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated November 13, 1998, in the Registration Statement
(Form SB-2) and related Prospectus of Internet Financial Services, Inc. for the
registration of 1,700,000 shares of its common stock.
/s/ Ernst & Young LLP
-----------------------
Ernst & Young LLP
New York, New York
February 4, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF WILLIAM BRAWER
I hereby consent to the reference to me as a person to be appointed a
Director of Internet Financial Services Inc. (the "Company") under the caption
"Management" in the Prospectus included in the Company's Registration Statement
on Form SB-2.
New York, New York
January 29, 1999
/s/ William Brawer
------------------------------
William Brawer
<PAGE>
EXHIBIT 23.4
CONSENT OF ELIZABETH CHAMBERS
I hereby consent to the reference to me as a person to be appointed a
Director of Internet Financial Services Inc. (the "Company") under the caption
"Management" in the Prospectus included in the Company's Registration Statement
on Form SB-2.
New York, New York
January 28, 1999
/s/ Elizabeth Chambers
-----------------------------
Elizabeth Chambers
<PAGE>
EXHIBIT 23.5
CONSENT OF MARK CHAMBRE
I hereby consent to the reference to me as a person to be appointed a
Director of Internet Financial Services Inc. (the "Company") under the caption
"Management" in the Prospectus included in the Company's Registration Statement
on Form SB-2.
New York, New York
January 30, 1999
/s/ Mark Chambre
------------------------
Mark Chambre
<PAGE>
EXHIBIT 23.6
CONSENT OF STANLEY WEINSTEIN
I hereby consent to the reference to me as a person to be appointed a
Director of Internet Financial Services Inc. (the "Company") under the caption
"Management" in the Prospectus included in the Company's Registration Statement
on Form SB-2.
New York, New York
January 31, 1999
/s/ Stanley Weinstein
--------------------------------
Stanley Weinstein
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 970,308
<SECURITIES> 104,518
<RECEIVABLES> 531,835
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,679,812
<PP&E> 3,650,743
<DEPRECIATION> 530,892
<TOTAL-ASSETS> 5,539,457
<CURRENT-LIABILITIES> 2,371,070
<BONDS> 0
0
0
<COMMON> 5,138
<OTHER-SE> 1,754,419
<TOTAL-LIABILITY-AND-EQUITY> 5,539,457
<SALES> 9,119,268
<TOTAL-REVENUES> 9,119,268
<CGS> 9,479,591
<TOTAL-COSTS> 9,479,591
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 259,322
<INCOME-PRETAX> (619,645)
<INCOME-TAX> 12,765
<INCOME-CONTINUING> (632,410)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (632,410)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
