<PAGE>
As filed with the Securities and Exchange Commission on April 16, 1999
Registration No. 333-71783
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
INTERNET FINANCIAL SERVICES INC.
(Name of small business issuer in its charter)
<TABLE>
<CAPTION>
Delaware 6211 13-3911867
<S> <C> <C>
(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)
---------------------
Approximate date of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective
---------------------
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If 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.
================================================================================
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================
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)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value ("Common
Stock") ............................. 2,300,000(2) $ 7.00 $16,100,000 $ 3,932.31
- -----------------------------------------------------------------------------------------------------------------
Underwriter's Warrants(3) ............ 200,000 $ .0005 $ 100 $ -- (4)
- -----------------------------------------------------------------------------------------------------------------
Common Stock underlying Underwriter's
Warrants ............................ 200,000 $ 11.55 $ 2,310,000 $ 564.20
- -----------------------------------------------------------------------------------------------------------------
Total .................................................................. $18,410,100
- -----------------------------------------------------------------------------------------------------------------
Total Registration Fee ...................................................................... $ 4,496.51
- -----------------------------------------------------------------------------------------------------------------
Amount Previously Paid ...................................................................... $ 4,496.51
- -----------------------------------------------------------------------------------------------------------------
Amount Due .................................................................................. $ 0
=================================================================================================================
</TABLE>
(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 300,000 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).
<PAGE>
Internet Financial Services Inc.
Cross Reference Sheet for Prospectus Under Form SB-2
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
ii
<PAGE>
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 APRIL 16, 1999
Internet Financial Services Inc.
2,000,000 Shares of Common Stock
$7.00 per Share
Internet Financial Services Inc. is offering 2,000,000 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.
---------------------
Investing in the common stock involves risks. See "Risk Factors" beginning
on page 6.
---------------------
================================================================================
Public Underwriting Proceeds
Offering Discounts and to
Price Commissions Company
- --------------------------------------------------------------------------------
Per Share ......... $ 7.00 $ .65 $ 6.35
- --------------------------------------------------------------------------------
Total ............. $14,000,000 $1,300,000 $12,700,000
================================================================================
---------------------
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 300,000 shares of common stock to cover over-allotments. The
underwriter is offering the shares on a firm commitment basis. Whale Securities
Co., L.P. expects to deliver the shares of common stock to purchasers on ,
1999.
---------------------
Whale Securities Co., L.P.
, 1999
<PAGE>
[LOGO AND DIAGRAM]
<PAGE>
PROSPECTUS SUMMARY
Internet Financial Services
Internet Financial Services Inc. provides real-time online financial
brokerage services and comprehensive information about the securities markets
through its proprietary trading systems, UltimateTrader(R) and
WatleyTrader(TM). We also operate a third-market institutional sales desk which
specializes in executing and facilitating large-block transactions in
approximately 500 thinly-traded equity securities.
UltimateTrader
We designed UltimateTrader for use by self-directed active traders.
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. UltimateTrader delivers and
automatically updates a continuous, dynamic stream of live market data to the
client's screen.
UltimateTrader's features enable clients to:
o access comprehensive information on stocks, markets, indices, mutual
funds, news and options;
o establish and track their securities, cash and margin positions;
o customize screen layouts;
o execute trades with a few simple mouse-clicks or key strokes; and
o route trades directly to the exchanges, the Nasdaq Market Maker System,
a specific market maker or an electronic communication network
WatleyTrader
WatleyTrader is our web-based Internet broker service which we designed
for active investors who execute trades online 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 live format for a fee, or a partially time delayed format for
free.
Our Formation
Internet Financial Services was incorporated in May 1996 under the laws of
the State of Delaware. Our wholly-owned subsidiary, A.B. Watley, Inc., was
organized in December 1958 under the laws of the State of New York. In January
1997, we acquired all of the outstanding capital stock of Watley.
How to Contact Internet Financial Services
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 is not part
of this prospectus.
3
<PAGE>
The Offering
Common stock offered..... 2,000,000 shares
Common stock to be
outstanding after this
offering................ 7,631,745 shares. Our outstanding shares do not
include:
o 200,000 shares reserved for issuance upon
exercise of the underwriter's warrants;
o 1,049,900 shares reserved for issuance upon
exercise of options granted under our stock
option plans;
o 150,100 shares reserved for issuance upon the
exercise of options available for future grant
under our stock option plans;
o 351,250 shares reserved for issuance upon
exercise of non plan options and warrants; and
o 300,000 shares reserved for issuance in this
offering to cover over-allotments, if any, by the
underwriter.
Use of proceeds.......... We intend to use the net proceeds of this offering
for;
o sales and marketing;
o expanding and upgrading our network;
o expanding client services;
o repaying indebtedness; and
o working capital and general corporate purposes.
Proposed Nasdaq SmallCap
Market symbol........... IFSX
Proposed Boston Stock
Exchange symbol......... IFI
----------------------
Notice to California investors: Each purchaser of our common stock in
California must be an accredited investor as that term is defined in Rule
501(a) of Regulation D promulgated under the Securities Act of 1933, or satisfy
one of the following suitability standards:
o minimum gross income of $65,000 and a net worth, exclusive of home, home
furnishings and automobiles, of $250,000; or
o minimum net worth, exclusive of home, home furnishings and automobiles,
of $500,000.
Notice to Ohio, South Carolina and Washington investors: Each purchaser of
our common stock in Ohio, South Carolina and Washington must be an accredited
investor as that term is defined in Rule 501(a) of Regulation D promulgated
under the Securities Act.
4
<PAGE>
Summary Financial Information
The following summary financial data as of September 30, 1998 and 1997,
and for the years ended September 30, 1998 and 1997, are derived from our
audited consolidated financial statements. The summary financial data as of
December 31, 1998 and for the three months ended December 31, 1998 and 1997 are
derived from our unaudited consolidated financial statements.
Statement of Operations Data:
<TABLE>
<CAPTION>
Three Months Ended
Year Ended September 30, December 31,
------------------------------- -----------------------------
1997 1998 1997 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues .................................... $ 4,532,532 $9,119,268 $1,457,560 $3,180,033
Net revenues ................................ 4,320,173 8,859,946 1,437,950 3,071,530
Commissions, floor brokerage and clearing
charges ................................... 1,844,927 3,425,725 597,070 1,369,610
Employee compensation and related costs ..... 1,297,575 2,247,963 380,041 852,342
Other expenses .............................. 2,234,868 3,805,903 823,427 1,074,854
Net loss .................................... (1,059,973) (632,410) (365,779) (229,426)
Net loss per share .......................... (.30) (.12) (.07) (.04)
Weighted average number of shares
outstanding ............................... 3,508,560 5,171,182 5,120,771 5,291,080
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1998
-------------------- --------------------------------------------------
Actual Pro Forma As Adjusted
---------------- -------------- --------------
<S> <C> <C> <C> <C>
Working capital (deficit) ......... $ (691,258) $ (1,777,898) $ (352,898) $10,710,269
Total assets ...................... 5,539,457 6,363,494 7,813,494 18,430,676
Total liabilities ................. 3,785,038 4,575,371 4,975,371 3,988,538
Stockholders' equity .............. 1,754,419 1,788,123 2,838,123 14,442,138
</TABLE>
The pro forma information presented above gives effect to the receipt of
approximately $1,050,000 of net proceeds in January 1999 upon the issuance of
221,500 shares of common stock, and 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.
The as adjusted information presented above gives effect to:
o the sale of the shares of common stock offered by this prospectus, the
anticipated application of a portion of the estimated net proceeds for
the repayment of $750,000 principal amount of indebtedness, a $5,000
prepayment fee and $32,000 of accrued and unpaid interest;
o the reclassification of approximately $246,000 of deferred offering costs
as a reduction to equity;
o 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; and
o the recognition of approximately $16,000 of professional fee expenses
related to the issuance of options to non-employees effective on the date
of this prospectus.
We have not categorized our consolidated financial statements 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.
5
<PAGE>
RISK FACTORS
The shares offered by this prospectus are speculative and involve a high
degree of risk. Each prospective investor should carefully consider the
following risk factors before making an investment decision.
Because we have experienced losses and expect our expenses to increase, we may
not be able to achieve profitability.
Since our inception, we have incurred losses. As of December 31, 1998 we
had an accumulated deficit of $2,133,187. We expect to continue to incur losses
until we are able to significantly increase our client base and revenues. Our
operating expenses 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.
The evolving nature of the online brokerage market makes the ultimate demand
for our services uncertain.
The level of demand for online brokerage services is uncertain because the
market is rapidly evolving. Our offering of brokerage services over the
Internet involves a relatively new approach to securities trading. 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.
Client attrition results in the loss of clients which may adversely impact our
business and the value of your investment.
Any significant increase in our client attrition rate could have a
material adverse effect on our business and operations. Historically, we have
experienced a client attrition rate of 7% per month. Client attrition results
in the erosion of our client base. We must attract new clients to maintain our
client base.
Declines in the securities markets could reduce client use of our online
brokerage services.
A general decrease in trading activity in the securities markets could
adversely affect the level of trading by our clients. Historically, when the
stock market suffers large declines, known as a bear market, the level of
individual investor activity declines. We will likely be adversely affected
during any long-term bear market. As a result, our business, financial
condition and operating results would be adversely affected because expenses
such as 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.
We may not be able to compete successfully for clients because the number of
competitors is increasing and some of our competitors are better known and have
greater resources.
The market for electronic brokerage services is intensely competitive and
rapidly changing. We compete directly with other firms which focus on active
trading clients as well as other discount brokerage firms offering online or
telephone 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. 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
this success will continue to attract new competitors to the industry which
could adversely affect our ability to gain or even maintain market share. These
potential competitors include depository institutions, insurance companies and
providers of online financial and information services. 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.
6
<PAGE>
We need to expand our network infrastructure and client support capabilities or
we will not be able to service our growing client base.
We will need to expand our network infrastructure and client support
capabilities in anticipation of an expanded client base. 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. Expansion must be completed without
system disruptions. Failure to expand our network infrastructure or client
service capabilities would materially adverse affect our business and
operations.
System failures or service interruptions could be caused by high levels of
client usage, failures of third-party systems or other acts beyond our control.
System failures or service interruptions could result in:
o substantial losses for our clients
o client inability to satisfy margin obligations
o decreased commission revenues
o loss of client accounts
o harm to our reputation.
System failures or service interruptions could cause substantial losses
for our clients and result in decreased commission revenues from client trading
activities and in loss of client accounts, client inability to satisfy margin
obligations and harm to our reputation and the perception of our trading
system's reliability. Any significant degradation or failure of our trading
systems or any other systems in the trading process could cause clients to
suffer delays in trading. During a systems failure, we may not be able to
process the volume of telephone orders placed by our clients.
Our online trading systems are heavily dependent on the integrity of the
electronic systems supporting it. Heavy stress placed on our trading systems
during peak trading times could cause our systems to operate at unacceptably
low speed or fail. Failure of our trading systems could also be caused by
online service providers, record keeping and data processing functions
performed by third parties and third-party software such as Internet browsers
and trading engines. Additionally, a natural disaster, power or
telecommunications failure or act of war, may cause an extended systems
failure. Computer viruses or unauthorized access to or sabotage of our network
by a third party could also result in system failures or service interruptions.
If we are unable to prevent unauthorized access to our clients' transactions
and other data we could be harmed.
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 software used by us to protect client transaction and
other data. The secure transmission of confidential information over public
networks is a critical element of our operations. Any significant compromise of
our trading systems' security could materially adversely affect our business,
financial condition and operating results.
Our operations would be interrupted if the services of our clearing brokers are
terminated.
Watley is dependent on the operational capacity and the ability of its
clearing brokers for the orderly processing of transactions. Watley's clearing
agreements may be terminated by either party, upon 60 days written notice for
Penson Financial Services, Inc., and 30 days prior written notice for Weiss,
Peck & Greer, L.L.C. Termination or material interruptions of services provided
by our clearing brokers would have a material adverse effect on our operations.
Watley's agreements with its clearing brokers provide that the clearing brokers
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.
Our client lending activities subject us to the risks of loss resulting from
clients not satisfying their obligations and our being required to cover our
clients' obligations.
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. 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
7
<PAGE>
obligations. A portion of Watley's clients' securities activities are
transacted on a margin basis through the clearing broker which Watley has
agreed to indemnify. Credit is extended to the client and secured by cash and
securities in the client's account or short sales, i.e., sales of securities
not yet purchased. Margin risk is 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.
We may seek to expand through acquisitions which are not currently identified
and which therefore may entail risks which you will not have a basis to
evaluate.
We may seek to expand our operations by acquiring companies in businesses
which we believe will complement or enhance our business. 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. 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 acquisitions. We have
not established any minimum criteria for any acquisition and our management may
have complete discretion in determining the terms of any acquisition.
Consequently, there is no basis for you to evaluate the specific merits or
risks of any potential acquisition that we may undertake.
Converting to a self-clearing broker will subject us to many risks which could
adversely affect our business and the value of your investment.
We may not receive regulatory approval to engage in self-clearing
operations.
The NASD must agree to amend Watley's membership agreement before Watley
will be able to engage in self-clearing operations. We cannot assure you that
the NASD will agree to so amend Watley's membership agreement.
Self-clearing brokers are subject to more regulatory control and
examination than we are currently subject which could lead to civil liabilities
or penalties for errors or violations of regulations.
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 these operations as accurately and efficiently as these
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. Any liability that arises as a
result of self-clearing operations could have a material adverse effect on our
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.
Converting to self-clearing operations will increase our capital
requirements and impose additional responsibilities for controlling client
securities and clearing transactions.
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 the 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 us 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 maintained by Watley which could have a
significant effect on our total assets and total liabilities.
Our inability to obtain accurate information could cause service interruptions
and loss of clients and could subject us to claims by clients or third parties.
We depend upon information suppliers to accurately provide and, in some
cases, format the data, on a real-time basis. Failure by any service provider
to supply information according to our requirements could result in service
interruptions, adverse client perception of our trading system and loss of
clients. In addition,
8
<PAGE>
we could be sued by clients who download inaccurate information from our
trading system for losses resulting from the client's use of information. We
may also be subject to claims, including claims for negligence, copyright or
trademark infringement 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 us 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.
If the Internet infrastructure is not developed or issues concerning the
commercial use of the Internet are not favorably resolved, use of our trading
systems may be adversely affected.
Our 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.
Widespread acceptance of UltimateTrader and WatleyTrader will depend upon the
adoption of the Internet as a widely used medium for commerce. The Internet may
not continue to develop as a 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. In addition, use of the
Internet could be adversely affected by delays in the development or adoption
of new standards and protocols to handle increased levels of Internet activity
or due to increased governmental regulation. Critical issues concerning the
commercial use of the Internet, including security, reliability, cost, ease of
use, accessibility and quality of service, remain unresolved. These issues may
negatively affect the growth of Internet use or the attractiveness of commerce
and communications on the Internet and, therefore impede our ability to grow.
Failure by third-party information vendors, telecommunication suppliers or
clearing brokers to be year 2000 complaint could adversely affect our network
operations.
We would be harmed if there are any systems failures or interruptions in
service resulting from the inability of our computing system or any
third-party's systems to recognize the year 2000. We are highly dependent upon
third-party financial information vendors, telecommunications suppliers and our
clearing brokers. We have sent letters to a number of our vendors requesting
assurances of their compliance. These third parties have generally advised us
that their review of their operating systems indicate that their operating
systems are or will be year 2000 compliant. 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.
Rapid technological change could cause our trading system to become less
attractive to potential clients.
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. If we are unable to respond to these changes, our trading systems may
become less attractive to potential clients. Our 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. Developing 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 these
developments. Our business, financial condition and operating results may be
adversely affected if we are unable to anticipate or respond quickly to any
developments.
Third parties could obtain access to our proprietary information or
independently develop similar technologies because of the limited protection
for our intellectual property.
Third parties may copy or 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 us and our
key employees, distributors and clients may not provide meaningful protection
of our proprietary technologies or
9
<PAGE>
other intellectual property if unauthorized use or disclosure occurs. 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 other jurisdictions 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.
Your investment will be subject to immediate and substantial dilution.
Purchasers of the shares of common stock in this offering will experience
immediate and substantial dilution of $5.12 per share, or 73.1%, between the
net tangible book value per share of common stock after this offering and the
initial public offering price per share.
Our management has significant control over stockholder matters which may
impact the ability of minority stockholders to have a say in our activities.
Our officers and directors and their families control the outcome of all
matters submitted to a vote of the holders of common stock, including the
election of directors, amendments to our certificate of incorporation and
approval of significant corporate transactions. After the closing of this
offering, these persons will beneficially own, in the aggregate, approximately
49.4% of our outstanding common stock. This consolidation of voting power could
also have the effect of delaying, deterring or preventing a change in control
of Internet Financial Services that might be beneficial to other stockholders.
We will use a portion of the proceeds of this offering to repay debt, some of
which is owed to affiliated parties.
We have allocated approximately $787,000, or 6.7%, 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, our Executive Vice
President, and approximately $500,000 will be used to repay a loan which is
guaranteed by six persons who are our officers, directors and/or principal
stockholders. These persons will receive a benefit as a result of the release
of their guarantees. Accordingly, these proceeds will not be available for
other corporate purposes.
Our management's broad discretion in the use of the proceeds of this offering
may increase the risk that they will not be used effectively.
We have allocated approximately $1,163,000, or 10.0%, of the estimated net
proceeds of this offering to working capital and general corporate purposes.
Our management will have broad discretion as to the application of these
proceeds without having to seek your approval.
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 a difference include, but are not limited to, those discussed
in "Risk Factors" and elsewhere in this prospectus.
10
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 2,000,000 shares of common stock
being offered by this prospectus, after deducting underwriting discounts and
other expenses of this offering, are estimated to be $11,650,000.
We expect to use these net proceeds 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 .................................... $ 3,600,000 30.9%
Expand and upgrade network ............................. 3,400,000 29.2
Expand client services ................................. 2,700,000 23.2
Repay indebtedness ..................................... 787,000 6.7
Working capital and general corporate purposes ......... 1,163,000 10.0
----------- -----
Total ................................................ $11,650,000 100.0%
=========== =====
</TABLE>
Sales and Marketing. We intend to produce, create and place television
advertising, Internet and print commercials. We also expect to hire additional
personnel to engage in these activities.
Expand and Upgrade Network. We intend to expand our network infrastructure
to support an increasing client base and to purchase additional computer and
telephone communications equipment to create an off-site back-up communications
center or hot site.
Expand Client Services. We expect to hire additional personnel and
purchase additional systems and equipment to:
o convert to self-clearing;
o engage in operations with international financial institutions and
clients;
o provide additional client support;
o continue to develop software and programming; and
o expand our third-market institutional sales desk to increase the number
of securities we cover for this market.
Repayment of Indebtedness. We intend to repay:
o the $500,000 principal amount promissory note, plus a $5,000 prepayment
fee, to New York Small Business Venture Fund LLC; and
o $250,000 principal amount of promissory notes, bearing interest at an
annual rate of 8%, including approximately $100,000 principal amount of
promissory notes held by Mel Steinberg, the father of Eric Steinberg, our
Executive Vice President.
o approximately $32,000 of accrued interest due on the promissory notes
The $500,000 principal amount promissory note bears interest at an annual
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.
Working Capital and General Corporate Purposes. We may use a portion of
the proceeds allocated to working capital and general corporate purposes 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 these purposes.
Over-allotment Option. If the underwriter exercises its over-allotment
option in full, we will realize additional net proceeds of $1,842,000, 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. We
based this estimate on assumptions, including continued expansion
11
<PAGE>
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 of the proceeds 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 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.
We will invest proceeds not immediately required for the purposes
described above 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 total tangible assets less total
liabilities by the number of outstanding shares of common stock.
At December 31, 1998, we had a net tangible book value of $1,462,522 or
$.28 per share. After giving effect to the sale of the 2,000,000 shares of
common stock being offered, after deducting estimated underwriting discounts
and expenses of this offering, our adjusted net tangible book value at December
31, 1998 would have been $14,362,740 or $1.88 per share, representing an
immediate increase in net tangible book value of $1.60 per share to the
existing stockholders and an immediate dilution of $5.12, or 73.1%, per share
to new investors.
The following table illustrates the above information with respect to
dilution to new investors on a per share basis:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price ........................... $7.00
Net tangible book value before offering ................ $ .28
Increase attributable to new investors and pro forma
adjustments ........................................... 1.60
-----
Adjusted net tangible book value after offering ......... 1.88
-----
Dilution to new investors ............................... $5.12
=====
</TABLE>
The following table sets forth as of the date of this prospectus, with
respect to our existing stockholders and new investors, a comparison of the
number of shares of common stock we issued, the percentage ownership of those
shares, the total consideration paid, the percentage of total consideration
paid and the average price per share. The number of shares purchased by
existing stockholders includes 295,271 shares issued after December 31, 1998
and 35,714 shares to be issued upon the closing of this offering.
<TABLE>
<CAPTION>
Average Price
Shares Purchased Total Consideration per Share
----------------------- -------------------------- --------------
Number Percent Amount Percent
----------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders ......... 5,631,745 73.8% $ 4,664,933 25.0% $ .83
New investors ................. 2,000,000 26.2 14,000,000 75.0 7.00
--------- ----- ----------- -----
Total ....................... 7,631,745 100.0% $18,664,933 100.0%
========= ===== =========== =====
</TABLE>
The above table assumes no exercise of the underwriter's over-allotment
option. If the underwriter exercises the over-allotment option in full, we
estimate that the new investors will have paid $16,100,000 for the 2,300,000
shares of common stock being offered, representing approximately 77.5% of the
total consideration for 29.0% 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.
12
<PAGE>
DIVIDENDS
We have 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. Our board of
directors will have the sole discretion in determining whether to declare and
pay dividends in the future. The declaration of dividends will depend on our
profitability, financial condition, cash requirements, future prospects and
other factors deemed relevant by our board of directors. Our ability to pay
cash dividends in the future could be limited or prohibited by regulatory
requirements and the terms of financing agreements that we may enter into or by
the terms of any preferred stock that we may authorize and issue.
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998
on an actual basis, adjusted to give effect to pro forma information and
adjusted to give effect to our sale of 2,000,000 shares of the common stock
being offered and the anticipated application of the estimated net proceeds.
The pro forma and as adjusted number of shares issued and outstanding include
70,771 shares issuable upon the closing of this offering and 35,714 shares
which will be issued upon exercise of options upon the closing of this
offering. The share numbers presented in the following table do not include:
o the 200,000 shares reserved for issuance upon exercise of the
underwriter's warrants;
o the 1,049,900 shares reserved for issuance upon exercise of options
granted under our stock option plans;
o the 150,100 shares reserved for issuance upon the exercise of options
available for future grant under our stock option plans;
o the 351,250 shares reserved for issuance upon exercise of non plan
options and warrants; and
o the 300,000 shares reserved for issuance in this offering to cover
over-allotments, if any, by the underwriter.
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------
Actual Pro Forma As Adjusted
--------------- --------------- --------------
<S> <C> <C> <C>
Short-term debt ........................................ $ 740,587 $ 740,587 $ 490,587
============ ============ ============
Long-term debt ......................................... $ 695,000 $ 1,095,000 $ 595,000
------------ ------------ ------------
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, 10,000,000
shares authorized; 5,300,760 shares issued and out-
standing, actual; 5,631,745 shares issued and out-
standing, pro forma; 7,631,745 shares issued and out-
standing, as adjusted ............................... 5,301 5,632 7,632
Additional paid-in capital ............................ 4,135,568 5,325,237 16,989,622
Option costs .......................................... (219,559) (359,559) (140,000)
Accumulated deficit ................................... (2,133,187) (2,133,187) (2,415,116)
------------ ------------ ------------
Total stockholders' equity .......................... $ 1,788,123 $ 2,838,123 $ 14,442,138
------------ ------------ ------------
Total capitalization ............................. $ 2,483,123 $ 3,933,123 $ 15,037,138
============ ============ ============
</TABLE>
In January 1999, our authorized common stock was increased to 20,000,000
shares.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
We are a financial services company which owns A.B. Watley, Inc., a
registered securities broker-dealer and member of the National Association of
Securities Dealers, Inc. We acquired all of the capital stock of Watley in
January 1997. Our financial statements consolidate the historical results of
Watley. Watley has accounted for all of our revenues for each period presented.
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 us to increase our personnel, purchase additional equipment and expand
our network and client service capabilities which will result in increasing
expenses.
Results of Operations
Three months ended December 31, 1998 compared to the three months ended
December 31, 1997
Revenues for the three months ended December 31, 1998 were $3,180,033, an
increase of 118.2% as compared to revenues of $1,457,560 for the three months
ended December 31, 1997. Revenues from commissions increased by $1,288,174, or
108.5% from $1,187,487, for the December 1997 period to $2,475,661 for the
December 1998 period due to the significantly increased number of online
orders, as well as the growth in our third-market institutional sales desk
operations. The number of online trading accounts grew from 455 at December 31,
1997 to 988 at December 31, 1998. Data Service revenues also increased by
$151,592, or 122.2% from $124,012 for the December 1997 period to $275,604 for
the December 1998 period due to the increase in the number of online accounts.
Revenues from principal transactions increased by $264,801, or 232.6% from
$113,858 for the December 1997 period to $378,659 for the December 1998 period,
mainly as a function of the significantly higher volumes of business conducted
by the third-market institutional sales desk. Interest and other income
increased from $32,203 for the December 1997 period to $50,109 for the December
1998 period.
Interest expense increased from $19,610 for the December 1997 period to
$108,503 for the December 1998 period as result of increased borrowings.
As a result of the above, net revenues increased by $1,633,580, or 113.6%,
from $1,437,950 for the December 1997 period to $3,071,530 for the December
1998 period. Nearly all of our revenues were generated by clients in the United
States and no single client or group of related clients accounted for 10% or
more of our revenues.
Total expenses increased by $1,496,268, or 83.1%, from $1,800,538 for the
December 1997 period to $3,296,806 for the December 1998 period. Commissions,
floor brokerage and clearing charges represent payments to our clearing and
floor brokers and to employees who facilitate our clients' transactions and
other expenses related to market data services. As a result of the large
increase in the volume of business conducted by our clients, these expenses
increased by $772,540, or 129.4%, from $597,070 for the December 1997 period to
$1,369,610 for the December 1998 period. Employment compensation and related
costs increased by $472,301, or 124.3%, from $380,041 for the December 1997
period to $852,342 for the December 1998 period, largely due to the hiring of
21 new employees to service the growth in our client base. Communications
expense increased by $58,616, or 40.5%, from $144,732 for the December 1997
period to $203,348 for the December 1998 period as a function of the growth in
our online client base. We expect that these expenses will continue to increase
as we try to further expand our client base.
Business development costs consist of advertising costs to obtain new
clients, which costs have mostly been for print and media advertising. These
expenses decreased by $164,407, or 44.7%, from $368,102 for the December 1997
period to $203,695 for the December 1998 period as a result of significantly
increased effectiveness of our marketing efforts and the resulting lower costs
of client acquisition.
14
<PAGE>
Professional service expenses increased from $104,816 for the December
1997 period to $198,571 for the December 1998 period, primarily due to
increased audit fees and consulting fees relating to the general growth of our
business. Occupancy and equipment costs increased by $144,433, or 204.2%, from
$70,716 for the December 1997 period to $215,149 for the December 1998 period,
primarily due to the relocation of our offices to a new, larger space and the
purchase of additional equipment to provide additional capacity and to
facilitate the relocation efforts. Depreciation and amortization expense
increased by $45,633, or 65.9%, from $69,278 for the December 1997 period to
$114,911 for the December 1998 period for similar reasons. Other expenses
increased by $73,397 or 111.6%, from $65,783 for the December 1997 period to
$139,180 for the December 1998 period for the same reasons.
The income tax provision increased from $3,191 for the December 1997
period to $4,150 for the December 1998 period.
Our operating results improved from a net loss of $365,779 for the three
months ended December 1997 to a net loss of $229,426 for the three months ended
December 31, 1998.
The results of operations for the three months ended December 31, 1998 are
not necessarily indicative of the results for any future interim period or for
the year ending September 30, 1999.
Fiscal year ended September 30, 1998 compared to fiscal year ended September
30, 1997.
Revenues for fiscal 1998 were $9,119,268, an increase of 101.2%, as
compared to revenues of $4,532,532 for fiscal 1997. Revenues from commissions
increased by $3,385,272, or 84.3% from $4,017,787 for fiscal 1997 to $7,403,059
for fiscal 1998 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 1997 to $661,236 for fiscal 1998 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 1997 to
$901,889 for fiscal 1998, 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 1997 to $146,704 for fiscal
1998.
Interest expense increased from $212,359 for fiscal 1997 to $259,322 for
fiscal 1998 as a result of increased borrowings.
As a result of the above, our net revenues increased by $4,539,773, or
105.1%, from $4,320,173 for fiscal 1997 to $8,859,946 for fiscal 1998.
Substantially all of our revenues were generated by clients in the United
States. 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 1997 to $9,479,591 for fiscal 1998. Commissions, floor brokerage and
clearing charges represent payments to our clearing brokers and to employees
who facilitate our clients' transactions and expenses related to market data
services. As a result of the significant increase in the volume of transactions
by our clients, these expenses increased by $1,580,798, or 85.7%, from
$1,844,927 for fiscal 1997 to $3,425,725 for fiscal 1998. Employment
compensation and related costs increased by $950,388, or 73.2% from $1,297,575
for fiscal 1997 to $2,247,963 for fiscal 1998 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 1997 to
$757,391 for fiscal 1998 as a result of our substantially increased base of
online clients. We expect that these expenses will continue to increase as we
seek to expand our client base.
Business development expenses increased by $539,227, or 122.2%, from
$441,424 for fiscal 1997 to $980,651 for fiscal 1998 as a result of our
expanded marketing efforts. We expect aggregate expenses to continue to
increase as we expand our marketing efforts. However, our new client
acquisition costs decreased on a per client basis.
Professional service expenses increased from $894,920 for fiscal 1997 to
$971,494 for fiscal 1998. Occupancy and equipment costs increased by $294,589,
or 196.9%, from $149,580 for fiscal 1997 to $444,169
15
<PAGE>
for fiscal 1998, 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 expense increased by $164,227, or
82.5%, from $198,980 for fiscal 1997 to $363,207 for fiscal 1998 for the same
reasons. Other expenses increased by $76,611, or 36.1%, from $212,380 for
fiscal 1997 to $288,991 for fiscal 1998 for the same reasons.
The income tax provision increased from $2,776 for fiscal 1997 to $12,765
for fiscal 1998.
As a result of the foregoing, our operating results improved from a net
loss of $1,059,973 for fiscal 1997 to a net loss of $632,410 for fiscal 1998.
Liquidity and Capital Resources
Our capital requirements have exceeded our cash flow from operations as we
have been building our business. At December 31, 1998, we had a working capital
deficit of $1,777,898. As a result, we have depended upon sales of our common
stock and borrowings from officers, directors and stockholders and third
parties to finance our working capital requirements.
Watley has outstanding an aggregate of $530,000 in the form of
subordinated loans, under agreements approved by the NASD. These loans are
included by Watley for purposes of computing its net capital under the SEC's
net capital rules. These borrowings by Watley consist of:
o a $55,000 principal amount non-interest bearing loan, and a $125,000
principal amount loan, bearing interest at an annual rate of 12%, from
Steve Malin, our Chairman of the Board and Chief Executive Officer; and
o a $200,000 principal amount loan, bearing interest at an annual rate of
15% and a $150,000 principal amount loan bearing interest at an annual
rate of 13% from Mel Steinberg, father of Eric Steinberg, our Executive
Vice President.
The loans mature in October 2000, except for the $125,000 loan which matures in
April 2000. During our fiscal year ended September 30, 1997, we paid an
aggregate of $47,788 of interest on these loans and during our fiscal year
ended September 30, 1998, we paid an aggregate of $49,500 of interest on these
loans.
Watley is currently required to maintain net capital of $100,000 and a
ratio of aggregate indebtedness to net capital of 15 to 1 under the SEC's net
capital rule. Such rule also prohibits "equity capital" including 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 under the net capital rule. At
December 31, 1998, Watley had net capital of $187,875, which was $87,875 in
excess of its minimum required net capital, and Watley's net capital ratio was
3.3 to 1.
We received net proceeds of $2,045,000 from a private placement of equity
securities during our fiscal year ended September 30, 1997. We used
approximately $1,180,000 of these proceeds to acquire the systems and equipment
utilized to test and launch our online trading systems during that period. We
used the balance of these proceeds for advertising and working capital.
During our fiscal year ended September 30, 1998, 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 35,714 shares of common stock for nominal consideration, of which
$100,000 was furnished by Mel Steinberg. We used these proceeds to develop
software and to purchase a portion of the equipment required to expand our
online network.
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 this 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. 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
our officers, directors and/or principal stockholders guaranteed our
obligations under this loan. We used these funds for the purchase of additional
equipment, marketing expenses, software development and working capital. We
intend to repay the loan, plus a 1% prepayment fee, from the proceeds of this
offering.
16
<PAGE>
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 borrowing under this financing, we have
granted the lender a security interest in existing equipment as well as in all
equipment purchased using funds obtained under this financing.
We had cash and cash equivalents of $970,308 as of September 30, 1998. Our
operating activities provided $582,325 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 $1,125,635
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 and $75,235 of
payments made for deferred offering costs.
As of December 31, 1998, we had cash and cash equivalents of $250,797.
Operating activities during the three months ended December 31, 1998 created a
net use of cash of $31,946. We incurred a net loss during the December 1998
period of $229,426 and $406,861 of cash was restricted to secure letters of
credit. These uses of cash were partially offset by depreciation and
amortization of $114,911, non-cash amortization of option costs of $71,983, a
decrease in securities owned of $89,548 and an increase in accounts payable and
accrued liabilities of $362,344. During the December 1998 period, we used
$984,097 of net cash in investing activities, consisting entirely of property
and equipment purchases. Financing activities provided $296,532 of cash,
consisting of $500,000 of proceeds from the issuance of notes payable and
$2,500 of proceeds from exercised stock options, which were partially offset by
$195,968 of payments made for deferred offering costs and a $10,000 repayment
of a loan to Bank of New York. We issued 38,260 shares of our common stock to
acquire Computer Strategies, Inc. during the three months ended December 31,
1998. Computer Strategies provided software support, research and development
to us and we were Computer Strategies' primary customer. The acquisition was
accounted for as a purchase. We recorded approximately $60,000 in goodwill from
the acquisition which is being amortized over three years, and approximately
$59,000 in capitalized software attributable to costs incurred in the
application development stage of our software development.
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 this 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. We granted the lender a security interest in substantially
all of our 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
this private placement:
o Anthony Huston, our Executive Vice President purchased 50,000 shares at a
price of $240,000;
o Leon Ferguson, Senior Vice President, purchased 52,000 shares at a price
of $249,600; and
o Mark Chambre, who has agreed to serve as a director upon the closing of
this offering, purchased 15,000 shares at a price of $72,000.
All of the purchasers of these shares agreed not to sell or otherwise dispose
of any of these shares for a period of twelve months from the date of this
prospectus.
We expect to make capital expenditures of approximately $3,300,000 during
the twelve months following the closing of this offering. These capital
expenditures are expected to be made to expand our network
17
<PAGE>
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 may seek
additional debt or equity financing to fund the cost of continued expansion. If
we incur debt, we will become subject to the risks that interest rates may
fluctuate and cash flow may be insufficient to make payments on the debt.
Net Operating Loss Carryforwards
Our net operating loss carryforwards expire beginning in the year 2012.
The issuance of additional equity securities, together with our recent
financings and this offering, could result in an ownership change and, thus,
could limit our use of our prior net operating losses. If we achieve profitable
operations, any significant limitation on the utilization of our net operating
losses 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 these net operating losses since this availability is dependent upon
profitable operations, which we have not achieved in prior periods.
Relevant Accounting Standards
We generally grant stock options to 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 No. 25, "Accounting for Stock Issued to Employees,"
and, accordingly, recognize no compensation expense related to option 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 instead
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 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.
We account for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." We recognize 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. We have established this valuation allowance
for our deferred tax assets.
In 1997, the Financial Accounting Standards Board issued SFAS 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 calculation is replaced with a
basic earnings per share calculation. The basic earnings per share differs from
the primary earnings per share calculation in that the basic earnings per share
does not include any potentially dilutive securities. Fully dilutive earnings
per share is replaced with diluted earnings per share and should be disclosed
regardless of dilutive impact to basic earnings per share. Accordingly, we have
adopted SFAS No. 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 our hardware and
software are substantially year 2000 compliant so that the
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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 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 our 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 or will be year
2000 compliant in a timely manner. We are currently developing a contingency
plan if 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 third-party's systems to recognize the year 2000. Moreover, since our
evaluation of these issues is continuing, we may discover additional issues
which could present a material risk of disruption to our operations.
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BUSINESS
We are a financial services company which owns A.B. Watley, Inc., a
registered securities broker-dealer and member of the National Association of
Securities Dealers, Inc. Watley has received favorable industry recognition,
ranking second in Dow Jones Business Directory's recent survey of Internet
brokers and sixth in Gomez Advisors Spring 1999 ranking of Internet brokers. In
addition, UltimateTrader and WatleyTrader were ranked seventh and sixteenth in
Barron's annual ranking of online brokers published in March 1999.
Industry Overview
Our industry has recently experienced a series of changes, led by
electronic and online commerce, which has created market opportunities for us
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 various 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 these 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.
As investors obtain even more access to investment information, we
believe, based upon our experience in the industry, they will desire greater
control over their financial decisions and seek alternative ways to
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invest more conveniently and cost-effectively and with less interaction with
brokers and other financial services professionals. Based upon our experience
in the industry, 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, the New York Stock Exchange and an alternative trading system called
Instinet. 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 us 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, 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 electronic communication network 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 electronic communication networks, which provide an
ever-increasing source of liquidity in the over-the-counter market.
Based upon our experience in the industry, 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 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.
Strategy
Our strategy is to capitalize on perceived opportunities arising from the
expanding online trading market by:
o Targeting active traders and other active investors. We believe that the
market for these 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
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base. Our 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 to ensure continued operations in the event of a systems
failure at our primary location.
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 these services. Additionally, after this
offering, we intend to hire additional associates to expand the number of
securities we cover for this market.
In addition, we intend to expand our operations by:
o Converting to self-clearing operations. Based upon an internal
cost/benefit analysis we believe that performing these operations
internally will reduce our operating costs and provide us the opportunity
to receive expanded revenues from margin transactions with our clients.
We expect to accomplish this expansion 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 Offering online services in foreign markets. 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 these
services for our clients in foreign markets.
o Offering 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
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.
Since UltimateTrader is a client-server application, it is not restricted
by the limitation of HTML, the primary programming language of the worldwide
web. With trading systems which use HTML, displayed data remains static until a
query is repeated. In contrast, UltimateTrader delivers and automatically
updates a continuous, dynamic stream of live market data to the client's
screen.
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
electronic communication network. 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 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.
Once an order is entered, UltimateTrader sends the order to the exchange
selected in less than two seconds from virtually anywhere in the world. These
significant savings in time have tremendous value to a client who is trying to
trade in markets characterized by rapidly changing prices.
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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 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 electronic
communication network 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 electronic communication
network, 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.
The following table sets forth the features offered for each
UltimateTrader Service Level
<TABLE>
<CAPTION>
Ultimate Trader Service Level Service Level Service Level Service Level
Features I II III IV
- ------------------------------------------ --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Dynamic Updating Quotations .............. - - - -
Unlimited Customized Pages ............... - - - -
Electronic Execution ..................... - - - -
Board View Portfolio Minder .............. - - -
Position Minder .......................... - - -
Scrolling Tickers ........................ - - -
Alarms ................................... - - -
Snap Quotes .............................. - - -
Market Minder ............................ - - -
Hot Keys ................................. - - -
MultiQuotes .............................. - - -
Charts with Technical Studies ............ - -
Nasdaq Level II Data ..................... -
Color Coded Market Maker Screens ......... -
Time and Sales ........................... -
</TABLE>
Following is a description of each of the UltimateTrader features we
offer:
o Dynamic Updating Quotations -- displays real time changes in prices and
markets as they occur.
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o Unlimited Customized Pages -- allows clients to create 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.
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 about the security 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.
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.
o Nasdaq Level II Data -- continuously updated display of market maker and
electronic communication network 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 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 electronic communication network or
SelectNet, substantially all of which is forwarded to the owner or operator of
that system.
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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; and
international events.
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. We charge users 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 our fiscal year ended September 30, 1998 and three months ended December
31, 1998, we derived approximately 67.4% and 70.3% of our total revenues from
UltimateTrader clients.
WatleyTrader
WatleyTrader is our web-based Internet brokerage service which we designed
for active investors who execute trades online 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, Charles Schwab and other online brokerages. The basic fee schedule for
the WatleyTrader is a transaction charge of $9.95 per order with an additional
$15.00 fee for trades made by telephone. Orders of more than 5,000 shares bear
a commission of $.01 per share for the entire order
During our fiscal year ended September 30, 1998 and three months ended
December 31, 1998, approximately 1.4% and .8% 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 500 thinly-traded
equity securities. These services are provided to clients who often require
that their purchases 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
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pension funds, insurance companies, banks, corporations and independent fund
managers. Approximately 30.7% and 28.9% of our revenues for our fiscal year
ended September 30, 1998 and three months ended December 31, 1998 were derived
from the institutional trading desk.
Client Services
Client services for all levels of online service, including trading,
administrative, and technical support, are among our highest priorities. Based
on our experience in the industry and client feedback, 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 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 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
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.
Watley's agreements with its clearing brokers provide that 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, which
could be material in amount. Watley's clearing agreements may be terminated by
either party, upon 60 days' written notice for Penson Financial Services, Inc.,
and 30 day's prior written notice for Weiss, Peck & Greer, L.L.C. Watley
depends 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.
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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 margin financing at interest
rates based on the brokers' call rate plus an additional amount of up to 1.75%.
The brokers' call rate is the prevailing interest rate charged by banks on
secured loans to broker-dealers.
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.
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.
Any individual with a personal computer who has a connection to the
Internet and has Windows 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 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.
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Firewalls and other software limit not only system access to the
authorized users, 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 the file transfer protocol, are in a
network entirely separate from the rest of our 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. 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.
Proposed Self-clearing Operations
We currently intend to convert to self-clearing operations. If we were to
implement self-clearing operations, our client's securities typically will be
held by us 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 these errors. Clearing operations have accounted for a significant portion
of our cost of services. Our failure to perform self-clearing operations
accurately and cost-effectively could have a material adverse effect on our
business, financial condition and operating results.
Suppliers
We obtain financial information from a number of third-party suppliers of
software and information services, including PC Quote, Inc., Townsend
Analytics, Ltd., Ethos Corporation and S&P ComStock, Inc. We have a number of
alternative sources of supply of these items of software and information
services available to us at comparable cost, on a timely basis to provide
adequate replacements, if arrangements with any of our current suppliers are
abrogated.
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 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 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 highly competitive and
rapidly changing. 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 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.
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<PAGE>
We believe our competition consists of large and small brokerage firms,
utilizing the Internet to transact retail brokerage business. Among these
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
Watley is a broker-dealer registered with the SEC and NASD and is licensed
as a broker-dealer in 49 states.
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.
Because of the recent increase in the number of complaints by online traders,
the SEC, NASD and other regulatory organizations may adopt more stringent
regulations for online firms and their practices. If we fail to comply with any
laws, rules or regulations we could be censured, fined, issued a
cease-and-desist order or Watley or our officers and employees could be
suspended or expelled.
In addition, significant changes in Watley's current business or
practices, including converting to self-clearing operations, require NASD and
other regulatory approval.
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 the
NASD. The NASD can impose 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 its officers or employees for violations of
the NASD's advertising regulations.
Net Capital Requirements
The SEC, NASD and various other regulatory agencies have stringent rules
requiring 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 defined as assets minus liabilities, plus other allowable credits
and qualifying subordinated borrowings less mandatory deductions that result
from excluding assets that are not readily convertible into cash and from
valuing other assets, such as a firm's positions in securities, conservatively.
Among these deductions are adjustments in the market value of securities to
reflect the possibility of a market decline prior to disposition.
As of December 31, 1998, Watley was required to maintain minimum net
capital, in accordance with SEC rules, of approximately $100,000 and had total
net capital of $187,875 or approximately $87,875 in excess of minimum net
capital requirements.
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, which ultimately could
require Watley's liquidation. In addition, a change in the net capital rules,
the imposition of
29
<PAGE>
new rules, a specific operating loss, or any unusually large charge against net
capital could limit those operations of Watley that require the intensive use
of capital and could limit our ability to expand our business. The net capital
rules also could restrict our ability to withdraw capital from Watley, which
could limit our ability to pay dividends, repay debt and repurchase shares of
our outstanding stock.
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 hold a United States trademark
registration for the UltimateTrader name. We have no patents or registered
copyrights. 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 us and our key employees, distributors and clients may 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.
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 us and our technologies and trading systems may be
determined to infringe on the intellectual property rights of others.
Research and Development
During the years ended September 30, 1997 and 1998, we spent approximately
$62,000 and $703,000 for software development. During the three months ended
December 31, 1998, we spent approximately $760,000 for software development.
These software development efforts were related to enhancing the operational
capabilities of our trading systems.
Computer Strategies, Inc. Acquisition
Effective October 2, 1998, we acquired all of the capital stock of
Computer Strategies, Inc. for 38,260 shares of common stock valued at $183,648.
Computer Strategies provided 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.
Personnel
As of March 22, 1998, we employed a total of 59 persons, of whom 10 are
engaged in executive management, 16 in trading activities, 10 in client
service, 5 in sales and marketing, 9 clerical and back office personnel, as
well as 9 other employees. All but one of our employees are employed on a
full-time basis. 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 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 these representatives to be associated with
Watley for any length of time.
Our success will 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 these personnel, many of which have significantly greater
resources than we have.
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<PAGE>
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.
A small portion of 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 by June 1999. Following this relocation, Watley
expects to terminate this lease without any material penalty.
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.
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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 ................ 34 President of A.B. Watley, Inc. and Director
Anthony G. Huston ........... 36 Executive Vice President -- Strategic Planning
Eric Steinberg .............. 33 Executive Vice President -- Administration
Leon Ferguson ............... 36 Senior Vice President and Chief Information Officer
Jonathan Priddle ............ 37 Senior Vice President -- Sales
Brett Vernick ............... 31 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 ........... 73 Director
</TABLE>
Steven Malin co-founded Internet Financial Services in May 1996 and has
been our Chairman of the Board and Chief Executive Officer since inception.
From August 1993 to December 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 Internet Financial Services. 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 earlier experience includes managing equity-trading, client
services and brokerage operations. Mr. Malin and Steven Malin are brothers.
Anthony G. Huston. Mr. Huston has been our Executive Vice President since
May 1996. 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.
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Eric Steinberg. Mr. Steinberg has been our Executive Vice President of
Administration since March 1998. His responsibilities include management of our
offices and negotiating our purchase and leasing arrangements. From May 1996 to
February 1998, Mr. Steinberg served as an administrative consultant to Internet
Financial Services. 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 us 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 Senior Vice President of
Sales since December 1998. From April 1997 to November 1998, he provided
consulting services to Watley. 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 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 has been our Vice President -- Finance since
April 1998. 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 Internet Financial
Services 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. Mr. Brawer 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 Internet Financial
Services upon the closing of this offering. Since August 1998, she has been
Vice President of Business Design and a member of the executive committee at
the Reader's Digest Association. Ms. Chambers is also a member of the Board of
Directors of the Reader's Digest Foundation. From September 1989 to August
1998, Ms. Chambers was with McKinsey & Company, where she was elected to
partnership in June 1995. Ms. Chambers graduated from Stanford University with
degrees in political science and economics, and holds an MBA from Harvard
University.
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<PAGE>
Mark Chambre has agreed to serve as a director of Internet Financial
Services 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.
Stanley Weinstein has agreed to serve as a director of Internet Financial
Services 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 a designee. The underwriter has not yet
exercised its right to designate a person.
Special Advisory Board
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 closing 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
closing 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, our internal
accounting controls and audit practices and professional services rendered to
us by our 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 receive no additional compensation for service as members of the
board of directors or committees. Following this offering, all of our
non-employee directors will be compensated annually for their services at
$2,000 and non-qualified options to acquire 1,500 shares of our common stock at
the end of each year of service.
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<PAGE>
Executive Compensation
During the fiscal year ended September 30, 1998, the salary of Mr. Steven
Malin, our Chief Executive Officer was $70,000. Mr. Malin forgave his salary
for fiscal 1998 and no other compensation, including "long-term compensation"
payments, were made to him in any form. No executive officer received salary
and bonus compensation which exceeded $100,000 in this fiscal year.
There were no stock option grants to Mr. Malin, during the fiscal year
ended September 30, 1998.
Employment Agreements
We have 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
until the effectiveness of this offering, and increasing to $110,000 after this
offering. Each agreement provides for a bonus equal to 20% of their salaries,
payable semi-annually, based upon certain revenue levels achieved by us, as may
be approved by the board of directors or a committee of the board.
Each of the employment agreements requires the officer to devote his full
time and efforts to our business 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.
Key-man Life Insurance
We have obtained "key-man" life insurance on each of 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.
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. 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 800,000 shares of common stock for
issuance upon exercise of options granted from time to time under the 1998
stock option plan. 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 our ownership and growth 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 and employee directors, or we may grant non-qualified
options to our employees, officers, directors and consultants. 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, 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 or five years for
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 granted; provided that incentive stock options granted to a 10%
holder of our voting stock shall be exercisable at a price equal to or greater
than 110% of the fair market value of the common stock on the date of the
grant. The exercise price for non-qualified options will be set by the board or
the committee, in its discretion, but in no event shall the exercise price be
less than the fair market value of the shares of common
35
<PAGE>
stock on the date of grant. The 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 restrictions on
sale or transfer.
As of the date of this prospectus, we have granted options to purchase
1,049,900 shares of common stock under our stock options plans at an exercise
price ranging from $2.00 to $7.00 per share. Of these options, options to
purchase 620,000 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.
For one year from the closing of the offering we will not grant options or
warrants to our existing officers, directors, employees or stockholders
beneficially owning 5% or more of the outstanding voting securities or their
affiliates, except for those options reserved for issuance under our 1998 stock
option plan.
Limitation on Liability and Indemnification Matters
As authorized by the Delaware General Corporation Law, our certificate of
incorporation provides that none of our directors shall be personally liable to
us or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability for:
o any breach of the director's duty of loyalty to our company or its
stockholders;
o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law
o unlawful payments of dividends or unlawful stock redemptions or
repurchases; or
o any transaction from which the director derived an improper personal
benefit.
This provision limits our rights and the rights of our stockholders to recover
monetary damages against a director for breach of the fiduciary duty of care
except in the situations described above. This provision does not limit our
rights or the rights of any stockholder to seek injunctive relief or rescission
if a director breaches his duty of care. In addition, our certificate of
incorporation provides that if the Delaware General Corporation Law is amended
to further 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 our director, officer, employee or agent 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 our directors, officers and controlling persons
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.
Before the closing of this offering, we will obtain and maintain a policy
of insurance under which our directors and officers will be insured, subject to
the limits of the policy, against certain losses arising from claims made
against our directors and officers by reason of any acts or omissions covered
under this policy in their capacities as directors or officers, including
liabilities under the Securities Act.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to Internet Financial
Services, as of the date of this prospectus and as adjusted to reflect the sale
by us of the 2,000,000 shares of common stock offered under this prospectus,
relating to the beneficial ownership of shares of common stock by: each person
who is known by us to be the beneficial owner of more than five percent of the
outstanding shares of common stock; each director or person who has agreed to
become a director; and all executive officers and directors as a group.
Unless otherwise indicated, the address of each beneficial owner in the
table set forth below is care of Internet Financial Services, 40 Wall Street,
New York, New York 10005.
We believe 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 him 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 him, 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.
<TABLE>
<CAPTION>
Percentage of Shares Beneficially Owned
Number of Shares ----------------------------------------
Name and Address of Beneficial Owner Beneficially Owned Before Offering After Offering
- ------------------------------------ -------------------- ----------------- ---------------
<S> <C> <C> <C>
Steven Malin ............................ 1,600,000 28.4% 21.0%
Harry Simpson ........................... 566,667 9.9 7.4
Anthony G. Huston ....................... 500,000 8.9 6.6
Robert Malin ............................ 425,000 7.5 5.6
Linda Malin ............................. 425,000 7.5 5.6
Eric Steinberg .......................... 425,000 7.5 5.6
Mark Chambre ............................ 52,500 .9 .7
William Brawer .......................... 0 0 0
Elizabeth Chambers ...................... 0 0 0
Stanley Weinstein ....................... 0 0 0
All directors and executive officers as a
group consisting of 13 persons ......... 3,875,834 66.4% 49.4%
</TABLE>
The number of shares beneficially owned by Harry Simpson includes 66,667
shares of common stock issuable upon exercise of currently exercisable options,
but does not include 133,333 shares of common stock issuable upon exercise of
options which are not currently exercisable.
The number of shares beneficially owned by all of our officers and
directors as a group includes 208,334 shares of common stock issuable upon
exercise of currently exercisable options, but does not include 411,666 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, Chairman of the Board and Chief Executive
Officer and a principal stockholder of Internet Financial Services, loaned
Watley $55,000 on an interest free basis. The maturity date for this loan is
October 31, 2000. Additionally, in April 1995, Mr. Malin loaned Watley $125,000
at an annual interest rate of 12%. The maturity date for this loan is April 30,
2000. Each of these 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 Internet Financial Services, loaned Watley
$200,000 at an annual interest rate of 15%. Additionally, effective October 30,
1996, Mr. Steinberg loaned Watley $150,000 at an annual interest rate of 13%.
The maturity date for each of the loans is October 31, 2000. Each of these
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 Internet Financial Services.
The loan bears interest at an annual rate of 6% and is due upon demand. Mr.
Malin has agreed to repay the loan within six months of the effective date of
the offering.
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, we 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 us was $80,000.
In April 1997, we completed a private placement of 1,050,000 shares of our
common stock for which we received net proceeds of $2,045,000. In connection
with this private placement, Jonathan Priddle, an executive officer of Internet
Financial Services, purchased 25,000 shares at a price of $50,000 and Mark
Chambre, who has agreed to serve as a director of Internet Financial Services
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 Internet Financial Services,
purchased an aggregate of 62,500 shares at an aggregate price of $125,000. All
of these purchases were on the same terms and at the same price as the
purchases made by the other investors in this private placement.
In May 1997, we sold computer hardware and related assets to Centennial
Ventures, Inc., a broker-dealer of which Linda Malin, a principal stockholder
of Internet Financial Services and the sister of Steven and Robert Malin, is an
executive officer. As consideration for this 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 an annual rate of 8% and is secured by
all of the assets we sold to Centennial Ventures, Inc.
In February 1998, Mel Steinberg loaned to Internet Financial Services
$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 14,286 shares of common stock for nominal consideration. Mr. Steinberg
has notified us that he intends to exercise the option upon the completion of
this offering. We have agreed to repay the loan, including accrued interest
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 under which we borrowed $500,000 at an annual
interest rate of 12%, repayable over 35 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
Internet Financial Services guaranteed our obligations under this loan. We
intend to repay this loan out of the proceeds of this offering, which will
discharge the liability of the guarantors. Stanley Weinstein, who has agreed to
serve as a director of Internet Financial Services on the date of this
prospectus, received a $25,000 consulting fee from us 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 common stock valued at
$183,648. 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.
38
<PAGE>
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 this private placement:
o Anthony Huston purchased 50,000 shares at a price of $240,000;
o 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
o Mark Chambre purchased 15,000 shares at a price of $72,000.
All of the purchasers of these shares agreed not to sell or otherwise dispose
of these 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 this private placement.
We believe that prior transaction with our officers, directors and
principal stockholders were on terms that were no less favorable than we could
have obtained from unaffiliated third parties. All future transactions,
including loans and advances, between us and our officers, directors and
stockholders beneficially owning 5% or more of our outstanding voting
securities, or their affiliates, will be for bona fide business purposes and on
terms not less favorable to us than we could have obtained in arm's length
transactions from unaffiliated third parties.
DESCRIPTION OF SECURITIES
Our 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, there are 5,631,745
shares of common stock issued and outstanding, which are held of record by 66
holders. As of the date of this prospectus, there are no shares of preferred
stock outstanding. Upon closing of this offering there will be 7,631,745 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 Internet Financial
Services, 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 our issuance of these shares.
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 of these shares, 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, preferred stock may be
used to discourage, delay or prevent a change in control.
Registration Rights
The holders of 405,225 shares of common stock, including 331,250 shares of
common stock issuable upon exercise of currently exercisable warrants, are
entitled to registration rights under the Securities Act for these 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 a
proposed registration. We may be required to include all registerable
39
<PAGE>
shares which these holders may request to be included in a registration. These
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 registration rights in connection with the 200,000 shares of common
stock issuable upon exercise of the underwriter's warrants.
Delaware Anti-Takeover Law
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. That section provides, with exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations
with a person or his affiliate or associate who is an owner of 15% or more of
the outstanding voting stock of the corporation for a period of three years
from the date that this person became an interested stockholder.
Transfer Agent and Warrant Agent
The transfer agent for our common stock is American Stock Transfer & Trust
Company, 40 Wall Street, New York, New York 10005.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this offering, we will have 7,631,745 shares of common
stock issued and outstanding of which the 2,000,000 shares offered by this
prospectus will be freely tradeable without restriction or further registration
under the Securities Act, except for any shares purchased by an affiliate of
Internet Financial Services. An affiliate of Internet Financial Services, a
person who has a controlling position with regard to Internet Financial
Services, will be subject to the resale limitations under the Securities Act.
All of the remaining 5,631,745 shares of common stock currently
outstanding are restricted securities. Of these restricted shares, 4,000,000
shares will be immediately eligible for sale, subject to the contractual
restrictions described below. The remaining restricted shares will become
eligible for sale at various times beginning 90 days following the date of this
prospectus, subject to the contractual provisions described below. We have also
issued options and warrants to purchase 1,601,150 shares of common stock,
including the 200,000 shares of common stock issuable upon exercise of the
underwriter's warrants.
We have granted registration rights to holders of 405,225 restricted
shares, including 331,250 shares of common stock issuable upon exercise of
currently exercisable warrants, as well as registration rights to the
underwriter for the shares of common stock issuable upon exercise of the
underwriter's warrants.
The holders of approximately 5,500,000 of the restricted shares of common
stock have agreed not to sell or otherwise dispose of any of those shares of
common stock or exercise any registration rights for a period of twelve months
following the date of this prospectus without the underwriter's prior written
consent.
We can not predict the effect, if any, that market sales of common stock
or the availability of these 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 ability to
raise capital through the sale of our equity securities.
40
<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 2,000,000 shares of common stock offered by us.
The underwriting agreement provides that the obligations of the
underwriter are subject to the delivery of an opinion of our counsel and to
various other conditions. The underwriter is 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. Watley, our subsidiary, will not participate in this offering.
We have granted to the underwriter an option, exercisable not later than
45 days after the date of this prospectus, to purchase up to 300,000 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 by this prospectus. If the underwriter
exercises its over-allotment in full, the total price to public would be
$16,100,000, the total underwriting discounts and commissions would be
$1,495,000 and the total proceeds, before payment of the expenses of this
offering, to us would be $14,605,000
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 by this prospectus, 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 states that the
underwriter may designate, including expenses of counsel retained for this
purpose by the underwriter. We estimate the expenses of this offering to be
$1,050,000, or $1,113,000 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
200,000 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 $11.55 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 the 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 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 Internet
Financial Services. Our officers, directors and principal stockholders have
agreed to vote their shares of common stock in favor of this designee. The
underwriter has not yet exercised and does not intend to exercise its right to
designate this person in the near future.
41
<PAGE>
The holders of approximately 5,500,000 shares of common stock have agreed
not to sell or otherwise dispose any of those 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
by this prospectus.
We have agreed to indemnify the underwriter against certain civil
liabilities, including liabilities under the Securities Act.
Before this offering there has been no public market for the common stock.
Accordingly, the initial public offering price of the common stock has been
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 the public offering
price include our financial condition and prospects, an assessment of our
management, market prices of similar securities of comparable publicly-traded
companies, financial and operating information of companies engaged in
activities similar to our business 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 Exchange 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 concessions 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 by this prospectus will be passed
upon for Internet Financial Services 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. Tenzer Greenblatt LLP has served as
counsel to the underwriter in connection with this offering.
EXPERTS
The consolidated financial statements 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 in this prospectus, and are included in
reliance upon this report given on the authority of Ernst & Young, LLP as
experts in auditing and accounting.
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 by this prospectus.
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 with it, portions of which have been omitted as permitted by
the rules and regulations of the SEC. For further information with respect to
Internet Financial Services and the securities offered by this prospectus,
reference is made to the registration statement and to the exhibits filed with
it. Statements contained in this prospectus regarding the content of any
contract or other document referred to are not necessarily complete. In each
42
<PAGE>
instance, we refer you to the copy of the contracts and or other documents
filed as exhibits to the registration statement, and these statements are
hereby qualified in their entirety by reference to the contract or document.
The registration statement, including all exhibits, may be inspected without
charge at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's regional offices located at Seven
World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of these
materials may also be obtained from the SEC's Public Reference at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, upon the payment of prescribed
fees. You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. In addition, registration statements and
other filings made with the commission through its Electronic Data Gathering,
Analysis and Retrieval systems are publicly available through the SEC's site on
the World Wide Web located at http://www.sec.gov. The registration statement,
including all exhibits and schedules and amendments, has been filed with the
commission through the Electronic Data Gathering, Analysis and Retrieval
system.
Upon the closing of this offering, we will become subject to the reporting
requirements of the Exchange Act and in accordance with these requirements,
will file reports, proxy statements and other information with the SEC. We
intend to furnish our stockholders with annual reports containing audited
financial statements and other periodic reports as we deem appropriate or as
may be required by law.
43
<PAGE>
Internet Financial Services Inc.
Consolidated Financial Statements
Years Ended September 30, 1997 and 1998 and Three Months Ended
December 31, 1997 and 1998 (unaudited)
Contents
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors ............................................................ F-2
Consolidated Statements of Financial Condition as of September 30, 1997 and September 30,
1998 and December 31, 1998 (unaudited) .................................................. F-3
Consolidated Statements of Operations for the Years Ended September 30, 1997 and 1998 and
for the Three Months Ended December 31, 1997 and December 31, 1998 (unaudited) .......... F-4
Consolidated Statements of Changes in Stockholder's Equity for the Years Ended September
30, 1997 and September 30, 1998 and for the Three Months Ended December 31, 1998
(unaudited) .............................................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended September 30, 1997 and 1998 and
for the Three Months Ended December 31, 1997 and December 31, 1998 (unaudited) ........... F-6
Notes to Consolidated Financial Statements ................................................ F-7
</TABLE>
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, 1997 and 1998, 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, 1997 and 1998, and the consolidated
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
Ernst & Young LLP
New York, New York
November 13, 1998
F-2
<PAGE>
Internet Financial Services Inc.
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
September 30, September 30, December 31,
1997 1998 1998
--------------- --------------- ---------------
Assets (unaudited)
<S> <C> <C> <C>
Cash and cash equivalents .............................................. $ 702,693 $ 970,308 $ 250,797
Restricted cash ........................................................ 113,569 -- 406,861
Securities owned, at market value ...................................... 24,206 104,518 14,970
Receivables from clearing broker ....................................... 292,356 531,835 474,648
Property and equipment at cost, net of accumulated depreciation of
$167,774, $530,892 and $645,803 at September 30, 1997, September
30, 1998 and December 31, 1998, respectively .......................... 1,010,208 3,650,743 4,591,868
Loans receivable from related party .................................... 123,697 115,711 117,256
Deferred offering costs ................................................ -- 75,235 271,203
Other assets ........................................................... 119,902 91,107 235,891
------------ ------------ ------------
Total assets ........................................................... $ 2,386,631 $ 5,539,457 $ 6,363,494
============ ============ ============
Liabilities and stockholders' equity
Liabilities:
Subordinated borrowings ............................................... 350,000 $ 350,000 $ 350,000
Subordinated borrowings from related party ............................ 180,000 180,000 180,000
Securities sold, not yet purchased, at market value ................... -- 19,137 5,826
Notes payable ......................................................... -- 250,000 750,000
Notes payable to related party ........................................ -- -- 85,587
Bank loan ............................................................. 120,000 80,000 70,000
Deferred rent incentives .............................................. -- 803,968 803,968
Accounts payable and accrued liabilities .............................. 681,899 2,101,933 2,329,990
------------ ------------ ------------
Total liabilities ...................................................... 1,331,899 3,785,038 4,575,371
Stockholders' equity:
Common stock, $.001 par value, 10,000,000 shares authorized,
5,050,000, 5,137,500 and 5,300,760 shares issued and outstanding at
September 30, 1997, September 30, 1998 and December 31, 1998,
respectively ........................................................ 5,050 5,138 5,301
Additional paid-in capital ............................................ 2,441,902 3,758,333 4,135,568
Option costs, net ..................................................... -- (100,292) (219,559)
Subscriptions receivable .............................................. (120,869) (4,999) --
Accumulated deficit ................................................... (1,271,351) (1,903,761) (2,133,187)
------------ ------------ ------------
Total stockholders' equity ............................................. 1,054,732 1,754,419 1,788,123
------------ ------------ ------------
Total liabilities and stockholders' equity ............................. $ 2,386,631 $ 5,539,457 $ 6,363,494
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
Internet Financial Services Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended Three months ended
-------------------------------- -------------------------------
September 30, September 30, December 31, December 31,
1997 1998 1997 1998
--------------- --------------- -------------- ---------------
Revenues: (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Commissions ................................................ $ 4,017,787 $7,403,059 $ 1,187,487 $ 2,475,661
Data service revenues ...................................... 148,353 661,236 124,012 275,604
Principal transactions ..................................... 230,297 901,889 113,858 378,659
Interest and other income .................................. 130,095 146,704 31,058 48,564
Interest income -- related party ........................... 6,000 6,380 1,145 1,545
------------ ---------- ----------- -----------
Total revenues .............................................. 4,532,532 9,119,268 1,457,560 3,180,033
Interest expense ........................................... 197,359 244,322 15,860 104,753
Interest expense -- related party .......................... 15,000 15,000 3,750 3,750
------------ ---------- ----------- -----------
Net revenues ................................................ 4,320,173 8,859,946 1,437,950 3,071,530
------------ ---------- ----------- -----------
Expenses:
Commissions, floor brokerage, and clearing charges ......... 1,844,927 3,425,725 597,070 1,369,610
Employee compensation and related costs .................... 1,297,575 2,247,963 380,041 852,342
Communications ............................................. 337,584 757,391 144,732 203,348
Business development ....................................... 441,424 980,651 368,102 203,695
Professional services ...................................... 894,920 971,494 104,816 198,571
Occupancy and equipment costs .............................. 149,580 444,169 70,716 215,149
Depreciation and amortization .............................. 198,980 363,207 69,278 114,911
Other ...................................................... 212,380 288,991 65,783 139,180
------------ ---------- ----------- -----------
Total expenses .............................................. 5,377,370 9,479,591 1,800,538 3,296,806
------------ ---------- ----------- -----------
Loss before income taxes .................................... (1,057,197) (619,645) (362,588) (225,276)
Income tax provision ........................................ 2,776 12,765 3,191 4,150
------------ ---------- ----------- -----------
Net loss .................................................... $ (1,059,973) $ (632,410) $ (365,779) $ (229,426)
============ ========== =========== ===========
Net loss per common share ................................... $ (.30) $ (.12) $ (.07) $ (.04)
============ ========== =========== ===========
Weighted average common shares outstanding .................. 3,508,560 5,171,182 5,120,771 5,291,080
============ ========== =========== ===========
</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 12) .............. -- -- 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 12) .............. -- -- 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)
Issuance of common stock, net.... 163,260 163 185,985 --
Option costs, net ............... -- -- 191,250 (119,267)
Net loss ........................ -- -- -- --
--------- ------ ---------- ----------
Balance at December 31, 1998
(unaudited) ..................... 5,300,760 $5,301 $4,135,568 $ (219,559)
========= ====== ========== ==========
Subscriptions Receivable
------------------------------ Accumulated
Shares Amount Deficit Total
--------------- ------------- ---------------- ---------------
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 12) .............. -- -- -- 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 12) .............. -- -- -- 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
Issuance of common stock, net.... 250,011 4,999 -- 191,147
Option costs, net ............... -- -- -- 71,983
Net loss ........................ -- -- (229,426) (229,426)
---------- ----------- ------------ -------------
Balance at December 31, 1998
(unaudited) ..................... -- $ -- $ (2,133,187) $ 1,788,123
========== =========== ============ =============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
Internet Financial Services Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended Three months ended
----------------------------------- ------------------------------
September 30, September 30, December 31, December 31,
1997 1998 1997 1998
----------------- --------------- -------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $ (1,059,973) $ (632,410) $ (365,779) $ (229,426)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Other contributions -- 115,000 -- --
Depreciation and amortization 198,980 363,207 69,188 114,911
Amortization of option costs 21,367 226,227 26,353 71,983
Loss on disposal of fixed assets 46,411 -- -- --
Subscriptions receivable -- -- -- 4,999
Changes in assets and liabilities:
(Increase) decrease in operating assets:
Restricted cash (113,569) 113,569 -- (406,861)
Securities owned 144,473 (80,312) (48,187) 89,548
Receivables from clearing brokers (219,122) (239,479) 60,295 57,187
Loans from related party (23,697) 7,986 (1,145) (1,545)
Other assets (57,184) 28,795 48,764 (81,775)
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased (41,262) 19,137 -- (13,311)
Accounts payable and accrued liabilities 409,516 660,605 651,222 362,344
------------- ------------ ---------- ----------
Net cash provided by (used in) operating
activities (694,060) 582,325 440,711 (31,946)
------------- ------------ ---------- ----------
Cash flows used in investing activities
Purchases of property and equipment, net (1,177,982) (2,244,313) (422,907) (984,097)
------------- ------------ ---------- ----------
Deferred rent incentives -- 803,968 -- --
------------- ------------ ---------- ----------
Net cash used in investing activities (1,177,982) (1,440,345) (422,907) (984,097)
------------- ------------ ---------- ----------
Cash flows from financing activities
Proceeds from sale of common stock, net 2,044,716 990,870 -- --
Proceeds from exercised stock options -- -- -- 2,500
Proceeds from issuance of subordinated
borrowings 150,000 -- -- --
Proceeds from notes payable 120,000 250,000 -- 500,000
Deferred offering costs -- (75,235) -- (195,968)
Repayment of bank loan (125,000) (40,000) (10,000) (10,000)
------------- ------------ ---------- ----------
Net cash provided by (used in) financing
activities 2,189,716 1,125,635 (10,000) 296,532
------------- ------------ ---------- ----------
Net increase (decrease) in cash and cash
equivalents 317,674 267,615 7,804 (719,511)
Cash and cash equivalents at beginning of period 385,019 702,693 702,693 970,308
------------- ------------ ---------- ----------
Cash and cash equivalents at end of period $ 702,693 $ 970,308 $ 710,497 $ 250,797
============= ============ ========== ==========
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 $ 193,733 $ 90,802 $ 15,860 $ 41,600
Taxes 53,633 2,776 -- --
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
Internet Financial Services Inc.
Notes to Consolidated Financial Statements
Years ended September 30, 1997 and 1998
(unaudited with respect to data as of December 31, 1998 and for the three-month
periods ended December 31, 1997 and December 31, 1998)
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.
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.
The unaudited consolidated financial statements as of December 31, 1998
and for the three months ended December 31, 1997 and December 31, 1998 have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three-month
period ended December 31, 1998 are not necessarily indicative of the results
that may be expected for the year ending September 30, 1999.
2. Summary of Significant Accounting Policies
Restricted Cash:
Restricted cash consists of cash on deposit at a financial institution
securing letters of credit and lines of credit.
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.
F-7
<PAGE>
Internet Financial Services Inc.
Notes to Consolidated Financial Statements -- (Continued)
Years ended September 30, 1997 and 1998
(unaudited with respect to data as of December 31, 1998 and for the three-month
periods ended December 31, 1997 and December 31, 1998)
2. Summary of Significant Accounting Policies -- (Continued)
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.
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.
F-8
<PAGE>
Internet Financial Services Inc.
Notes to Consolidated Financial Statements -- (Continued)
Years ended September 30, 1997 and 1998
(unaudited with respect to data as of December 31, 1998 and for the three-month
periods ended December 31, 1997 and December 31, 1998)
2. Summary of Significant Accounting Policies -- (Continued)
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. At December 31, 1998, A.B. Watley had net capital, as
defined, of $187,875 which was $87,875 in excess of its required net capital of
$100,000. The aggregate indebtedness to net capital ratio was 3.3 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. 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.
F-9
<PAGE>
Internet Financial Services Inc.
Notes to Consolidated Financial Statements -- (Continued)
Years ended September 30, 1997 and 1998
(unaudited with respect to data as of December 31, 1998 and for the three-month
periods ended December 31, 1997 and December 31, 1998)
5. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
September 30
------------------------------
1997 1998
------------- --------------
<S> <C> <C>
Computer equipment ...................................... $1,115,626 $ 1,961,113
Software ................................................ 62,356 697,377
Construction-in-progress ................................ -- 1,503,338
Furniture, fixtures, and leasehold improvements ......... -- 19,807
---------- -----------
1,177,982 4,181,635
Less accumulated depreciation and amortization .......... 167,774 530,892
---------- -----------
$1,010,208 $ 3,650,743
========== ===========
</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, 1997 and 1998 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, 1997 and 1998, interest expense on the subordinated
loans amounted to $62,000 and $64,500, 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 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.
F-10
<PAGE>
Internet Financial Services Inc.
Notes to Consolidated Financial Statements -- (Continued)
Years ended September 30, 1997 and 1998
(unaudited with respect to data as of December 31, 1998 and for the three-month
periods ended December 31, 1997 and December 31, 1998)
7. Notes Payable -- (Continued)
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) has been accounted for as a
debt servicing fee and is being amortized over the life of the loan. The
unamortized amount of the debt servicing fee is included as "Option costs, net"
in Stockholders' Equity.
8. Bank Loan
The bank loans at September 30, 1997 and 1998 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 receivable from related party at September 30, 1998 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
===========
F-11
<PAGE>
Internet Financial Services Inc.
Notes to Consolidated Financial Statements -- (Continued)
Years ended September 30, 1997 and 1998
(unaudited with respect to data as of December 31, 1998 and for the three-month
periods ended December 31, 1997 and December 31, 1998)
10. Commitments and Contingencies -- (Continued)
Rent expense for the years ended September 30, 1997 and 1998 was $98,934
and $170,101, respectively.
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.
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. Acquisitions
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 was accounted for as
a purchase. The Company recorded approximately $60,000 in goodwill from the
acquisition which is being 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. At the date of
acquisition, CSI owed $85,580 to the sole shareholder of CSI, who became an
officer of the Company. This amount is included in notes payable to related
party and was paid to Mr. Ferguson in January and February 1999.
12. Stock Options
Under the Company's 1997 and 1998 Stock Option Plans (the "Plans"),
employees, non-employee directors and officers, and consultants are generally
granted options (both incentive stock options and nonqualified stock 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 1997 and 1998 Plans
cannot exceed 600,000 and 400,000 shares, respectively, (1,000,000 shares in
total). No option shall be granted under the 1997 Plan after January 26, 2007
or under the 1998 Plan after March 16, 2008.
A summary of the Company's stock option activity (exclusive of the options
discussed in Note 7 and the information discussed in Note 16) and related
information for the years ended September 30, 1997 and 1998 is as follows:
F-12
<PAGE>
Internet Financial Services Inc.
Notes to Consolidated Financial Statements -- (Continued)
Years ended September 30, 1997 and 1998
(unaudited with respect to data as of December 31, 1998 and for the three-month
periods ended December 31, 1997 and December 31, 1998)
12. Stock Options -- (Continued)
<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 85,000 and
20,000 shares, respectively, for the years ended September 30, 1997 and 1998.
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, 1997
and 1998 the amount charged to expense for non-employee options was $21,367 and
$76,832, respectively, and is included in professional services.
The weighted average fair value of options granted during the years ended
September 30, 1997 and 1998 was $0.57 and $1.13, 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:
1997 Grants 1998 Grants
------------- ------------
Dividend yield ............................ 0% 0%
Average expected life:
Employees ................................ 5.4 years 5.4 years
Non-employees ............................ 5.5 years 0.5 years
Risk-free interest rate ................... 6.6% 5.4%
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 had accounted for all
the 1997 and 1998 stock option grants on the fair value method. For purposes of
the pro forma information, the fair values of the 1997 and 1998 option grants
to employees are amortized over the vesting period. The pro forma information
for the years ended September 30, 1997 and 1998 is as follows:
F-13
<PAGE>
Internet Financial Services Inc.
Notes to Consolidated Financial Statements -- (Continued)
Years ended September 30, 1997 and 1998
(unaudited with respect to data as of December 31, 1998 and for the three-month
periods ended December 31, 1997 and December 31, 1998)
12. Stock Options -- (Continued)
Year ended September 30
---------------------------------
1997 1998
---------------- --------------
Net loss as reported ................... $ (1,059,973) $ (632,410)
Net loss pro forma ..................... (1,082,707) $ (674,499)
Net loss per share as reported ......... $ (.30) $ (.12)
Net loss per share pro forma ........... $ (.31) $ (.13)
Additional information regarding options outstanding as of September 30,
1998 (exclusive of the options discussed in Note 7 and the information
discussed in Note 16) 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
======= =======
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.
13. 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, 1997 and
1998 is comprised of New York State and New York City taxes in the amount of
$2,776 and $12,765, 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, 1997 and 1998 follows:
F-14
<PAGE>
Internet Financial Services Inc.
Notes to Consolidated Financial Statements -- (Continued)
Years ended September 30, 1997 and 1998
(unaudited with respect to data as of December 31, 1998 and for the three-month
periods ended December 31, 1997 and December 31, 1998)
13. Income Taxes -- (Continued)
Year ended September 30
---------------------------
1997 1998
------------ ------------
Tax benefit at federal statutory rate .......... (34.0%) (34.0%)
State taxes, net of federal tax effect ......... 0.3% 2.9%
Valuation allowance ............................ 34.8% 33.9%
Other .......................................... (0.8%) (0.3%)
----- -----
Effective tax rate ............................. 0.3% 2.5%
===== =====
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, 1997 and 1998
are as follows:
Year ended September 30
----------------------------
1997 1998
------------- ------------
Net operating loss ....................... $ 369,197 $ 638,238
Mark-to-market loss on inventory ......... 10,931 10,932
Depreciation ............................. (33,441) (82,221)
Other .................................... 9,867 6,927
---------- ----------
Total deferred tax assets ................ 356,554 573,876
Valuation reserve ........................ (356,554) (573,876)
---------- ----------
Net deferred tax asset ................... $ -- $ --
========== ==========
At September 30, 1998, the Company has a net operating loss carryforwards
for federal tax purposes of $1,382,065 that will expire no sooner than
September 30, 2013.
14. 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.
On October 1, 1998, and as subsequently modified, the Company's Board of
Directors authorized the sale of up to 2,000,000 shares of common stock
(subject to increase at the discretion of the Company's executive officers),
plus a 15% over-allotment option to the underwriter, in an IPO at an estimated
gross offering price of not less than $7.00 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 restriction
provision for nominal consideration to certain employees of the Company, and
(2) grants of 519,350 and 14,500 stock options with an exercise price of $7.00
per share to certain employees and non-employees, respectively, of the Company.
These options vest over a period of up to three years. The estimated fair value
of non-employee options and the 3,000 shares issued to certain employees will
be expensed upon the effectiveness of the IPO.
15. Earnings Per Share
The weighted average number of shares outstanding for the years ended
September 30, 1997 and 1998 reflect the 70,771 shares discussed in Note 16
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.
F-15
<PAGE>
Internet Financial Services Inc.
Notes to Consolidated Financial Statements -- (Continued)
Years ended September 30, 1997 and 1998
(unaudited with respect to data as of December 31, 1998 and for the three-month
periods ended December 31, 1997 and December 31, 1998)
16. Subsequent Events (Unaudited)
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.
On January 31, 1999, the subordinated borrowings maturing on October 31,
1999 were amended to extend the maturity date to October 31, 2000.
On March 24, 1999 the Company amended its 1998 Stock Option Plan to
increase the number of shares covered thereunder to 800,000 shares. In addition
the Company agreed to issue as of the effective date of its IPO options
covering an aggregate of 224,750 shares to certain employees at an exercise
price of $7.00 per share.
F-16
<PAGE>
[LOGO AND DIAGRAM]
<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 ............................. 6
Forward-Looking Statements ............... 10
Use of Proceeds .......................... 11
Dilution ................................. 12
Dividends ................................ 13
Capitalization ........................... 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations ......................... 14
Business ................................. 20
Management ............................... 32
Principal Stockholders ................... 37
Certain Transactions ..................... 38
Description of Securities ................ 39
Shares Eligible for Future Sale .......... 40
Underwriting ............................. 41
Legal Matters ............................ 42
Experts .................................. 42
Additional Information ................... 42
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>
================================================================================
2,000,000 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 .................................................... $ 4,496.51
NASD Filing Fee ..................................................... $ 2,341.01
Legal Fees and Expenses* ............................................ $ 130,000.00
Printing and Engraving Costs* ....................................... $ 130,000.00
Accounting Fees* .................................................... $ 180,000.00
Blue Sky Expenses and Counsel Fees .................................. $ 90,000.00
Boston Stock Exchange and NASDAQ Listing Fees and Related Expenses* . $ 40,000.00
Miscellaneous* ...................................................... $ 53,162.48
------------
Total ............................................................. $ 630,000.00
============
</TABLE>
- ------------
* Estimated
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, in reliance upon Section 4(2) of the
Securities Act, issued an aggregate of 431,538 shares of Common Stock, $.001
par value ("Common Stock"), valued at $80,000, to Steven Malin and Robert
Malin, the co-founders of the Registrant, in exchange for all of the issued and
outstanding shares of A.B. Watley, Inc.
2. In January 1997, the Registrant, in reliance upon Section 4(2) of the
Securities Act, issued an aggregate of 3,568,462 shares of Common Stock to nine
investors for aggregate proceeds of $71,369. These investors are directors,
executive officers and/or employees of the Registrant and two family members of
two of the directors.
3. In January 1997, the Registrant, in reliance upon Rule 701 of the
Securities Act, issued options to purchase an aggregate of 125,000 shares of
Common Stock, exercisable at $.02 per share, to three executive officers of the
Registrant.
4. In April 1997, the Registrant, in reliance upon Regulation 506 of the
Securities Act, issued an aggregate of 1,050,000 shares of Common Stock to
forty-two investors for aggregate proceeds of $2,100,000. All of these
investors were accredited investors, of which 38 were individuals, 1 was a
Profit Sharing Plan, 1 was a Trust and 2 were foreign investors.
5. In April 1997, the Registrant, in reliance upon Rule 701 of the
Securities Act, 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.
6. In September 1997, the Registrant, in reliance upon Rule 701 of the
Securities Act, 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.
7. In November 1997, the Registrant, in reliance upon Rule 701 of the
Securities Act, 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.
8. In January 1998, the Registrant, in reliance upon Section 4(2) of the
Securities Act, issued 50,000 shares of Common Stock to a foreign accredited
investor for $500,000.
9. In March 1998, the Registrant, in reliance upon Section 4(2) of the
Securities Act, issued 20,000 shares of Common Stock and warrants to purchase
20,000 shares of Common Stock to a foreign accredited investor for $200,000.
10. In May 1998, the Registrant, in reliance upon Section 4(2) of the
Securities Act, issued 17,500 shares of Common Stock to a foreign accredited
investor for $175,000.
11. In October 1998, the Registrant, in reliance upon Section 4(2) of the
Securities Act, issued 38,260 shares of Common Stock, valued at $183,648, to
Leon Ferguson in exchange for all the shares of Computer Strategies, Inc.
12. In October 1998, the Registrant, in reliance upon Section 4(2) of the
Securities Act, issued warrants to purchase 191,250 shares of Common Stock to
New York Small Business Venture Fund, LLC, an accredited investor, as partial
consideration for making a $500,000 loan to the Registrant.
<PAGE>
13. In October 1998, the Registrant, in reliance upon Rule 701 of the
Securities Act, issued 25,000 shares of Common Stock to an executive officer
upon exercise of options, for proceeds of $500.
14. In November 1998, the Registrant, in reliance upon Rule 701 of the
Securities Act, issued an aggregate of 100,000 shares of Common Stock to two
executive officers upon exercise of options, for aggregate proceeds of $2,000.
15. In December 1998, the Registrant, in reliance upon Section 4(2) of the
Securities Act, issued an aggregate of 3,000 shares of Common Stock to five
employees for aggregate proceeds of $1,500.
16. In January 1999, the Registrant, in reliance upon Section 4(2) of the
Securities Act, issued an aggregate of 70,771 shares of Common Stock to three
stockholders for no or nominal consideration. These stockholders were non-U.S.
investors.
17. In January 1999, the Registrant, in reliance upon Regulation 506 of
the Securities Act, issued an aggregate of 221,500 shares of Common Stock to
twelve investors for aggregate net proceeds of $1,050,000. All of these
investors were accredited investors, of which 10 were individuals (including
one executive officer, one proposed director (to take office upon the
effectiveness of the offering) and a trust for the benefit of an executive
officer) and two were corporate entities.
18. In January 1999, the Registrant, in reliance upon Section 4(2) of the
Securities Act, issued warrants to purchase 140,000 shares of Common Stock to
New York Community Investment Company, L.L.C., an accredited investor, as
partial consideration for making a $400,000 loan to the Registrant.
II-2
<PAGE>
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 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, as amended.*
4.1 Specimen Common Stock Certificate.*
4.2 Form of Underwriter's Warrant Agreement, including Form of Warrant Certificate.*
5.1 Opinion of Hartman & Craven LLP on legality of securities being registered.
10.1 1997 Stock Option Plan.*
10.2 Second 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 Land-
lord and the Company as Tenant for premises located at 40 Wall Street, New York, New York.*
10.9 [Intentionally omitted]
10.10 [Intentionally omitted]
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.*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
- ---------- -----------
<S> <C>
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.*
</TABLE>
- ------------
* Previously filed
** Previously 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
II-4
<PAGE>
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-5
<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 amendment to
the registration statement to be signed on its behalf by the undersigned in the
City of New York, State of New York, on April 15, 1999.
INTERNET FINANCIAL SERVICES INC.
By: /s/ Steven Malin
----------------------------------
Steven Malin,
Chairman and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
amendment to the 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 April 15, 1999
- ------------------------------------------- Officer and Director (Principal Executive
Steven Malin Officer and Principal Financial Officer)
* Vice President -- Finance April 15, 1999
- ------------------------------------------- (Principal Accounting Officer)
Michael Fielman
* President, Chief Operating Officer April 15, 1999
- ------------------------------------------- and Director
Harry Simpson
* Director April 15, 1999
- -------------------------------------------
Robert Malin
/s/ Steven Malin
- -------------------------------------------
Steven Malin
(Attorney-in-fact)
</TABLE>
*By Attorney-in-fact
II-6
<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, as amended.*
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 Second 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 [Intentionally omitted]
10.10 [Intentionally omitted]
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
ComStock, 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.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
- ---------- -----------
<S> <C>
23.4 Consent of Elizabeth Chambers.*
23.5 Consent of Mark Chambre.*
23.6 Consent of Stanley Weinstein.*
24.1 Power of Attorney.*
</TABLE>
- ------------
* Previously filed
** Previously 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>
EXHIBIT 1.1
Internet Financial Services Inc.
2,000,000 Shares of Common Stock
(Par Value $.001 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") Two Million (2,000,000) shares (the "Offered Shares") of the
common stock, par value $.001 per share, which Offered Shares are presently
authorized but unissued shares of the common stock par value $.001 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 Three Hundred
Thousand (300,000) 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 Two Hundred Thousand (200,000) Common Shares at
an exercise price of $11.55 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.
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 $6.35 per share. The Underwriter
plans to offer the Shares to the public at a public offering price of $7.00 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 (as hereinafter defined) (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
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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.
(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.
(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
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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 A.B. Watley, Inc., a corporation duly organized, validly
existing and in good standing under the laws of the State of New York
("Watley"), and Computer Strategies, Inc., a corporation duly organized, validly
existing and in good standing under the laws of the State of Texas ("CSI") (each
individually a "Subsidiary" and together the "Subsidiaries"). Unless the context
otherwise requires, all references to the "Company" in this Agreement shall
include the Subsidiaries. Each of the Subsidiaries has full power and authority,
corporate and other, 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. Each of the Company and the
Subsidiaries 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 any Subsidiary.
The Company owns all of the issued and outstanding shares of
capital stock of the Subsidiaries, 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
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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 any Subsidiary. Other than the Subsidiaries, the
Company has no equity interests in any entity.
(b) This Agreement has been duly executed and delivered by
the Company and constitutes the valid and binding obligation of the Company, and
the Underwriter's Warrant 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 its terms. The execution,
delivery and performance of this 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 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 any 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 any Subsidiary pursuant to any indenture, mortgage,
note, contract, commitment or other agreement or instrument to which the Company
or any Subsidiary is a party or by which the Company, any 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, any 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 any 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
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Shares to the Underwriter, and (ii) the consummation by the Company of the
transactions contemplated by this Agreement or the Underwriter's Warrant
Agreement.
(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. 333-71783) 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
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<PAGE>
to the requirements of the 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
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<PAGE>
accepted accounting principles applied on a consistent basis 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 Subsidiaries 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 any 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 any 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 stockholder 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
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<PAGE>
outstanding options and warrants to purchase Common 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 stockholder 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 stockholder 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 any 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
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<PAGE>
decree of any governmental 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, any Subsidiary or
any of the Company's or any Subsidiary's properties or businesses. Each of the
Company and the Subsidiaries owns, possesses or has 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 their respective business and operations
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
any Subsidiary or involving the Company's or any Subsidiary's properties or
business which, if determined adversely to the Company or any 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 any
Subsidiary or which question the validity of the capital stock of the Company or
a Subsidiary 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 any Subsidiary and enjoining the
Company or any Subsidiary from taking, or requiring the Company or any
Subsidiary to take, any action, or to which the Company or any Subsidiary, or
the Company's or any 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.
(r) Each of the Company and the Subsidiaries owns or
possesses adequate and enforceable rights to use all patents, patent
applications, trademarks, service marks, copyrights,
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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 any Subsidiary has infringed nor is
infringing upon the rights of others with respect to the Intangibles; and
neither the Company nor any 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 any 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 any 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 any 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 any Subsidiary, otherwise than as set forth or contemplated in
the Prospectus.
(t) Neither the Company nor the Subsidiaries owns any real
property. Each of the Company and the Subsidiaries 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 any Subsidiary. The leases, licenses or other contracts or
instruments under which the Company and the Subsidiaries lease, hold or are
entitled to use any property, real or personal, are valid, subsisting and
enforceable only with such exceptions as are not material and do
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not interfere with the use of such property made, or proposed to be made, by the
Company or any 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 any 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 any
Subsidiaries 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 Subsidiaries 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 a 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 any 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 Subsidiaries 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 its officers, employees and
consultants and between the Subsidiaries and their respective officers,
employees and consultants, described in the Registration Statement, are binding
and enforceable obligations upon the respective parties thereto in
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accordance with their respective terms, except as such 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, neither the
Company nor the Subsidiaries has 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 any
Subsidiary's employees or is imminent which could adversely affect the Company
or any Subsidiary.
(y) Neither the Company nor any Subsidiary has, 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) The 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 each of the
Company and the Subsidiaries 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 or any Subsidiary.
(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 August 1, 1998 and
supplemented diligence requests dated December 1, 1998 and January 11, 1999.
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Any certificate signed by an officer of the Company or by
an officer of a 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
a
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signed copy of the Registration Statement as originally filed and of all
amendments thereto, whether filed before or after the Registration Statement
becomes effective, a copy of all exhibits filed therewith and a signed copy of
all consents and certificates of experts.
(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-K (or 10-KSB), 10-Q (or 10-QSB) and exhibits thereto,
filed or
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furnished to the Commission, any securities 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
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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).
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
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securities of the Company, in any manner whatsoever, whether 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 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(b) or 12(g) of the
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Exchange Act and the Company will maintain such registration for a minimum of
five (5) years from the Effective Date.
(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 stockholders 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.
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(r) 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.
(s) 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.
(t) 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.
(u) 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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(v) 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.
(w) 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.
(x) 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.
(y) 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.
(z) 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.
(aa) 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.
(ab) 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,
other than the issuance of Common Shares upon exercise of options and warrants
outstanding on the Closing Date and described in the Prospectus.
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(ac) 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.
(ad) 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.
(ae) 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
stockholder's meeting at least once per annum.
(af) 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 10:00 A.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
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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.
(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 A.B. Watley, Inc., a corporation duly organized,
validly existing and in good standing under the laws of the State of New York
("Watley"), and Computer Strategies, Inc., a corporation duly organized, validly
existing and in good standing under the laws of the State of Texas ("CSI") (each
individually a "Subsidiary", and together the "Subsidiaries"). Unless the
context otherwise requires, all references to the "Company" shall include the
Subsidiaries. Each of the Subsidiaries has full power and authority, corporate
and other, 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. Each of the Company and the
Subsidiaries is duly qualified to do business as a foreign corporation and is 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 or any
of the Subsidiaries.
To the best of Company Counsel's knowledge, the Company owns
all of the issued and outstanding shares of capital stock of the Subsidiaries,
free and clear of any security interests, liens, encumbrances, claims and
charges of any nature whatsoever, except as set forth in the Registration
Statement and all of such shares have been duly authorized and validly issued
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and are fully paid and nonassessable. To the best of Company counsel's
knowledge, 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 any Subsidiary. To
the best of Company Counsel's knowledge, other than the Subsidiaries, the
Company has no equity interests in any entity.
(ii) The Company has full power and authority,
corporate and other, to execute, deliver and perform this Agreement and the
Underwriter's Warrant Agreement and to consummate the transactions contemplated
hereby and thereby. The execution, delivery and performance of this 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 and the Underwriter's 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, 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 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 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 any
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 any
Subsidiary pursuant to any
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indenture, mortgage, note, contract, commitment or other material agreement or
instrument to which the Company or any Subsidiary is a party or by which the
Company, any Subsidiary or any of the Company's or any 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, any
Subsidiary or any of the Company's or any Subsidiary's properties or business;
or (D) have any effect on any Permit necessary for the Company or any 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 any Subsidiary to make
use thereof.
(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 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
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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, any
Subsidiary or any of their respective assets or businesses, including, without
limitation, those promulgated by the Commission and comparable state and local
regulatory authorities.
(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 stockholder 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 stockholder of the Company. The
certificates representing the Shares are in proper legal form.
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(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 stockholder 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.
(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 any
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) Each of the Company and the Subsidiaries owns or
possesses adequate and enforceable rights to use all patents, patent
applications, trademarks, service marks,
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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 any 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 any 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 or any Subsidiary
other than those licenses which the Company and the Subsidiaries have obtained.
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.
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 paragraph 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
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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.
(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
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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 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
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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 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
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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
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
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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
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
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<PAGE>
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 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
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<PAGE>
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, 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
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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.
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
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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) trading in any securities of the Company shall have been
suspended or halted by any national securities exchange, the NASD or the
Commission; (vii) there has been a materially adverse change in the condition
(financial or otherwise), prospects or obligations of the Company; or (viii) the
Company will have sustained a material loss, whether or not insured, by reason
of fire, flood, accident or other calamity.
(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
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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., 40 Wall Street, New York, New York 10005,
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 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.
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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: Whale Securities Corp.,
General Partner
By _______________________________
Name:
Title:
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April 6, 1999
Internet Financial Services Inc.
40 Wall Street
New York, New York 10005
Gentlemen:
We have acted as counsel to Internet Financial Services Inc. (the
"Company"), a corporation organized under the laws of the State of Delaware, in
connection with the preparation of a Registration Statement on Form SB-2 (the
"Registration Statement") relating to the offer and sale of up to 2,300,000
shares (the "Shares") of common stock of the Company, par value $.001 per share
("Common Stock").
We have examined copies of the Certificate of Incorporation and By-Laws
of the Company, the Registration Statement, all resolutions adopted by the
Company's Board of Directors (the "Board"), consents of the Board and other
records and documents that we have deemed necessary for the purpose of this
opinion. We have also examined such other documents, papers, statutes and
authorities as we have deemed necessary to form a basis for the opinion
hereinafter expressed. We have assumed the genuineness of all signatures and the
conformity to original documents of all copies submitted to us. As to various
questions of fact material to our opinion, we have relied on statements and
certificates of officers and representatives of the Company and others.
Based on the foregoing, we are of the opinion that the Shares, when
duly sold, issued and paid for in accordance with the terms of the Prospectus
included as part of the Registration Statement, will be validly and legally
issued and will be fully paid and non-assessable.
<PAGE>
Internet Financial Services Inc.
April 6, 1999
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the Prospectus included as part of the Registration Statement. As
described under such caption, Edward I. Tishelman is a member of our firm and
the owner of 112,500 shares of Common Stock. In giving such consent, we do not
thereby admit that we are within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended and the Rules
and Regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
HARTMAN & CRAVEN LLP
By: /s/ Edward I. Tishelman
-----------------------------
Edward I. Tishelman,
a partner
EIT/bh
<PAGE>
Exhibit 23.2
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 Amendment No. 2 to the
Registration Statement (Form SB-2 No. 33-71783) and related Prospectus of
Internet Financial Services Inc. for the registration of 2,000,000 shares of its
common stock.
/s/ Ernst & Young LLP
New York, New York
April 15, 1999
