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As filed with the Securities and Exchange Commission on May 26, 2000.
Registration No. 333-_______
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
A.B. Watley Group Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-3911867
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
40 Wall Street
New York, New York 10005
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(Address of Principal Executive (Zip Code)
Offices)
Steven Malin
Chairman and Chief Executive Officer
A.B. Watley Group Inc.
40 Wall Street, New York, New York 10005
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(Name and address of agent for service)
(212) 422-1664
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(Telephone number, including area code, of agent for service)
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Copy to:
Edward I. Tishelman, Esq.
Hartman & Craven LLP
460 Park Avenue
New York, New York 10022
(212) 753-7500
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment Plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment Plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed
Title of each class maximum Proposed
of offering maximum
securities price aggregate Amount of
to be Amount to be per offering registration
registered registered share (1) price fee
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common
Stock, par value
$.001 per share 474,714 shares $18.25 $8,663,530.50 $2,287.17
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of
1933, on the basis of the average of the high and low sale prices
reported on the Nasdaq National Market on May 24, 2000.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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A.B. WATLEY GROUP INC.
PROSPECTUS
474,714 SHARES OF
COMMON STOCK
This Prospectus relates to an offering from time to time of up to 474,714
shares of common stock of A.B. Watley Group Inc. The selling stockholders
identified in this prospectus are offering all of the shares to be sold in this
offering.
We will not receive any of the proceeds from the sale of the shares by the
selling stockholders. We will pay the expenses of registration of the shares
which may be offered by this prospectus.
Investing in the common stock involves risks. See Risk Factors beginning on
page 2.
Our common stock is traded on the Nasdaq National Market under the symbol
ABWG. On May 24, 2000, the closing price of our common stock as reported on the
Nasdaq National Market was $18.25.
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.
The date of this Prospectus is May __, 2000.
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AVAILABLE INFORMATION
We have filed with the SEC the registration statement on form S-3 under
the Securities Act with respect to the common stock offered hereby. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement and the
exhibits filed therewith, certain portions of which have been omitted as
permitted by the rules and regulations of the SEC. For further information with
respect to our company and the securities offered hereby, reference is hereby
made to the registration statement and to the exhibits filed as a part thereof.
Statements contained in this prospectus regarding the content of any contract or
other document referred to are not necessarily complete. In each instance, we
refer you to the copy of such contract or other document filed as an exhibit to
the registration statement, and each such statement is hereby qualified in its
entirety by such reference. The registration statement, including all exhibits
thereto, may be inspected without charge at the principal office of the SEC at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
commission's regional offices located at Seven World Trade Center, Suite 1300,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials may also be obtained
from the Public Reference Section of the commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, upon the payment of prescribed fees. In
addition, registration statements and certain other filings made with the
commission through its Electronic Data Gathering, Analysis and Retrieval systems
are publicly available through the commission's site on the World Wide Web
located at http://www.sec.gov. The registration statement, including all
exhibits and schedules thereto and amendments thereof, has been filed with the
commission through the Electronic Data Gathering, Analysis and Retrieval system.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The commission allows us to "incorporate by reference" the information we
file with the commission. This permits us to disclose important information to
you by referencing these filed documents. We incorporate by reference in this
prospectus the following documents which have been filed with the commission:
(1) our Annual Report on Form 10-KSB for the year ended September 30, 1999;
(2) our Quarterly Report on Form 10-QSB for the quarter ended December 31,
1999 and for the quarter ended March 31, 2000; and
(3) the description of the common stock contained in our registration
statement on Form 8-A dated April 14, 2000.
We incorporate by reference all documents filed pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus and
prior to the termination of this offering.
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We will promptly provide without charge to you, upon written or oral
request, a copy of any or all of the documents incorporated by reference in this
prospectus, other than exhibits to such documents, unless such exhibits are
specifically incorporated by reference in such documents. Requests should be
directed to A.B. Watley Group Inc., Att: Investor Relations, 40 Wall Street, New
York, New York, telephone number 201-422-1664.
Unless otherwise indicated, references to "we", "us" and "our" refer to
A.B. Watley Group Inc., a Delaware corporation, and its subsidiaries. Our common
stock, par value $.001 per share, is referred to in this prospectus as the
"common stock."
FORWARD LOOKING STATEMENTS
This Prospectus contains certain statements that may be deemed
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. All statements, other than statements
of historical facts, that address activities, events or developments that the
company intends, expects, projects, believes or anticipates will or may occur in
the future are forward-looking statements. Such statements are based on certain
assumptions and assessments made by management of the company in light of its
experience and its perception of historical trends, current conditions, expected
future developments and other factors it believes to be appropriate. The
forward-looking statements included in this Prospectus are also subject to a
number of material risks and uncertainties, including but not limited to
economic, competitive, governmental and technological factors affecting the
company's operations, markets, services and prices, and other factors discussed
in the company's filings under the Securities Act and the Exchange Act.
Prospective investors are cautioned that such forward-looking statement are not
guarantees of future performance and that actual results, developments and
business decisions may differ from those envisaged by such forward-looking
statements.
RISK FACTORS
Although we are optimistic that we will be able to continue our
substantial growth and strengthen our position in the online and electronic
trading of securities, we also acknowledge that our business and this industry
in general are subject to a number of risks and uncertainties, which could
adversely affect future results. Among these are:
1. Competition In The Online And Electronic Brokerage Business Is
Increasing. Not only are we faced with competing with the traditional electronic
trading firms, such as E-Trade and E-Schwab, as well as smaller sized
competitors, but we are also faced with the entry of new firms, including
traditional brokerage firms such as Merrill Lynch, and the emergence of giants,
such as Goldman Sachs & Co., as a sponsor or joint venturer of e-commerce
brokerage firms and electronic communications networks. We will continue to
compete based upon what we perceive as the excellence of our trading systems,
the skills of our customer service personnel, the breadth of information and
other services provided, attractive pricing of our services and maintenance and
upgrade of our technology. Although added competition has also served to
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increase the overall market for this type of brokerage service, the increased
competition also places more pressure on us in our competitive efforts,
including a need to increase our marketing efforts, which is already underway.
2. We Are Expanding Rapidly And Need to Properly Manage Our Increased
Infrastructure. The expansion of our business has led us to increase our systems
and personnel. These must be managed efficiently and places additional burdens
upon executive management.
3. We Must Maintain Our Access To The Most Improved Technology.
Technological changes continue in the electronic commerce field generally and in
our segment of online brokerage. We must keep pace with these technological
developments by a combination of licensing and developing software, to be able
to continue to provide what we regard as highly efficient and attractive
services and systems for our accounts.
4. Our Industry Faces Substantial Regulatory Supervision. We, as well as
all members of the U.S. securities brokerage industry, are regulated by the NASD
and SEC. These supervisory bodies have tended to increase the intensity of their
regulatory efforts, particularly with respect to the online trading industry.
Additional regulations have been proposed, from time to time, dealing with the
suitability of online trading and broker supervision of accounts. All these
place a greater burden on the conduct of our electronic and online brokerage
business.
5. Our Proposed Conversion To Self-Clearing Operations Subjects Us to
Additional Risks. Although self-clearing will allow us to theoretically increase
the profitability of our operations, it will also place additional burdens upon
managing our business. 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
ours, without significant prior experience, involve substantial risk of losses
due to clerical errors related to the handling of client funds and securities.
We have attempted to mitigate this risk by hiring, from a large competitor, as a
senior officer someone who has extensive experience in the senior management of
self-clearing operations and conversions to self-clearing. 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.
THE COMPANY
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 provide real-time online financial brokerage
services and comprehensive information about the
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securities markets through our proprietary trading systems, UltimateTrader(TM)
and WatleyTrader(TM). Watley has received favorable industry recognition,
ranking fourth in Dow Jones Business Director's recent survey of Internet
brokers and sixth in Gomez Advisors' ranking of Internet brokers. In addition,
UltimateTrader and WatleyTrader were ranked seventh and sixth in Barron's annual
ranking of online brokers published in March 1999.
Our company was incorporated in May 1996 under the laws of the State of
Delaware. Watley 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.
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
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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, increasing utilization of the Internet to
access a wide range of financial services, 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 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(R) and WatleyTrader(TM),
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 was 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
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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. The evolution of the Internet has
fundamentally changed the way in which many investors manage their financial
affairs. The speed, convenience, choice, cost savings and information that the
Internet offers as an investment tool has driven investor assets online. We
anticipate a continuation in this trend as evidenced by research released by
Forrester Research and IDC. These independent research firms project that total
U.S. assets managed online will reach $3.1 trillion in 2003, up from $325
billion at the end of 1998. During that period, the number of online accounts is
estimated to roughly quadruple, to over 20 million. Also, the percentage of all
investors who invest online is expected to grow to 30% from roughly 10% today.
Meanwhile, according to The Industry Standard, within the past four years online
trades as a percent of total trading volume have gone from less than 1% to 14%
of all stock orders and 30% of the volume on Nasdaq and the NYSE. According to
one industry analyst, the online trading volume could represent 50% of all
trades over the next three years.
Strategy
Our strategy, which has been accelerated since our initial public offering
in April 1999, 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
UltimateTrader is well positioned to satisfy their requirements. We
have established low rates and offered a broad range of supplementary
information and data for these persons.
o Expanding our marketing efforts for our online brokerage service. We
are aggressively marketing UltimateTrader by targeting active traders
through print, online and other advertisements. Our advertising efforts
include advertisements in financial publications and various other
regional and national publications that have a demographic similar to
our target market. We are also advertising and promoting UltimateTrader
through Internet website and banner advertisements and other media. Our
marketing campaign has accelerated throughout fiscal year 1999,
especially during the 4th quarter. Our continued investment in the
content and services provided via our Internet site and the
WatleyTrader service has earned strong rankings for our company in
several major industry surveys such as #6 in the Gomez Advisors Review
and #7 in both Barron's and Time Magazine. Such rankings have given us
very valuable publicity and strengthened our brand in a very
competitive marketplace.
o Expanding our network infrastructure and client support capabilities.
We are expanding our network infrastructure and client support
capabilities, to better service an increasing client base. Our internal
computing needs require ongoing investments in our network and server
infrastructure. During fiscal year 2000, we also intend to establish an
off-site back-up communications center or hot site, in a different
region
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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,
we have hired additional associates to expand the number of
institutions we service and 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 cost and provide us the
opportunity to receive expanded revenues from margin transactions with
our clients. We have completed this review and are seeking to hire the
appropriate staff to build and manage our own clearing department. We
have hired a new senior officer from a very large competing firm who
has over 12 years of experience in managing self-clearing operations
and conversions to self-clearing. We have identified and are seeking to
obtain, by internal development or third party license, the requisite
software systems and computer hardware to convert to self-clearing
operations in the not too distant future.
Offering online services in foreign markets. We have started to provide
electronic execution services for foreign institutions and their clients for
transactions in U.S. securities markets and to arrange for foreign institutions
to provide for these services for our clients in foreign markets. We are
actively pursuing these relationships in the Far East and Europe, with the goal
of an eventual global securities presence.
Ultimate Trader
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 date to the client's screen.
UltimateTrader provides our clients access to comprehensive information on
stocks, market, 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
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operating system. Different computer screen arrays or pages can be built to suit
the users 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 is the case with a number of 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 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. Typical
executions for market orders entered via Ultimate Trader range from 2 seconds to
10 seconds depending on market conditions. These significant savings in time
have tremendous value to a client who is trying to trade in markets
characterized by rapidly changing prices.
Speed of order execution is also affected by how an order is routed.
UltimateTrader clients are able to route their orders directly to the exchanges,
such as the New York Stock Exchange, American Stock Exchange, Nasdaq Stock
Market, Inc. and Chicago Board Options Exchange. Most other retail online
trading systems route orders to a third-market firm or the online broker's
trading subsidiary, which in turn routes the orders to the market.
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.
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 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.
UltimateTrader clients can select from two different service levels,
UltimateTrader Free and UltimateTrader Pro. Our UltimateTrader Free service has
been only recently introduced and promoted after the end of our most recent
fiscal year.
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The following table sets forth the features offered for UltimateTrader
Free and Pro Service Level:
Ultimate Trader Features Free Pro
Dynamic Updating Quotations X X
Unlimited Customized Pages X X
Electronic Execution X X
Buying Power X X
Board View Portfolio Minder X X
Position Minder X X
Scrolling Tickers X
Alarms X
Snap Quotes X
Market Minder X
Hot Key X X
MultiQuotes X
Charts with Technical Studies X
Nasdaq Level II Data X X
Color Coded Market Maker Screens X
Time and Sales X X
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 Buying Power - allows clients to view current buying power, the value
of the account as of the trading day's business morning.
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, option 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.
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Our fee schedule for clients subscribing to UltimateTrader Free is as
follows:
Monthly Fees for
----------------
Number of Trades Per Month Transaction Charges Real Time Data
- -------------------------- ------------------- --------------
1-9 trades per month $23.95 free
10-24 trades per month $22.95 free
25-49 trades per month $20.95 free
50-99 trades per month $19.95 free
100-199 trades per month $18.95 free
Our fee schedule for clients subscribing to UltimateTrader Pro is as
follows:
Monthly Fees for
----------------
Number of Trades Per Month Transaction Charges Real Time Data
- -------------------------- ------------------- --------------
1-9 trades per month $23.95 $300
10-24 trades per month $22.95 $250
25-49 trades per month $20.95 $200
50-99 trades per month $19.95 free
100-199 trades per month $18.95 free
Dow Jones News Service is an optional service priced at $95.00 per month.
Watley's fee 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.
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.
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, 1999, we derived approximately 71% of
our total revenues from UltimateTrader clients.
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WatleyTrader
WatleyTrader is our web-based Internet brokerage service which we designed
for active investors who execute trades 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
$14.00 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, 1999, approximately 3% of our
revenues originated from WatleyTrader clients.
Third Market Institutional Sales Desk
Watley's third-market institutional sales desk specializes in facilitating
and/or executing large-block transactions in approximating 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 pension
funds, insurance companies, banks, corporations and independent fund managers.
Approximately 22% of our revenues for our fiscal year ended September 30, 1999
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 department helps clients get online, handles product
and services inquiries and addresses all brokerage and technical questions. The
Client Service department also conducts various surveys to verify the
satisfaction of our clients and to learn more about client preferences and
requirements.
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Live client support is available 12 hours a day from 8:00 AM to 8:00 PM
EST Monday through Friday. Our client services department operates on a one-stop
shopping basis, meaning that clients do not typically have to be transferred
between departments to receive answers to their inquires. We currently employ
seventeen Client Service personnel (inclusive of management), 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 support 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 relationship management (CRM) and computer
telephony integration (CTI) software. CRM databases are updated with each client
contact to track client service calls. A separate internal database tracks
trading patterns, changes in customer balances and compliance issues. Both
databases are used to generate periodic reports for management. Client services
associates access the latest product and account information through CRM and
customer account databases.
During the second quarter of fiscal year 1999, we 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 are planning to upgrade our online
support capabilities through a recently acquired online chat support software
package.
We plan to create a VIP client services team to service our most active
online clients. By providing client support for all issues on an account manager
basis, we intend for the VIP team to offer much more individualized service on a
prioritized basis. We believe that providing highly prioritized, 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 generally execute and process directly 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 agreement 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
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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 days 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 laws.
Clients' securities transactions are effected on either a cash or margin
basis. In connection with margin transactions, credit is extended to a client,
collateralized by securities and cash in the client's account, for a portion of
the purchase price. The client is charged for 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.
Network Infrastructure
Our network consists of a series of servers, routing and
Internet-networking equipment, workstations, software support cluster, 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 our market data servers and to one of
our order servers.
Our network is accessed by electronic messaging. A message is sent to
Watley's network 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 only 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 client. Once the permission server allows the client to establish
a connection to the UltimateTrader system, the connection between the client and
server is maintained until the client requests it be terminated or until the
UltimateTrader system determines that the connection is no longer efficient or
is inoperable.
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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 servers accept buy/sell or sell short messages from the client
application and qualifies the order according to a number of business rules.
Once an order is qualified, it is sent to the exchange of the client's choice
and messages are sent to update our database. This update offers the client
real-time account positions, buying power 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.
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.
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
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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 are marketing UltimateTrader by targeting active traders through print,
online and other modes. 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 demographics
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 market. We also intend to advertise and
promote UtimateTrader through Internet website and banner advertisements and
television commercials. We also plan to broaden our presence on the Internet
through various partnerships, sponsorships and co-branding efforts such as our
recent deal with U-Cool, an Internet community site that has over 150,000
subscribers and 10 million unique monthly visitors. Our strong rankings in
various industry surveys have provided us with extremely valuable publicity. We
will continue to make investments in our online services and offerings to
maintain and even strengthen these rankings.
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 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.
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 Merrill Lynch & Co., Inc.; Morgan Stanley Dean Witter
& Co.; PaineWebber Incorporated; and Salomon Smith Barney, as well as financial
institutions and mutual funds.
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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 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
ceased-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.
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
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adjustments in the market value of securities to reflect the possibility of a
market decline prior to disposition.
As of March 31, 2000, Watley was required to maintain minimum net capital,
in accordance with SEC rules, of approximately $356,810 and had total net
capital of $1,991,809 or approximately $1,634,999 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 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 six months ended March 31, 2000, we spent approximately
$3,000,000 for software development. We are expecting to incur an additional
$500,000 in software development costs to complete our current projects. We plan
to complete the current project in June 2000. These software development efforts
are related to the creation of proprietary direct access online trading and
market information software.
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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 May 1, 2000, we employed a total of 127 persons, of whom 11 are engaged in
executive management, 20 in trading activities, 44 in information technology, 17
in client service, 7 in sales and marketing, 13 clerical and back office
personnel, as well as 14 other employees. All but one of these persons 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, in part, 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 that we have.
Our principal executive offices are located at 40 Wall Street, New York,
New York, and our telephone number is 212/422-1100.
SELLING STOCKHOLDERS
The shares being offered for resale by the selling stockholders consist of
shares that (i) were acquired upon the exercise of warrants to purchase shares
of our common stock and (ii) may be acquired upon the exercise of outstanding
warrants to purchase shares of our common stock. We have agreed to keep the
registration statement, of which this prospectus is a part, effective until the
earlier of the date that all of such shares (i) have been sold pursuant to the
registration statement and (ii) may be sold without registration. We agreed to
pay the expenses
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of registering the shares under the Securities Act, including registration and
filing fees, but not any commissions, underwriting commissions or similar
charges relating to the sale of shares.
The following table sets forth the name of each selling shareholder, the
number of shares of common stock beneficially owned by such selling shareholder
as of May 1, 2000 (including shares issuable pursuant to outstanding warrants)
and the number of shares being offered by each selling shareholder. The shares
being offered by this prospectus are being registered to permit public secondary
trading, and the selling stockholders may offer all or part of the shares for
resale from time to time. However, such selling stockholders are under no
obligation to sell all or any portion of such shares nor are such selling
stockholders obligated to sell any shares immediately under this prospectus. All
information with respect to share ownership has been furnished to us by the
selling stockholders.
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
ownership is determined by assuming that options, warrants or convertible
securities that are held by him and which are exercisable within 60 days of the
date of this prospectus have been exercised and converted.
Shares
Beneficially Owned Shares to be Shares
Name of Selling Prior to the Sold Owned After the
Shareholder Offering in the Offering Offering
- ----------- -------- --------------- --------
New York Community
Investment Company L.L.C 331,250 331,250 0
New York Small Business
Venture Fund, LLC 191,250 191,250 0
Whale Securities Co., L.P 143,464 143,464 0
Total to be sold: 474,714
-------
Voting and investment power with respect to the shares beneficially owned
by New York Small Business Venture Fund, LLC ("NYSBVF") is shared by New York
Community Investment Company L.L.C. ("NYCIC") so that, technically and for
purposes of the table, NYCIC is shown as beneficially owning the same shares as
NYSBVF, the total number of shares that is, in fact, owned by NYCIC is 140,000
shares.
The warrants exercisable for shares of common stock issued in the name of
Whale Securities Co., L.P. ("Whale") include warrants held for the accounts of
certain current and former equity holders, lenders and employees of Whale. The
"Shares Beneficially Owned Prior
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to the Offering" set forth above do not include shares of common stock held in
Whale's trading account.
The "Shares Owned After the Offering" set forth above assumes all shares offered
hereby are sold in the Offering.
USE OF PROCEEDS
We will not receive any proceeds from the sales of the shares of common
stock. All of the shares of common stock being offered are beneficially owned by
the selling stockholders named in this prospectus and the proceeds of sale will
go to them.
PLAN OF DISTRIBUTION
The shares may be sold or distributed from time to time by the selling
stockholders or by pledgees, donees or transferees of, or successors in interest
to, the selling stockholders, directly to one or more purchasers (including
pledgees) or through brokers, dealers or underwriters who may act solely as
agents or may acquire shares as principals, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices, at negotiated
prices or at fixed prices, which may be changed. The distribution of the shares
may be made in one or more of the following methods: (i) ordinary brokers
transactions, which may include long or short sales, (ii) transactions involving
cross or block trades or otherwise on the Nasdaq National Market, (iii) purchase
by brokers, dealers or underwriters as principal and resale by such purchasers
for their own accounts pursuant to this prospectus, (iv) "at the market" to or
through market makers or into an existing market for the common stock, (v) in
other ways not involving market makers or established trading markets, including
direct sales to purchasers or sales effected through agents, (vi) through
transactions in options, swaps or other derivatives (whether exchange listed or
otherwise),or (vii) any combination of the foregoing, or by any other legally
available means. In addition, the selling stockholders or their successors in
interest may enter into hedging transactions with broker-dealers who may engage
in short sales of shares of common stock in the course of hedging the positions
they assume with the selling stockholders. The selling stockholders or their
successors in interest may also enter into option or other transactions with
broker-dealers that require that delivery by such broker-dealers of the shares,
which shares may be resold thereafter pursuant to this prospectus.
Brokers, dealers, underwriters or agents participating in the
distribution of the shares may receive compensation in the form of discounts,
concessions or commissions from the selling stockholders and/or the purchasers
of shares for whom such broker-dealers may act as agent or to whom they may sell
as principal, or both (which compensation as to a particular broker-dealer may
be in excess of customary commissions). The selling stockholders and any
broker-dealers acting in connection with the sale of the shares hereunder may be
deemed to be underwriters within the meaning of section 2(11) of the Securities
Act, and any commissions received by them and any profit realized by them on the
resale of shares as principals may be deemed underwriting compensation under the
Securities Act. Neither we nor any selling shareholder can presently
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estimate the amount of such compensation. We know of no existing arrangements
between any selling shareholder and any other shareholder, broker, dealer,
underwriter or agent relating to the sale or distribution of the shares.
Furthermore, we may act as a broker-dealer for the selling stockholders in
selling any of the shares offered by this prospectus.
Each selling shareholder and any other persons participating in a
distribution of securities will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, which may restrict certain activities of, and limit
the timing of purchases and sales of securities by, selling stockholders and
other persons participating in a distribution of securities. Furthermore, under
Regulation M, persons engaged in a distribution of securities are prohibited
from simultaneously engaging in market making and certain other activities with
respect to such securities for a specified period of time prior to the
commencement of such distributions subject to specified exceptions or
exemptions. All of the foregoing may affect the marketability of the securities
offered hereby.
Any securities covered by this prospectus that qualify for sale pursuant
to rule 144 under the Securities Act may be sold under that rule rather than
pursuant to this prospectus.
There can be no assurance that the selling stockholders will sell any or
all of the shares of common stock offered by this prospectus.
LEGAL MATTERS
The validity of the shares of common stock being offered hereby will be
passed upon for us by Hartman & Craven LLP, 460 Park Avenue, New York, New York
10022.
EXPERTS
The consolidated financial statements of A.B. Watley Group Inc. appearing
in A.B. Watley Group Inc.'s Annual Report (Form 10-KSB) for the year ended
September 30, 1999, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon included therein and incorporated
herein by reference. Such consolidated financial statements are incorporated
herein by reference in reliance upon such report given on the authority of such
firm as experts in accounting and auditing.
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---------------------------- ---------------------------
We have not authorized any dealer, 474,714 Shares
salesperson or any other person to give
any information or to represent anything A.B. WATLEY GROUP INC.
not contained in this prospectus. You
must not rely on any unauthorized Common Stock
information. This prospectus does not
offer to sell or buy any shares in any ---------------------------
jurisdiction where it is unlawful. PROSPECTUS
--------------------------
-----------------------------
May __, 2000
---------------------------
---------------------------
TABLE OF CONTENTS
Available Information...............1
Incorporation of Certain Documents
By Reference......................1
Forward-Looking Statements..........2
Risk Factors........................2
The Company.........................3
Selling Shareholders................19
Use of Proceeds.....................21
Plan of Distribution................21
Legal Matters.......................22
Experts.............................22
---------------------------
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Securities and Exchange Commission Registration Fee $ 2,287.17
Printing and Edgarization.......................... 2,000.00*
Legal Fees and disbursements....................... 18,000*
Miscellaneous Expenses including accounting, Federal
Express, and postage............................... 2,000 *
----------
Total........ $24,287.17*
==========
- ----------
*Estimated.
ITEM 15. 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 corporations 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 or a
knowing violation of laws; (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 Registrant 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.
<PAGE>
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.
At present, there is no pending litigation or other proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought, nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
ITEM 16. EXHIBITS.
EXHIBIT NO.
- -----------
4.1 Restated Certificate of Incorporation of the Company and form of
amendment thereto.*
4.2 Amendment to Certificate of Incorporation, filed on February 5,
1999.**
4.3 By-laws of the Company, as amended.*
4.4 Form of Underwriter's Warrant Agreement, including Form of Warrant
Certificate.*
4.5 Warrant to Purchase up to 87,500 Shares of Common Stock of A.B.
Watley Group Inc., dated October 2, 1998, as amended as of October
2, 1998 and as of January 18, 1999.
4.6 Warrant to Purchase up to 80,000 Shares of Common Stock of A.B.
Watley Group Inc., dated January 28, 1999.
5 Opinion of Hartman & Craven LLP with respect to the legality of the
securities being registered hereby.
23.1 Consent of Ernst & Young LLP.
23.2 The consent of Hartman & Craven LLP is contained in its opinion
filed as Exhibit 5 to this registration statement.
- --------------
* Incorporated by reference from the Company's Registration Statement on Form
SB-2 (Reg. No. 333-71783).
**Incorporated by reference from the Company's Registration Statement on Form
8-A.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
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(1)To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
Provided, however, that paragraphs (a)(l)(i) and (a)(1)(ii) do not apply
if the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the registrant
pursuant to Section 13 or Section l 5(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(4) For purposes of determining any liability under the Act, 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(b) under the Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in
II-3
<PAGE>
the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to 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 for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, New York on May 26, 2000.
A.B. WATLEY GROUP.
By: /s/ Steven Malin
-----------------------------
Steven Malin
Chairman of the Board and Chief
Executive Officer
Each person whose signature appears below constitutes and appoints Steven
Malin and Harry Simpson, and each of them, his true and lawful attorney-in-fact
and agent, acting alone, with full powers of substitution and resubstitution,
for his or her and in his or her name, place and stead, in any and all
capacities, this Registration Statement, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, acting alone,
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Steven Malin Chairman of the Board, Chief Executive
- ---------------- Officer and Director (Principal
Steven Malin Executive Officer and Principal May 26, 2000
Financial Officer)
/s/ Joseph M. Ramos, Jr. Senior Vice President and Chief
- ------------------------ Financial Officer (Principal
Joseph M. Ramos, Jr. Accounting Officer) May 26, 2000
/s/ Harry Simpson Director May 26, 2000
- -----------------
Harry Simpson
/s/ Robert Malin Director May 26, 2000
- ----------------
Robert Malin
/s/ Michael B. Kraines Director May 26, 2000
- ----------------------
Michael B. Kraines
/s/ Elizabeth Chambers Director May 26, 2000
- ----------------------
Elizabeth Chambers
/s/ Mark Chambre Director May 26, 2000
- ----------------
Mark Chambre
/s/ Stanley Weinstein
- ---------------------
Stanley Weinstein Director May 26, 2000
</TABLE>
<PAGE>
EXHIBIT INDEX
.
EXHIBIT NO. DESCRIPTION
4.5 Warrant to Purchase Up to 87,500 Shares of Common Stock of
A.B. Watley Group Inc., dated October 2, 1998, as amended as
of October 2, 1998 and as of January 18, 1999.
4.6 Warrant to Purchase up to 80,000 Shares of Common Stock of
A.B. Watley Group, Inc., dated January 28, 1999.
5 Opinion of Hartman & Craven LLP with respect to the legality of
the securities being registered hereby.
23.1 Consent of Ernst & Young LLP.
23.2 The consent of Hartman & Craven LLP is contained in its opinion
filed as Exhibit 5 to this registration statement.
<PAGE>
Exhibit 4.5
Warrant to Purchase up to 87,500
Shares of Common Stock
WARRANT TO PURCHASE UP TO 87,500 SHARES OF THE COMMON STOCK
OF
INTERNET FINANCIAL SERVICES, INC.
and its wholly owned subsidiary, A.B. Watley, Inc.
This Warrant has not been registered under the Securities Act of 1933,
as amended (the "Securities Act") or any securities laws of the State of New
York. This Warrant has been and any shares of Common Stock issued upon exercise
thereof ("Warrant Shares") will be acquired for investment (and not with a view
toward distribution or resale) directly from Internet Financial Services, Inc.
and its wholly owned subsidiary A.B. Watley, Inc. (the "Company") in a
transaction not involving any public offering, and must be held indefinitely. No
sale, pledge or other transfer or disposition of the Warrant or Warrant Shares,
or of any interest therein, may be made unless in compliance with the terms
herein and unless and until (i) a registration statement under the Securities
Act has been filed with the Securities and Exchange Commission (the
"Commission") and pursuant to any applicable state securities laws and has
become effective with respect to such transfer or (ii) the Company shall have
received an opinion of counsel reasonably satisfactory to it that registration
under the Securities Act and applicable state law is not required with respect
to the intended transfer. Rule 144 will not be available for sales of the
Warrant or Warrant Shares. The above restrictions shall not apply to the
exercise of the right of redemption ("Put") as set forth in Paragraph 4 hereof.
Any purported sale, pledge or other transfer or disposition of this
Warrant or of the Warrant Shares in violation of any provision of this Warrant
and the above securities laws restrictions shall be null and void.
Dated: October 2, 1998
<PAGE>
This certifies that in consideration of the sum of $10.00 and other
good and valuable consideration paid by New York Small Business Venture Fund LLC
("Lender") to the Company the receipt of which is hereby acknowledged, Lender or
its registered assigns, is entitled to purchase, subject to the provisions of
this Warrant, for a period of five (5) years from the date hereof being the
closing of the certain loan from Lender to the Company in the amount of
$500,000. (the "Loan") made pursuant to a certain loan agreement (the "Loan
Agreement"), but not thereafter, from the Company, up to 87,500 shares of the
Company's Common Stock $.001 par value per share (the "Stock" or "Common Stock")
on a fully diluted basis (to be adjusted for all convertible securities and
options and warrants issued and which were issued at the time of issuance of
this Warrant), such shares being hereinafter referred to as the "Warrant
Shares". The Company stipulates that, prior to the date hereof, there are
5,137,500 shares of common stock issued and outstanding. The purchase price for
the Warrant Shares issuable hereunder is the lesser of $10. per share or the
price of any future offering by the Company up to the time of the exercise of
the Warrant as from time to time adjusted pursuant to the terms hereof (such
being hereinafter referred to as the "Warrant Price").
This Warrant is subject to the following terms and conditions:
1. Exercise of Warrant.
This Warrant may be exercised in whole or in part by Lender up to five
(5) years from the date hereof. The registered holder hereof must give written
notice at the offices of the Company of their intention to exercise the Warrant
in whole or in part. Upon delivery of this Warrant at the offices of the Company
or at such other address as the Company may designate by notice in writing to
the registered holder hereof with the Subscription Form
2
<PAGE>
annexed hereto duly executed, accompanied by payment of the Warrant Price for
the number of Warrant Shares purchased, the registered holder of this Warrant
shall be entitled to receive a certificate or certificates for the Warrant
Shares so purchased. The Warrant Shares deliverable hereunder shall, upon
payment therefor and issuance in accordance with this Warrant, be fully-paid and
non-assessable and the Company agrees that at all times during the term of this
Warrant it shall cause to be reserved for issuance such number of shares of its
Common Stock as shall be required for issuance and delivery upon exercise of
this Warrant. In the event of a partial exercise and purchase of Warrant Shares,
the Company shall issue an exchange Warrant that can thereafter be utilized to
exercise the purchase of the remaining Warrant Shares not as yet purchased,
which exchange Warrant shall be issued on the same terms and conditions as set
forth herein, but adjusted for the remaining number of shares that is subject to
the Warrant.
2. Transfer or Assignment of Warrant.
Any assignment or transfer of this Warrant which is permissible shall
be made by surrender of this Warrant at the offices of the Company or at such
other address as the Company may designate in writing to the registered holder
hereof with the Assignment Form annexed hereto duly executed and accompanied by
payment of any requisite transfer taxes and the Company shall, provided all
conditions with respect thereto as set forth herein have been complied with,
without charge, execute and deliver a new Warrant of like tenor and amount in
the name of the assignee.
3. Charges, Taxes and Expenses.
The issuance of certificates for shares of Common Stock upon any
exercise of this Warrant shall be made without charge to the holder hereof for
any stock transfer tax or other expense in respect to the issuance of such
certificates, all of such taxes and
3
<PAGE>
expenses shall be paid by the Company, and such certificates shall be issued
only in the name of the registered holder of this Warrant.
4. Lender's Right of Redemption of the Warrant or
Warrant Shares
Lender will have the right to sell the Warrant or the Warrant Shares to
the Company on the terms and conditions of this Section 4, such right being
hereinafter referred to as Lender's "Put". The Put may be exercised upon the
earlier of either (a) any time after five (5) years from the date hereof, in the
event there has not been a public offering of the Company, or (b) a default by
the Company under any of the terms, covenants and conditions of the Loan
documents beyond any applicable notice and cure provisions; in each case at a
per share price ("Put Price") based upon Lender's proportionate share of the
greater of the following Company valuation formulae:
a) cumulative net earnings after taxes ("Net Earnings") from the
date hereof to the time of the exercise of the Put; or
b) six (6) times the average pre-tax operating earnings
(operating earnings being equal to Net Earnings, plus
depreciation, taxes, amortization and interest expense) for
the two (2) full fiscal years immediately prior to the
exercise of the Put; or
c) six (6) times pre-tax operating earnings (operating earnings
being equal to Net Earnings, plus depreciation, taxes,
amortization and interest expense) for the full fiscal year
immediately prior to the exercise of the Put); or
d) an appraisal conducted by a professional valuation firm
appointed by mutual consent of Lender and the Company. In the
event mutual consent is not obtained, Lender and the Company
shall submit the issue of the selection of
4
<PAGE>
an appraiser to the American Arbitration Association and shall
abide by its decision. Both parties shall share equally the
cost of any such appraisal and arbitration.
The Put Price will be increased by the amount of the Warrant Price
actually paid if the Warrant or any portion thereof has been exercised into the
underlying common stock. The amount of the Put Price shall be determined as of
the date upon which the Put was exercised. The Put Price will be paid to Lender
in cash thirty (30) days after the Put exercise.
The Put will terminate upon the completion of an initial public
offering of the Company's securities.
5. The Make Up Provision
If the Company within six (6) months of the Put's exercise a) becomes a
party to any merger or consolidation where the Company is not the surviving
entity or where more than fifty percent (50%) of the Company's ownership is
transferred; or b) sells substantially all of its assets, liquidates or disposes
of a material part of its business; or c) files a registration statement for and
consummates a public offering, the Company will then be obligated to recompute
the proceeds which would have been due to Lender and remit the difference
between such recomputation and the Put Price to Lender in cash at the close of
the sale as described in Section 5 subsection (a) and (b) hereof or the close of
the public offering of the Company.
6. Certain Obligations of the Company.
The Company will not, by amendment of its Certificate of Incorporation
or through reorganization, consolidation, merger, dissolution or sale of assets,
or by any other voluntary act or deed, avoid or seek to avoid the performance or
observance of any of the
5
<PAGE>
covenants, stipulations or conditions to be performed or observed by the Company
hereunder. The Company represents that the shares issuable under this Warrant
will represent 87,500 shares of the Company as of the date hereof.
7. Anti Dilution Protection for Stock Threshold Amount
The Company and Lender agree that for the purposes of this Section 7
the terms "Stock Threshold Amount" as defined herein shall be $10. per share of
Common Stock . The Stock Threshold Amount and, in some cases, the number of
shares purchasable upon the exercise of this Warrant shall be subject to
adjustment from time to time upon the occurrence of certain events described in
this Section 7.
7.1 Adjustment of Stock Threshold Amount and Number of Shares.
7.1.1 Subdivision or Combination of Stock and Stock Dividend. In
case the Company shall at any time subdivide its outstanding shares of Stock
into a greater number of shares or declare a dividend upon its Stock payment
solely in shares of Stock, the Stock Threshold Amount in effect immediately
prior to such subdivision or declaration shall be proportionately reduced, and
the number of shares issuable upon exercise of the Warrant shall be
proportionately increased. Conversely, in case the outstanding shares of Stock
of the Company shall be combined into a smaller number of shares, the Stock
Threshold Amount in effect immediately prior to such combination shall be
proportionately increased, and the number of shares issuable upon exercise of
the Warrant shall be proportionately reduced.
7.1.2 Adjustment Due to Issuance of Shares. (a) If at any time or
from time to time after October 2, 1998 (the "Commencement Date"), the Company
shall issue or sell Additional Shares of Common Stock (as hereinafter defined)
other than as a dividend or other distribution on any class of stock and other
than upon a subdivision or combination of
6
<PAGE>
shares of Common Stock for a consideration per share less than the Stock
Threshold Amount, then forthwith upon such issue or sale, the Company shall
adjust Lender's exercise price to such consideration.
(b) For the purpose of this Section 7.1.2, the consideration
received by the Company for any issue or sale of securities shall (i) to the
extent it consists of cash, be computed as the gross offering price provided the
net amount of cash received is at least ninety (90%) percent of the gross
offering price in connection with such issue or sale. For the purposes of this
Section 7.1.2.(b), in determining the cash received pursuant to this sub-
section (i), the Company shall receive a credit in connection with an initial
public offering for expenses up to ten (10%) percent of the gross proceeds of
such offering. For example, if the gross offering price is $8.00 per share and
the Company's proceeds are $6.25 per share, an additional $.80 per share shall
be added such that the amount of cash received by the Company is deemed to be
$7.05 per share; (ii) to the extent it consists of a service or property other
than cash, be computed at the fair value of that service or property as
determined in good faith by the Board; and (iii) if Additional Shares of Common
Stock (as hereinafter defined), Convertible Securities (as hereinafter defined),
or rights or options to purchase either Additional Shares of Common Stock or
Convertible Securities are issued or sold together with other stock or
securities or other assets of the Company for a consideration that covers both,
be computed as the portion of the consideration so received that may be
reasonably determined in good faith by the Board to be allocable to such
Additional Shares of Common Stock, Convertible Securities or rights or options.
(c) For the purpose of the calculations provided in this
Section 7.1.2, if at any time or from time to time after the Commencement Date
the Company shall issue any rights or options for the purchase of, or stock or
other securities convertible into, Additional
7
<PAGE>
Shares of Common Stock (such convertible stock or securities being hereinafter
referred to as "Convertible Securities"), then, and in each case, if the
Effective Price (as hereinafter defined) of such rights, options or Convertible
Securities shall be less than the Stock Threshold Amount, the Company shall be
deemed to have issued at the time of the issuance of such rights or options or
Convertible Securities the maximum number of Additional Shares of Common Stock
issuable upon exercise thereof and to have received as consideration for the
issuance of such shares an amount equal to the total amount of the
consideration, if any, payable to the Company upon exercise or conversion of
such options or rights. "Effective Price" shall mean the quotient determined by
dividing the total of all of such consideration by such maximum number of
Additional Shares of Common Stock. No further adjustment shall be made as a
result of the actual issuance of Additional Shares of Common Stock on the
exercise of any such rights or options or the conversion of any such Convertible
Securities. If any such rights or options or the conversion privilege
represented by any such Convertible Securities shall expire without having been
exercised, the adjustment to the number of shares available hereunder upon the
issuance of such rights, options or Convertible Securities shall be readjusted
to the number of shares that would have been in effect had an adjustment been
made on the basis that the only Additional Shares of Common Stock so issued were
the Additional Shares of Common Stock, if any, actually issued or sold on the
exercise of such rights or options or rights of conversion of such Convertible
Securities, and such Additional Shares of Common Stock, if any, were issued or
sold for the consideration actually received by the Company for the granting of
all such rights or options, whether or not exercised, plus the consideration
received by issuing or selling the Convertible Securities actually converted
plus the consideration, if any, actually received by the Company on the
conversion of such Convertible Securities.
8
<PAGE>
(d) For the purpose of the calculations provided for in this
Section 7.1.2, if at any time or from time to time after the Commencement Date
the Company shall issue any rights or options for the purchase of Convertible
Securities, then, in each such case, if the Effective Price thereof is less than
the then Stock Threshold Amount, the Company shall be deemed to have issued at
the time of the issuance of such rights or options the maximum number of
Additional Shares of Common Stock issuable upon conversion of the total amount
of Convertible Securities covered by such rights or options and to have received
as consideration for the issuance of such Additional Shares of Common Stock an
amount equal to the amount of consideration, if any, received by the Company for
the issuance of such rights or options; plus the minimum amounts of
consideration, if any, payable to the Company upon the conversion of such
Convertible Securities. "Effective Price" shall mean the quotient determined by
dividing the total amount of such consideration by such maximum number of
Additional Shares of Common Stock. No further adjustment of such Stock Purchase
Price adjusted upon the issuance of such rights or options shall be made as a
result of the actual issuance of the Convertible Securities upon the exercise of
such rights or options or upon the actual issuance of Additional Shares of
Common Stock upon the conversion of such Convertible Securities.
The provisions of subsection (c) above for readjustment upon the
expiration of rights or options or the rights of conversion of Convertible
Securities, shall apply mutatis mutandis to the rights, options and Convertible
Securities referred to in this subsection (d).
(e) The term "Additional Shares of Common Stock" as used
herein shall mean all shares of Common Stock issued or deemed issued by the
Company after the Commencement Date whether or not subsequently reacquired or
retired by the Company, other than (i) shares of Common Stock issued upon
conversion of convertible securities or
9
<PAGE>
the exercise of warrants outstanding as of the Commencement Date; and (ii)
shares of Common Stock issued to employees, officers or directors pursuant to
any stock offering, plan or arrangement approved by the Board of Directors of
the Company.
7.2 Notice of Adjustment. Promptly after adjustment to provide for
the maintenance of the Stock Threshold for Lender's Warrant Shares or any
increase or decrease in the number of shares purchasable upon the exercise of
this Warrant, the Company shall give written notice thereof, by recognized
overnight mail, e.g. Federal Express, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company. The
notice shall be signed by the Company's chief financial officer and shall state
the effective date of the adjustment and the increase or decrease, if any, in
the number of shares purchasable at such price upon the exercise of this
Warrant, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based.
7.3 Other Notices. If at any time:
(a) the Company shall declare any cash dividend upon its
Stock;
(b) the Company shall declare any dividend upon its Stock
payable in stock (other than a dividend payable solely in shares of Stock) or
make any special dividend or other distribution to the holders of its Stock;
(c) there shall be any consolidation or merger of the Company
with another corporation, or a sale of all or substantially all of the Company's
assets to another corporation; or
(d) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company; then, in any one or more of said
cases, the Company shall give, by recognized overnight mail, e.g. Federal
Express, addressed to the registered holder
10
<PAGE>
of this Warrant at the address of such holder as shown on the books of the
Company, (i) at least 10 days' prior written notice of the date on which the
books of the Company shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in respect
of any such dissolution, liquidation or winding-up; (ii) at least 10 days' prior
written notice of the date on which the books of the Company shall close or a
record shall be taken for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger or sale, and (iii) in
the case of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, at least 10 days' written notice
of the date when the same shall take place. Any notice given in accordance with
clause (i) above shall also specify, in the case of any such dividend,
distribution or option rights, the date on which the holders of Stock shall be
entitled thereto. Any notice given in accordance with clause (iii) above shall
also specify the date on which the holders of Stock shall be entitled to
exchange their Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up, as the case may be. If the Holder of the Warrant does
not exercise this Warrant prior to the occurrence of an event described above,
except as provided in Sections 7.1 and 7.4, the Holder shall not be entitled to
receive the benefits accruing to existing holders of the Stock in such event.
7.4 Changes in Stock. In case at any time following the
Commencement Date, the Company shall be a party to any transaction (including,
without limitation, a merger, consolidation, sale of all or substantially all of
the Company's assets or recapitalization of the Stock) in which the previously
outstanding Stock shall be changed into or exchanged for different securities of
the Company or common stock or other securities of another corporation or
interests in a noncorporate entity or other property (including cash) or any
11
<PAGE>
combination of any of the foregoing (each such transaction being herein called
the "Transaction" and the date of consummation of the Transaction being herein
called the "Consummation Date"), then, as a condition of the consummation of the
Transaction, lawful and adequate provisions shall be made so that each Holder,
upon the exercise hereof at any time on or after the Consummation Date, shall be
entitled to receive; and this Warrant shall thereafter represent the right to
receive, in lieu of the Stock issuable upon such exercise prior to the
Consummation Date, the highest amount of securities or other property to which
such Holder would actually have been entitled as a stockholder upon the
consummation of the Transaction if such Holder had exercised such Warrant
immediately prior thereto. The provisions of this Section 7.4 shall similarly
apply to successive Transactions.
7.5 General
(a) Notwithstanding anything contained herein to the contrary, the
provisions of Section 7 shall only apply if more than 5% of the Company's Common
Stock in the aggregate is sold in a single or multiple transaction(s) for a
consideration at least 30% less than the Stock Threshold Amount .
(b) Notwithstanding anything herein to the contrary in this Warrant the
Company's obligation to issue shares due to any dilution of the Stock Threshold
Amount set forth above shall not alter or effect the right of Lender, its
successors and assigns to exercise this Warrant at the Warrant Price.
8. Come Along Rights and Tag Along Rights
A. In the event any shareholder(s) of the Company (the "Owner") offer
to sell all of their interests in the Company to a third party in an arms length
transaction, then Lender shall, at the written request of the Company's Board of
Directors, be required to sell to such
12
<PAGE>
third party the same portion of Lender's ownership interest, as the interests
being transferred bears to Lender's entire interest for the same purchase price
(on a pro rata basis) that is paid by such third party in such transaction (the
"Come Along Rights") in accordance with this Paragraph 8. Any offer by the Owner
to sell their interests in the Company shall be valid for a period of sixty (60)
days (the "Transfer Period"). The Come Along Rights shall operate as follows:
(a) if the purchase price is in excess of the formula employed in the Put and
all ownership interests are included in the sale, then Lender shall participate
pro rata as a seller in such transaction on the same terms and conditions; or
(b) if the purchase price is less than the Put Price, then Lender shall be
deemed to exercise its Put at the Put Price. The Come Along Rights shall
terminate in the event the Company consummates an initial public offering which
provides the Company with gross proceeds of $10. million or more.
B. Lender shall be entitled to participate pro rata on the same terms
and conditions in the event any shareholder of the Company owning a ten (10%)
percent or greater ownership interest (the "Principal Owner") of the Company
sells twenty (20%) percent or more of its ownership interest in the Company (the
"Tag Along Rights"), except for transfers among existing shareholders or their
direct family, viz. mother, father, sister, brother and children, and open
market sales provided insiders notify Lender of their intent to sell, which
shall be exempt. Any offer by a Principal Owner to sell its interests in the
Company shall be valid for the Transfer Period. The selling shareholder(s) shall
notify Lender in writing of the terms of any offer within three (3) business
days of such offer having been agreed to by the selling shareholder(s) and a
third party in writing. Lender may exercise its Tag Along Rights by delivering
written notice of such exercise to the selling shareholder(s) at any time within
fifteen (15) days after commencement of the Transfer
13
<PAGE>
Period. The selling shareholder(s) shall delay the consummation of the proposed
sale for the lesser of such fifteen (15) day period or until all of the
shareholders entitled to Tag Along Rights otherwise consent in writing. The
Transfer Period shall begin upon the receipt by Lender of such written notice
from the selling shareholder(s). The Tag Along Rights shall terminate in the
event the Company consummates an initial public offering which provides the
Company with gross proceeds of $10 million or more.
9. Registration Rights
In the event the Company proposes to sell any security from and after
the date hereof that will be registered with the Commission under the Securities
Act in a public offering except on Form S-8 or just for the purpose of employee
benefits, then in such event, the Company agrees to use best efforts to "piggy
back" a registration of the Warrant Shares, as the case may be, so that the
Warrant Shares become publicly registered securities in such registration. The
aforesaid registration shall be at the sole cost and expense of the Company.
Upon registration of the Warrant Shares, the holder shall be entitled to
dispose, sell, or transfer the Warrant Shares as a publicly registered security,
but not earlier than thirty (30) days subsequent to the effectiveness of such
Registration Statement. Notwithstanding the foregoing, if an underwriter of such
registered offering determines that the inclusion of the Warrant Shares in such
offering would be detrimental to the Company, or the underwriter requests a one
(1) year holdback in an initial public offering, then Lender hereby consents to
such one (1) year holdback and the underwriter and the Company shall have the
right to exclude some or all of such securities from the offering, provided that
such exclusion is applied pro rata to all of the holders of securities wishing
to participate in the offering. Lender shall be further entitled to all "piggy
back" and demand registration rights afforded any other shareholder.
14
<PAGE>
10. Registration Procedures
Company Undertakings. In order to fulfill its agreement to use its best
efforts to effect the registration of the Warrant Shares under the Securities
Act, the Company shall (except as otherwise provided in this Agreement), as
expeditiously as possible:
10.1.1 with respect to the obligations of the Company under Section 9
above, prepare and file with the Commission a Registration Statement or any
amendment thereto with respect to such securities on or before the expiration of
thirty (30) days from receipt of notice, and thereafter to use its best efforts
to cause such Registration Statement to become effective and remain effective
until all the Warrant Shares are sold or become capable of being publicly sold
without registration under the Securities Act;
10.1.2 prepare and file with the Commission such amendments and
supplements to the Registration Statement and the prospectus used in connection
therewith as may be necessary to comply with the provisions of the Securities
Act with respect to the sale or other disposition of all the Warrant Shares.
10.1.3 furnish to Lender such numbers of copies of a summary prospectus
or other prospectus, including a preliminary prospectus or any amendment or
supplement to any prospectus, in conformity with the requirements of the
Securities Act, and such other documents as Lender may reasonably request in
order to facilitate the public sale of the Warrant Shares owned by Lender;
10.1.4 use its best efforts to register and qualify the Warrant Shares
covered by the Registration Statement under such other securities or blue sky
laws of such jurisdictions as Lender shall reasonably request, and do any and
all other acts and things which may be necessary or advisable to enable Lender
to consummate the public sale or other disposition in such jurisdictions, except
that the Company shall not for any such purpose be required to
15
<PAGE>
qualify to do business as a foreign corporation in any jurisdiction wherein it
is not so qualified or to file therein any general consent to service of
process;
10.1.5 otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering the
period of at least twelve months, beginning with the first fiscal quarter
beginning after the effective date of the registration statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the Securities Act;
10.1.6 notify Lender at any time when a prospectus relating thereto
covered by such Registration Statement is required to be delivered under the
Securities Act, of the happening of any event of which it has knowledge as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
10.2 Expenses. All expenses incurred in any registration of the
Warrant Shares under this Warrant shall be paid by the Company, including,
without limitation, (i) printing expenses, fees and disbursements of counsel for
the Company, (ii) expenses of any special audits to which the Company shall
agree or which shall be necessary to comply with governmental requirements in
connection with any such registration, (iii) all registration and filing fees
for the Warrant Shares under federal and state securities laws, and (iv)
expenses of complying with the securities or blue sky laws of any jurisdictions;
provided, however, the Company shall not be liable for (a) any discounts or
commissions due to any underwriter on account of the sale of the Warrant Shares;
(b) any stock transfer taxes incurred with respect to Warrant Shares sold in the
offering or (c) the fees and expenses of counsel for any
16
<PAGE>
holder of the Warrant or Warrant Shares, provided that the Company will pay the
costs and expenses of Company counsel when the Company's counsel is representing
any or all owners of Warrant Shares or Lender.
10.3 Indemnification.
10.3.1 The Company's Indemnity. Without limitation of any other
indemnity provided to Lender or other owner of Warrant Shares, in connection
with an Offering referred to in Section 10, to the extent permitted by law, the
Company shall indemnify and hold harmless such Person, the affiliates, officers,
directors and partners of such Person, any underwriter (as defined in the
Securities Act) for such Person, and each person, if any, who controls such
Person or underwriter (within the meaning of the Securities Act or the
Securities Exchange Act of 1934, as amended), against any losses, claims,
damages or liabilities (joint or several) to which they may become subject under
the Securities Act or other federal or state law, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any of the following statements, omissions or violations
(collectively a "Violation"):
(i) any untrue statement or alleged untrue statement of a material fact
contained in a registration statement filed pursuant to Section 10, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto,
(ii) the omission or alleged omission to state therein a material fact
required to be stated therein, or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, or
(iii) any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any state securities law or any rule or
regulation promulgated under the Securities Act, the Exchange Act or any state
securities law, in connection with a
17
<PAGE>
registration of Warrant Shares required under Section 9.
The Company shall reimburse Lender, its affiliates, officers or directors or
partners, underwriters or controlling persons for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
Company shall not be liable to any of the foregoing in any such case for any
such loss, claim, damage, liability or action to the extent that it arises out
of or is based upon a violation which occurs in reliance upon and in conformity
with written information furnished expressly for use in connection with such
registration by any such holder, owner, or any other affiliate, officer,
director, partner, underwriter, or controlling person thereof.
10.3.2 Lender's Indemnity. Lender shall indemnify and hold harmless
the Company, its affiliates, officers, directors, shareholders and
representatives, any underwriter (as defined in the Securities Act) and each
person, if any, who controls the Company or the underwriter (within the meaning
of the Securities Act or the Exchange Act), against any losses, claims, damages,
or liabilities (joint or several) to which they may become subject under the
Securities Act, the Exchange Act or other federal or state laws, insofar as such
losses, claims, damages or liabilities (or actions and respect thereof)
including, without limitation, reasonable attorneys fees or expenses, arise out
of or are based upon any statements or information provided by Lender to the
Company in connection with the offer or sale of the Warrant Shares.
10.4 Notice; Right to Defend. Promptly after receipt by an
indemnified party under this Section 10 of a notice of the commencement of any
action (including any governmental action), such indemnified party shall, if a
claim in respect thereof is to be made against any
18
<PAGE>
indemnifying party under this Section 10, deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying party shall have
the right to participate in the defense of such action. If the indemnifying
party agrees in writing that it will be responsible for any costs, expenses,
judgments, damages and losses incurred by the indemnified party with respect to
such claim, then the indemnifying party, jointly with any other indemnifying
party similarly noticed, shall have the right to assume the defense of such
action with counsel mutually satisfactory to the parties; provided, however,
that an indemnified party shall have the right to retain its own counsel, with
the fees and expenses to be paid by the indemnifying party, if the indemnified
party reasonably believes that representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall relieve such indemnifying party of any
liability to the indemnified party under this Section 10 only if and to the
extent that such failure is prejudicial to its ability to defend such action,
and the omission so to deliver written notice to the indemnifying party will not
relieve it of any liability that it may have to any indemnified party otherwise
than under this Section 10.
10.5 Contribution. If the indemnification rights provided for in
this Section 10 are held by a court of competent jurisdiction to be unavailable
to an indemnified party with respect to any loss, liability, claim, damage or
expense referred to therein, then the indemnifying party, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of such loss, liability,
claim, damage or expense in such proportion as is appropriate to reflect the
relative
19
<PAGE>
fault of the indemnifying party on the one hand and of the indemnified party on
the other hand in connection with the statements or omissions which resulted in
such loss, liability, claim, damage or expense as well as any other relevant
equitable considerations. The relative fault of the indemnifying party and the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. Notwithstanding the foregoing, the amount Lender shall be
obligated to contribute pursuant to this Section 10.5 shall be limited to an
amount equal to the proceeds to Lender of the Warrant Shares sold pursuant to
the registration statement which gives rise to such obligation to contribute
(less the aggregate amount of any damages which Lender has otherwise been
required to pay in respect of such loss, claim, damage, liability or action or
any substantially similar loss, claim, damage, liability or action arising from
the sale of such Warrant Shares).
The indemnification and contribution rights provided by this Section 10
shall be continuing rights and shall survive the registration and sale of any
securities by any person entitled to indemnification or contribution hereunder
and shall survive the expiration or termination of this Agreement.
11. Warrant for Additional Common Stock
In the event the Company fails to achieve ninety percent (90%) of the
threshold points of revenue or pre-tax income in accordance with Exhibit A
attached hereto and made a part hereof for calendar years ending 1998, 1999 and
2000, Lender shall receive an additional warrant for 37,500 shares (the
"Additional Shares") of the Company on the same
20
<PAGE>
terms and conditions contained herein, provided, however, that if within three
(3) years from the date hereof there is an initial public offering of the
Company's stock which provides the Company with proceeds being the gross
offering price provided the net amount of cash received is at least ninety (90%)
percent of the gross offering price, paid to the Company in connection with such
issue or sale of $10. million or more, the Additional Shares shall be 18,750.
For the purposes of this Section 11, in determining the cash received pursuant
to this section, the Company shall receive a credit in connection with an
initial public offering for expenses up to ten (10%) percent of the gross
proceeds of such offering. For example, if the gross offering price is $8.00 per
share and the Company's proceeds are $6.25 per share, an additional $.80 per
share shall be added such that the amount of cash received by the Company is
deemed to be $7.05 per share.
12. Miscellaneous.
(A) The terms of this Warrant shall be binding upon and shall inure to the
benefit of any successors or permitted assigns of the Company and of the holder
or holders hereof and of the Warrant Shares.
(B) No holder of this Warrant, as such, shall be entitled to vote or receive
dividends or be deemed to be a stockholder of the Company for any purpose, nor
shall anything contained in this Warrant be construed to confer upon the holder
of this Warrant, as such, any rights of a stockholder of the Company or any
right to vote, give or withhold consent to any corporate action, receive
dividends or subscription rights, or otherwise.
(C) Receipt of this Warrant or the Warrant Shares shall constitute agreement to
all the terms and conditions contained herein including, but not limited to, the
securities laws restrictions, and shall be deemed a representation of investment
intent without a view toward distribution or resale.
21
<PAGE>
(D) This Warrant and the performance of the parties hereunder shall be construed
and interpreted in accordance with the laws of the State of New York and New
York County shall have exclusive jurisdiction with respect to all controversies
and disputes arising hereunder.
(E) All notices permitted or required herein shall be given as provided in the
Loan Agreement.
13. Disposition of this Warrant and the Warrant Shares
and Registration Under Securities Laws
(A) The holder of this Warrant or the Warrant Shares, by acceptance hereof
agrees, prior to the disposition of any such Warrant or Warrant Shares, to give
written notice to the Company expressing such holder's intention to effect such
disposition and describing the manner thereof.
(B) The holder also understands (i) that the Warrant and the Warrant Shares have
not been and will not be registered under the Securities Act or any applicable
state securities law and that the Company is and will be relying upon an
exemption from the registration requirements providing for issuance of
securities not involving any public offering, and (ii) that the Company has
relied upon the fact that the Warrant and Warrant Shares will be held for
investment and without a view to distribution. The holder confirms to the
Company that it is acquiring the Warrant and the Warrant Shares for its own
account for investment and not with a view to the resale or distribution
thereof, however that Lender shall be entitled to assign any portion of the
Warrant or Warrant Shares to any party who participates with Lender
("Participant") in this transaction or any member of Lender without any such
transfer being deemed a prohibited distribution of the Warrant or Warrant
Shares, provided that nothing herein shall be interpreted as an opinion that
such transfer complies with applicable federal or state securities laws. The
Company acknowledges that each Participant shares
22
<PAGE>
in the same rights or obligations that Lender has obtained hereunder to the
extent of their respective participation interests in the event they were to
become a registered holder of their respective participation interest.
(C) Any substitute Warrant and each certificate for the Warrant Shares shall
contain a legend on the face thereof, in form and substance satisfactory to
counsel for the Company, setting forth the restrictions on transfer thereof
contained in this Warrant (including, but not limited to, the Put, and the above
securities law restrictions).
(D) Prior to the date hereof, Lender has made an investigation of the Company
and its business and has had available to it all information with respect
thereto which it needed to make an informed investment decision.
14. Amendment to Warrant.
Notwithstanding any of the provisions of this Warrant to the contrary,
any of the provisions of this Warrant may be changed by a writing executed by
the Company and by the holder hereof.
15. Board Visitation
Lender shall be given notice of all meetings of the Board of Directors,
receive copies of minutes of all meetings of the Board of Directors and Lender
shall be entitled to send an observer to all meetings of the Board of Directors
of the Company from closing of the Loan until one (1) year following the
exercise of the Warrant hereunder.
23
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officers and its corporate seal to be affixed hereto.
INTERNET FINANCIAL SERVICES, INC.
By: /s/ Steven Malin
--------------------------------
Steven Malin,
Chief Executive Officer
Attest:
- ---------------------------------
Agreed to and Accepted:
NEW YORK SMALL BUSINESS
VENTURE FUND LLC
By: /s/ Howard Sommer
-----------------------------
Howard Sommer, Vice President
24
<PAGE>
SUBSCRIPTION FORM
(To be executed by New York Small Business
Venture Fund LLC if they desire to
exercise the Warrant)
TO: INTERNET FINANCIAL SERVICES, INC.
The undersigned hereby exercises the right to purchase _____ shares of
the Common Stock of Internet Financial Services, Inc. evidenced by the attached
Warrant and herewith makes payment of the purchase price of such shares in full,
all in accordance with the conditions and provisions thereof.
The undersigned requests that certificates for such shares be issued
pursuant to the Warrant in the name of:
-----------------------------------------------------------------------
Name
-----------------------------------------------------------------------
Address
-----------------------------------------------------------------------
Dated:
-----------------------------------------------------------------------
Signature
-----------------------------------------------------------------------
Name of Registered Holder
(Please Print)
-----------------------------------------------------------------------
<PAGE>
EXERCISE OF WARRANTS EVIDENCED BY THIS WARRANT CERTIFICATE
Number of Shares
of Stock for Date of
which exercised Exercise Notation Made by
- --------------- -------- ----------------
<PAGE>
ASSIGNMENT FORM
(To be executed by Lender in the event of an Assignment
or Transfer of the Warrant)
TO: INTERNET FINANCIAL SERVICES, INC.
The undersigned hereby assigns/transfers the Warrant to:
-----------------------------------------------------------------------
Name
-----------------------------------------------------------------------
Address
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Signature
-----------------------------------------------------------------------
Name of Registered Holder
(Please Print)
Dated:
<PAGE>
AMENDMENT TO WARRANT
Amendment dated as of October 2, 1998 to a certain Warrant
issued by Internet Financial Services, Inc. (the "Company") to New York Small
Business Venture Fund LLC ("Lender") dated as of October 2, 1998 (the "Original
Warrant").
W I T N E S S E T H :
1. The provisions of the Original Warrant are hereby
incorporated by reference and made a part hereof. Except as otherwise provided,
all definitions in the Original Warrant shall have the same meanings when used
herein.
2. This Amendment is being entered into in contemplation of
the Company's initial public offering ("IPO") of its shares of common stock
("Stock") proposed to be underwritten by Whale Securities Co., L.P. ("Whale"),
as underwriter, as substantially outlined in the letter of intent between the
Company and Whale dated July 31, 1998. If such underwriting is not consummated
on or before March 31, 1999, this Amendment shall be void and of no effect.
3. Based on the assumption that the Company's Stock will
undergo a reverse split of approximately .675841:1, the number of shares of
Stock covered by the Warrant on the date of the IPO shall be 127,500 shares and
the Warrant Price shall be the IPO price, presently contemplated to be $8.00 per
share of Stock, notwithstanding the terms of the Original Warrant.
4. Section 7.1.2 of the Original Warrant is eliminated in its
entirety.
5. Section 11 of the Original Warrant, and Exhibit A thereto,
is eliminated in its entirety.
6. Except as hereby modified, the terms of the Original
Warrant remain in effect. In the event of any conflict between the terms of the
Original Warrant and this Amendment, the terms of the Original Warrant shall
prevail.
<PAGE>
7. Lender agrees to sign the attached letter providing for the
lock-up of Stock provided that the Company insiders, the underwriter and similar
parties receiving stock or options in connection with a financing agree to a
similar lockup, and any amendments thereto required by the NASD or other
regulatory authority.
IN WITNESS WHEREOF, this Amendment has been entered into on
the __ day of October, 1998, effective as October 2, 1998.
INTERNET FINANCIAL SERVICES, INC.
By: /s/ Steven Malin
-----------------------
Steven Malin, Chairman and
Chief Executive Officer
Agreed to and Accepted by:
NEW YORK SMALL BUSINESS VENTURE LLC
By: /s/ Howard Sommer
------------------------------
Howard Sommer, Vice President
<PAGE>
SECOND AMENDMENT TO WARRANT
Second Amendment ("Second Amendment") dated as of January 18,
1999 to a certain Warrant issued by Internet Financial Services, Inc. (the
"Company") to New York Small Business Venture Fund LLC ("Lender") dated as of
October 2, 1998 as amended by an Amendment dated as of October 2, 1998 (the
Warrant as heretofore amended being called the "Current Warrant").
W I T N E S S E T H :
1. The provisions of the Current Warrant are hereby
incorporated by reference and made a part hereof. Except as otherwise provided,
all definitions in the Current Warrant shall have the same meanings when used
herein.
2. This Second Amendment being entered into is in
contemplation of the Company's initial public offering ("IPO") of its shares of
common stock ("Stock") proposed to be underwritten by Whale Securities Co., L.P.
("Whale"), as underwriter, as substantially outlined in the letter of intent
between the Company and Whale dated July 31, 1998. If such underwriting is not
consummated on or before May 19, 1999, this Second Amendment shall be void and
of no effect.
3. Based on the assumption that the Company's Stock will not
undergo a reverse split incident to, or in preparation for, the IPO, the number
of shares of Stock covered by the Warrant on the date of the IPO shall be
191,250 shares and the Warrant Price shall be the IPO price, presently
contemplated to be $6.00 per share of Stock, notwithstanding the terms of the
Current Warrant.
4. Except as hereby modified, the terms of the Current Warrant
remain in effect. In the event of any conflict between the terms of the Current
Warrant and this Amendment, the terms of this Amendment shall prevail.
5. Lender agrees to sign the attached letter providing for the
lock-up of Stock provided that the Company insiders, the underwriter and similar
parties receiving stock or options in connection with a financing agree to a
similar lockup, and any amendments thereto
<PAGE>
required by the NASD or other regulatory authority.
IN WITNESS WHEREOF, this Amendment has been entered into on
and as of the 18th day of January, 1999.
INTERNET FINANCIAL SERVICES, INC.
By: /s/ Steven Malin
--------------------------------
Steven Malin, Chairman and
Chief Executive Officer
Agreed to and Accepted by:
NEW YORK SMALL BUSINESS VENTURE LLC
By: /s/ Howard Sommer
-------------------------------
Howard Sommer, Vice President
<PAGE>
Exhibit 4.6
Warrant to Purchase up to 80,000
Shares of Common Stock
WARRANT TO PURCHASE UP TO 80,000 SHARES OF THE COMMON STOCK
OF
INTERNET FINANCIAL SERVICES INC.
and its wholly owned subsidiary, A.B. Watley, Inc.
This Warrant has not been registered under the Securities Act of 1933,
as amended (the "Securities Act") or any securities laws of the State of New
York. This Warrant has been and any shares of Common Stock issued upon exercise
thereof ("Warrant Shares") will be acquired for investment (and not with a view
toward distribution or resale) directly from Internet Financial Services Inc.
and its wholly owned subsidiary A.B. Watley, Inc. (the "Company") in a
transaction not involving any public offering, and must be held indefinitely. No
sale, pledge or other transfer or disposition of the Warrant or Warrant Shares,
or of any interest therein, may be made unless in compliance with the terms
herein and unless and until (i) a registration statement under the Securities
Act has been filed with the Securities and Exchange Commission (the
"Commission") and pursuant to any applicable state securities laws and has
become effective with respect to such transfer or (ii) the Company shall have
received an opinion of counsel reasonably satisfactory to it that registration
under the Securities Act and applicable state law is not required with respect
to the intended transfer. Rule 144 will not be available for sales of the
Warrant or Warrant Shares. The above restrictions shall not apply to the
exercise of the right of redemption ("Put") as set forth in Paragraph 4 hereof.
Any purported sale, pledge or other transfer or disposition of this
Warrant or of the Warrant Shares in violation of any provision of this Warrant
and the above securities laws restrictions shall be null and void.
Dated: January 28, 1999
<PAGE>
This certifies that in consideration of the sum of $10.00 and other
good and valuable consideration paid by New York Community Investment Company
L.L.C. ("Lender") to the Company the receipt of which is hereby acknowledged,
Lender or its registered assigns, is entitled to purchase, subject to the
provisions of this Warrant, for a period of five (5) years from the date hereof
being the closing of the certain loan from Lender to the Company in the amount
of $400,000. (the "Loan") made pursuant to a certain loan agreement (the "Loan
Agreement"), but not thereafter, from the Company, up to 80,000 shares of the
Company's Common Stock $.001 par value per share (the "Stock" or "Common
Stock"), such shares being hereinafter referred to as the "Warrant Shares". The
Company stipulates that, prior to the date hereof, there are 5,416,196 shares of
Common Stock issued and outstanding (including certain shares issuable upon the
closing of the Company's initial public offering of the Company's securities (an
"IPO"), but not including options and warrants to purchase an aggregate of
1,206,400 shares of Common Stock). The purchase price for the Warrant Shares
issuable hereunder is the price per share as determined in connection with the
Company's IPO or if there is no IPO, the price per share determined based upon a
$30 million valuation of the Company before the Loan and before the additional
capital infusion of $600,000. by investors in connection with the 1999 Private
Placement (as defined herein) up to the time of the exercise of the Warrant, as
from time to time adjusted pursuant to the terms hereof (such being hereinafter
referred to as the "Warrant Price").
This Warrant is subject to the following terms and conditions:
<PAGE>
1. Exercise of Warrant.
This Warrant may be exercised in whole or in part by Lender or the
holder of this Warrant up to five (5) years from the date hereof. The registered
holder hereof must give written notice at the offices of the Company of their
intention to exercise the Warrant in whole or in part. Upon delivery of this
Warrant at the offices of the Company or at such other address as the Company
may designate by notice in writing to the registered holder hereof with the
Subscription Form annexed hereto duly executed, accompanied by payment of the
Warrant Price for the number of Warrant Shares purchased, the registered holder
of this Warrant shall be entitled to receive a certificate or certificates for
the Warrant Shares so purchased. The Warrant Shares deliverable hereunder shall,
upon payment therefor and issuance in accordance with this Warrant, be
fully-paid and non-assessable and the Company agrees that at all times during
the term of this Warrant it shall cause to be reserved for issuance such number
of shares of its Common Stock as shall be required for issuance and delivery
upon exercise of this Warrant. In the event of a partial exercise and purchase
of Warrant Shares, the Company shall issue an exchange Warrant that can
thereafter be utilized to exercise the purchase of the remaining Warrant Shares
not as yet purchased, which exchange Warrant shall be issued on the same terms
and conditions as set forth herein, but adjusted for the remaining number of
shares that is subject to the Warrant.
2. Transfer or Assignment of Warrant.
Any assignment or transfer of this Warrant which is permissible shall
be made by surrender of this Warrant at the offices of the Company or at such
other address as the Company may designate in writing to the registered holder
hereof with the Assignment Form annexed hereto duly executed and accompanied by
payment of any requisite transfer
<PAGE>
taxes and the Company shall, provided all conditions with respect thereto as set
forth herein have been complied with, without charge, execute and deliver a new
Warrant of like tenor and amount in the name of the assignee.
3. Charges, Taxes and Expenses.
The issuance of certificates for shares of Common Stock upon any
exercise of this Warrant shall be made without charge to the holder hereof for
any stock transfer tax or other expense in respect to the issuance of such
certificates, all of such taxes and expenses shall be paid by the Company, and
such certificates shall be issued only in the name of the registered holder of
this Warrant.
4. Lender's Right of Redemption of the Warrant or Warrant Shares.
Lender or the holder of this Warrant will have the right to sell the
Warrant or the Warrant Shares to the Company on the terms and conditions of this
Section 4, such right being hereinafter referred to as Lender's or the holder of
this Warrant's "Put". The Put may be exercised upon the earlier of either (a)
any time after five (5) years from the date hereof, in the event there has not
been an IPO, or (b) a default by the Company under any of the terms, covenants
and conditions of the Loan documents beyond any applicable notice and cure
provisions; in each case at a per share price ("Put Price") based upon Lender's
or the holder of this Warrant's proportionate share of the greater of the
following Company valuation formulae:
i) cumulative net earnings after taxes ("Net Earnings") from the
date hereof to the time of the exercise of the Put; or
ii) six (6) times the average pre-tax operating earnings
(operating earnings being equal to Net Earnings, plus
depreciation, taxes, amortization and interest expense) for
the two (2) full fiscal years immediately prior to the
<PAGE>
exercise of the Put; or
iii) six (6) times pre-tax operating earnings (operating earnings
being equal to Net Earnings, plus depreciation, taxes,
amortization and interest expense) for the full fiscal year
immediately prior to the exercise of the Put); or
iv) an appraisal conducted by a professional valuation firm
appointed by mutual consent of Lender or the holder of this
Warrant and the Company. In the event mutual consent is not
obtained, Lender or the holder of this Warrant and the Company
shall submit the issue of the selection of an appraiser to the
American Arbitration Association and shall abide by its
decision. Both parties shall share the cost of any such
appraisal and arbitration equally.
The Put Price will be increased by the amount of the Warrant Price
actually paid if the Warrant or any portion thereof has been exercised into the
underlying Common Stock. The amount of the Put Price shall be determined as of
the date upon which the Put was exercised. The Put Price will be paid to Lender
or the holder of this Warrant in cash thirty (30) days after the Put exercise.
The Put will terminate upon the completion of an IPO.
5. The Make Up Provision
If the Company within six (6) months of the Put's exercise a) becomes a
party to any merger or consolidation where the Company is not the surviving
entity or where more than fifty percent (50%) of the Company's ownership is
transferred; or b) sells substantially all of its assets, liquidates or disposes
of a material part of its business; or c) files a registration statement for and
consummates a public offering, the Company will then be obligated to recompute
the proceeds which would have been due to Lender or the holder of this Warrant
and remit the difference between such recomputation and the Put Price to Lender
or the
<PAGE>
holder of this Warrant in cash at the close of the sale as described in Section
4 subsection (a) and (b) hereof or the close of the public offering of the
Company.
6. Certain Obligations of the Company.
The Company will not, by amendment of its Certificate of Incorporation
or through reorganization, consolidation, merger, dissolution or sale of assets,
or by any other voluntary act or deed, avoid or seek to avoid the performance or
observance of any of the covenants, stipulations or conditions to be performed
or observed by the Company hereunder. The Company represents that the shares
issuable under this Warrant will represent 80,000 shares of the Company as of
the date hereof.
7. Anti Dilution Protection for Stock Threshold Amount
A. The Company and Lender or the holder of this Warrant agree that for
the purposes of this Section 7 the terms "Stock Threshold Amount" as defined
herein shall be $6.00 per share of Common Stock . The Stock Threshold Amount
and, in some cases, the number of shares purchasable upon the exercise of this
Warrant shall be subject to adjustment from time to time upon the occurrence of
certain events described in this Section 7.
B. Notwithstanding anything to the contrary contained herein, the
Lender or the holder of this Warrant acknowledges that the Company intends to
issue up to 221,500 shares of Common Stock at a purchase price of $4.80 per
share in a private placement transaction (the "1999 Private Placement"). The
Lender or the holder of this Warrant agrees that the issuance of shares of
Common Stock in the 1999 Private Placement shall not require an adjustment to
the number of shares purchasable upon exercise of this Warrant pursuant to this
Section 7.
7.1 Adjustment of Stock Threshold Amount and Number of Shares.
<PAGE>
7.1.1 Subdivision or Combination of Stock and Stock Dividend. In
case the Company shall at any time subdivide its outstanding shares of Stock
into a greater number of shares or declare a dividend upon its Stock payment
solely in shares of Stock, the Stock Threshold Amount in effect immediately
prior to such subdivision or declaration shall be proportionately reduced, and
the number of shares issuable upon exercise of the Warrant shall be
proportionately increased. Conversely, in case the outstanding shares of Stock
of the Company shall be combined into a smaller number of shares, the Stock
Threshold Amount in effect immediately prior to such combination shall be
proportionately increased, and the number of shares issuable upon exercise of
the Warrant shall be proportionately reduced.
7.1.2 Adjustment Due to Issuance of Shares. (a) If at any time or
from time to time after January 28, 1999 (the "Commencement Date"), the Company
shall issue or sell Additional Shares of Common Stock (as hereinafter defined)
other than as a dividend or other distribution on any class of stock and other
than upon a subdivision or combination of shares of Common Stock for a
consideration per share less than the Stock Threshold Amount, then forthwith
upon such issue or sale, the Company shall adjust Lender's or the holder of this
Warrant's exercise price to such consideration.
(b) For the purpose of this Section 7.1.2, the consideration
received by the Company for any issue or sale of securities shall (i) to the
extent it consists of cash, be computed as the gross offering price provided the
net amount of cash received is at least ninety (90%) percent of the gross
offering price in connection with such issue or sale. For the purposes of this
Section 7.1.2.(b), in determining the cash received pursuant to this sub-
section (i), the Company shall receive a credit in connection with an IPO for
expenses up to ten (10%) percent of the gross proceeds of such offering. For
example, if the gross offering
<PAGE>
price is $8.00 per share and the Company's proceeds are $6.25 per share, an
additional $.80 per share shall be added such that the amount of cash received
by the Company is deemed to be $7.05 per share; (ii) to the extent it consists
of a service or property other than cash, be computed at the fair value of that
service or property as determined in good faith by the Board; and (iii) if
Additional Shares of Common Stock, Convertible Securities (as hereinafter
defined), or rights or options to purchase either Additional Shares of Common
Stock or Convertible Securities are issued or sold together with other stock or
securities or other assets of the Company for a consideration that covers both,
be computed as the portion of the consideration so received that may be
reasonably determined in good faith by the Board to be allocable to such
Additional Shares of Common Stock, Convertible Securities or rights or options.
(c) For the purpose of the calculations provided in this
Section 7.1.2, if at any time or from time to time after the Commencement Date
the Company shall issue any rights or options for the purchase of, or stock or
other securities convertible into, Additional Shares of Common Stock (such
convertible stock or securities being hereinafter referred to as "Convertible
Securities"), then, and in each case, if the Effective Price (as hereinafter
defined) of such rights, options or Convertible Securities shall be less than
the Stock Threshold Amount, the Company shall be deemed to have issued at the
time of the issuance of such rights or options or Convertible Securities the
maximum number of Additional Shares of Common Stock issuable upon exercise
thereof and to have received as consideration for the issuance of such shares an
amount equal to the total amount of the consideration, if any, payable to the
Company upon exercise or conversion of such options or rights. "Effective Price"
shall mean the quotient determined by dividing the total of all of such
consideration by such maximum number of Additional Shares of Common Stock. No
<PAGE>
further adjustment shall be made as a result of the actual issuance of
Additional Shares of Common Stock on the exercise of any such rights or options
or the conversion of any such Convertible Securities. If any such rights or
options or the conversion privilege represented by any such Convertible
Securities shall expire without having been exercised, the adjustment to the
number of shares available hereunder upon the issuance of such rights, options
or Convertible Securities shall be readjusted to the number of shares that would
have been in effect had an adjustment been made on the basis that the only
Additional Shares of Common Stock so issued were the Additional Shares of Common
Stock, if any, actually issued or sold on the exercise of such rights or options
or rights of conversion of such Convertible Securities, and such Additional
Shares of Common Stock, if any, were issued or sold for the consideration
actually received by the Company for the granting of all such rights or options,
whether or not exercised, plus the consideration received by issuing or selling
the Convertible Securities actually converted plus the consideration, if any,
actually received by the Company on the conversion of such Convertible
Securities.
(d) For the purpose of the calculations provided for in this
Section 7.1.2, if at any time or from time to time after the Commencement Date
the Company shall issue any rights or options for the purchase of Convertible
Securities, then, in each such case, if the Effective Price thereof is less than
the then Stock Threshold Amount, the Company shall be deemed to have issued at
the time of the issuance of such rights or options the maximum number of
Additional Shares of Common Stock issuable upon conversion of the total amount
of Convertible Securities covered by such rights or options and to have received
as consideration for the issuance of such Additional Shares of Common Stock an
amount equal to the amount of consideration, if any, received by the Company for
the issuance of such rights or options; plus the minimum amounts of
consideration, if any, payable to the
<PAGE>
Company upon the conversion of such Convertible Securities. "Effective Price"
shall mean the quotient determined by dividing the total amount of such
consideration by such maximum number of Additional Shares of Common Stock. No
further adjustment of such stock purchase price adjusted upon the issuance of
such rights or options shall be made as a result of the actual issuance of the
Convertible Securities upon the exercise of such rights or options or upon the
actual issuance of Additional Shares of Common Stock upon the conversion of such
Convertible Securities.
The provisions of subsection (d) above for readjustment upon the
expiration of rights or options or the rights of conversion of Convertible
Securities, shall apply mutatis mutandis to the rights, options and Convertible
Securities referred to in this subsection (d).
(e) The term "Additional Shares of Common Stock" as used
herein shall mean all shares of Common Stock issued or deemed issued by the
Company after the Commencement Date whether or not subsequently reacquired or
retired by the Company, other than (i) shares of Common Stock issued upon
conversion of convertible securities or the exercise of warrants outstanding as
of the Commencement Date; and (ii) shares of Common Stock issued to employees,
officers or directors pursuant to any stock offering, plan or arrangement
approved by the Board of Directors of the Company.
7.2 Notice of Adjustment. Promptly after adjustment to provide for
the maintenance of the Stock Threshold Amount for Lender's or holder's Warrant
Shares or any increase or decrease in the number of shares purchasable upon the
exercise of this Warrant, the Company shall give written notice thereof, by
recognized overnight mail, e.g. Federal Express, addressed to the registered
holder of this Warrant at the address of such holder as shown on the books of
the Company. The notice shall be signed by the Company's chief financial officer
and shall state the effective date of the adjustment and the
<PAGE>
increase or decrease, if any, in the number of shares purchasable at such price
upon the exercise of this Warrant, setting forth in reasonable detail the method
of calculation and the facts upon which such calculation is based.
7.3 Other Notices. If at any time:
(a) the Company shall declare any cash dividend upon its
Stock;
(b) the Company shall declare any dividend upon its Stock
payable in stock (other than a dividend payable solely in shares of Stock) or
make any special dividend or other distribution to the holders of its Stock;
(c) there shall be any consolidation or merger of the Company
with another corporation, or a sale of all or substantially all of the Company's
assets to another corporation;
(d) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
(e) in any one or more of said cases, the Company shall give,
by recognized overnight mail, e.g. Federal Express, addressed to the Lender or
registered holder of this Warrant at the address of the Lender or such holder as
shown on the books of the Company, (i) at least 10 days' prior written notice of
the date on which the books of the Company shall close or a record shall be
taken for such dividend, distribution or subscription rights or for determining
rights to vote in respect of any such dissolution, liquidation or winding-up;
(ii) at least 10 days' prior written notice of the date on which the books of
the Company shall close or a record shall be taken for determining rights to
vote in respect of any such reorganization, reclassification, consolidation,
merger or sale, and (iii) in the case of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up, at least 10 days' written notice of the date when the
<PAGE>
same shall take place. Any notice given in accordance with clause (i) above
shall also specify, in the case of any such dividend, distribution or option
rights, the date on which the holders of Stock shall be entitled thereto. Any
notice given in accordance with clause (iii) above shall also specify the date
on which the holders of Stock shall be entitled to exchange their Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up, as the case may be. If the Lender or holder of this Warrant does not
exercise this Warrant prior to the occurrence of an event described above,
except as provided in Sections 7.1 and 7.4, the Lender or the holder of this
Warrant shall not be entitled to receive the benefits accruing to existing
holders of the Stock in such event.
7.4 Changes in Stock. In case at any time following the
Commencement Date, the Company shall be a party to any transaction (including,
without limitation, a merger, consolidation, sale of all or substantially all of
the Company's assets or recapitalization of the Stock) in which the previously
outstanding Stock shall be changed into or exchanged for different securities of
the Company or common stock or other securities of another corporation or
interests in a noncorporate entity or other property (including cash) or any
combination of any of the foregoing (each such transaction being herein called
the "Transaction" and the date of consummation of the Transaction being herein
called the "Consummation Date"), then, as a condition of the consummation of the
Transaction, lawful and adequate provisions shall be made so that the Lender or
holder of this Warrant, upon the exercise hereof at any time on or after the
Consummation Date, shall be entitled to receive; and this Warrant shall
thereafter represent the right to receive, in lieu of the Stock issuable upon
such exercise prior to the Consummation Date, the highest amount of securities
or other property to which the Lender or holder of this Warrant would actually
<PAGE>
have been entitled as a stockholder upon the consummation of the Transaction if
such Lender or holder of this Warrant had exercised such Warrant immediately
prior thereto. The provisions of this Section 7.4 shall similarly apply to
successive Transactions.
7.5 General
(a) Notwithstanding anything contained herein to the contrary, the
provisions of Section 7 shall only apply if more than 5% of the Company's Common
Stock in the aggregate is sold in a single or multiple transaction(s) for a
consideration at least 30% less than the Stock Threshold Amount .
(b) Notwithstanding anything herein to the contrary in this Warrant the
Company's obligation to issue shares due to any dilution of the Stock Threshold
Amount set forth above shall not alter or effect the right of Lender or the
holder of this Warrant, its successors and assigns to exercise this Warrant at
the Warrant Price.
(c) Notwithstanding anything contained herein to the contrary, in the
event of an IPO by the Company by May 19, 1999, the provisions of Section 7.1.2
shall not be applicable and the number of shares of stock covered by this
Warrant on the date of the IPO shall be 140,000 shares and the Warrant Price
shall be the IPO price.
8. Come Along Rights and Tag Along Rights
A. In the event any shareholder(s) of the Company (the "Owner") offer
to sell all of their interests in the Company to a third party in an arms length
transaction, then Lender or the holder of this Warrant shall, at the written
request of the Company's Board of Directors, be required to sell to such third
party the same portion of Lender's or holder's ownership interest, as the
interests being transferred bears to Lender's or holder's entire interest for
the same purchase price (on a pro rata basis) that is paid by such third party
in such transaction (the "Come Along Rights") in accordance with this Paragraph
8. Any offer
<PAGE>
by the Owner to sell their interests in the Company shall be valid for a period
of sixty (60) days (the "Transfer Period"). The Come Along Rights shall operate
as follows: (a) if the purchase price is in excess of the formula employed in
the Put and all ownership interests are included in the sale, then Lender or the
holder of this Warrant shall participate pro rata as a seller in such
transaction on the same terms and conditions; or (b) if the purchase price is
less than the Put Price, then Lender or the holder of this Warrant shall be
deemed to exercise its Put at the Put Price. The Come Along Rights shall
terminate in the event the Company consummates an IPO.
B. Lender or the holder of this Warrant shall be entitled to
participate pro rata on the same terms and conditions in the event any
shareholder of the Company owning a ten (10%) percent or greater ownership
interest (the "Principal Owner") of the Company sells twenty (20%) percent or
more of its ownership interest in the Company (the "Tag Along Rights"), except
for transfers among existing shareholders or their direct family, viz. mother,
father, sister, brother and children, and open market sales provided insiders
notify Lender or the holder of this Warrant of their intent to sell, which shall
be exempt. Any offer by a Principal Owner to sell its interests in the Company
shall be valid for the Transfer Period. The selling shareholder(s) shall notify
Lender or the holder of this Warrant in writing of the terms of any offer within
three (3) business days of such offer having been agreed to by the selling
shareholder(s) and a third party in writing. Lender or the holder of this
Warrant may exercise its Tag Along Rights by delivering written notice of such
exercise to the selling shareholder(s) at any time within fifteen (15) days
after commencement of the Transfer Period. The selling shareholder(s) shall
delay the consummation of the proposed sale for the lesser of such fifteen (15)
day period or until all of the shareholders entitled to Tag Along Rights
otherwise consent in writing. The Transfer Period shall begin upon the receipt
by
<PAGE>
Lender or the holder of this Warrant of such written notice from the selling
shareholder(s). The Tag Along Rights shall terminate in the event the Company
consummates an IPO.
9. Registration Rights
A. In the event the Company proposes to sell any security from and
after the date hereof that will be registered with the Commission under the
Securities Act in a public offering except on Form S-8 or just for the purpose
of employee benefits, then in such event, the Company agrees to use best efforts
to "piggy back" a registration of the Warrant Shares, as the case may be, so
that the Warrant Shares become publicly registered securities in such
registration. The aforesaid registration shall be at the sole cost and expense
of the Company. Upon registration of the Warrant Shares, the Lender or the
holder of this Warrant shall be entitled to dispose, sell, or transfer the
Warrant Shares as a publicly registered security, but not earlier than thirty
(30) days subsequent to the effectiveness of such Registration Statement.
Notwithstanding the foregoing, if an underwriter of such registered offering
determines that the inclusion of the Warrant Shares in such offering would be
detrimental to the Company, or the underwriter requests a one (1) year holdback
in an IPO, then Lender or the holder hereby consents to such one (1) year
holdback and the underwriter and the Company shall have the right to exclude
some or all of such securities from the offering, provided that such exclusion
is applied pro rata to all of the holders of securities wishing to participate
in the offering. The Company shall be further entitled to all "piggy back" and
demand registration rights afforded any other shareholder.
B. Notwithstanding anything to the contrary contained in the foregoing,
the Lender or the holder of this Warrant agrees to execute a "lock-up" letter in
favor of Whale Securities Co., L.P. in connection with the proposed IPO in the
form attached hereto, provided that all other shareholders execute a "lock up"
letter, with the exclusion of the
<PAGE>
owner(s) of up to 80,000 shares of the Company (provided such owners are not
inside owners), who shall not be required to execute a "lock-up" letter.
10. Registration Procedures
Company Undertakings. In order to fulfill its agreement to use its best
efforts to effect the registration of the Warrant Shares under the Securities
Act, the Company shall (except as otherwise provided in this Agreement), as
expeditiously as possible:
10.1.1 with respect to the obligations of the Company under Section 9
above, prepare and file with the Commission a Registration Statement or any
amendment thereto with respect to such securities, and thereafter to use its
best efforts to cause such Registration Statement to become effective and remain
effective until all the Warrant Shares are sold or become capable of being
publicly sold without registration under the Securities Act;
10.1.2 prepare and file with the Commission such amendments and
supplements to the Registration Statement and the prospectus used in connection
therewith as may be necessary to comply with the provisions of the Securities
Act with respect to the sale or other disposition of all the Warrant Shares.
10.1.3 furnish to Lender or the holder of this Warrant such numbers of
copies of a summary prospectus or other prospectus, including a preliminary
prospectus or any amendment or supplement to any prospectus, in conformity with
the requirements of the Securities Act, and such other documents as Lender or
the holder of this Warrant may reasonably request in order to facilitate the
public sale of the Warrant Shares owned by Lender or the holder of this Warrant;
10.1.4 use its best efforts to register and qualify the Warrant Shares
covered by the Registration Statement under such other securities or blue sky
laws of such jurisdictions as
<PAGE>
Lender or the holder of this Warrant shall reasonably request, and do any and
all other acts and things which may be necessary or advisable to enable Lender
or the holder of this Warrant to consummate the public sale or other disposition
in such jurisdictions, except that the Company shall not for any such purpose be
required to qualify to do business as a foreign corporation in any jurisdiction
wherein it is not so qualified or to file therein any general consent to service
of process;
10.1.5 otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering the
period of at least twelve months, beginning with the first fiscal quarter
beginning after the effective date of the registration statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the Securities Act;
10.1.6 notify Lender or the holder of this Warrant at any time when a
prospectus relating thereto covered by such Registration Statement is required
to be delivered under the Securities Act, of the happening of any event of which
it has knowledge as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing.
10.2 Expenses. All expenses incurred in any registration of the
Warrant Shares under this Warrant shall be paid by the Company, including,
without limitation, (i) printing expenses, fees and disbursements of counsel for
the Company, (ii) expenses of any special audits to which the Company shall
agree or which shall be necessary to comply with governmental requirements in
connection with any such registration, (iii) all registration and
<PAGE>
filing fees for the Warrant Shares under federal and state securities laws, and
(iv) expenses of complying with the securities or blue sky laws of any
jurisdictions; provided, however, the Company shall not be liable for (a) any
discounts or commissions due to any underwriter on account of the sale of the
Warrant Shares; (b) any stock transfer taxes incurred with respect to Warrant
Shares sold in the offering or (c) the fees and expenses of counsel for any
holder of the Warrant or Warrant Shares, provided that the Company will pay the
costs and expenses of Company counsel when the Company's counsel is representing
any or all owners of Warrant Shares or Lender or the holder of this Warrant.
10.3 Indemnification.
10.3.1 The Company's Indemnity. Without limitation of any other
indemnity provided to Lender or the holder of this Warrant or other owner of
Warrant Shares, in connection with an Offering referred to in Section 10, to the
extent permitted by law, the Company shall indemnify and hold harmless such
person, the affiliates, officers, directors and partners of such person, any
underwriter (as defined in the Securities Act) for such person, and each person,
if any, who controls such person or underwriter (within the meaning of the
Securities Act or the Securities Exchange Act of 1934, as amended [the "Exchange
Act"], against any losses, claims, damages or liabilities (joint or several) to
which they may become subject under the Securities Act or other federal or state
law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation"):
(i) any untrue statement or alleged untrue statement of a material fact
contained in a registration statement filed pursuant to Section 10, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto,
<PAGE>
(ii) the omission or alleged omission to state therein a material fact
required to be stated therein, or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, or
(iii) any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any state securities law or any rule or
regulation promulgated under the Securities Act, the Exchange Act or any state
securities law, in connection with a registration of Warrant Shares required
under Section 9.
The Company shall reimburse Lender or the holder of this Warrant, its
affiliates, officers or directors or partners, underwriters or controlling
persons for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company shall not be liable to
any of the foregoing in any such case for any such loss, claim, damage,
liability or action to the extent that it arises out of or is based upon a
violation which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
any such holder, owner, or any other affiliate, officer, director, partner,
underwriter, or controlling person thereof.
10.3.2 Lender's or holder of this Warrant's Indemnity. Lender or the
holder of this Warrant shall indemnify and hold harmless the Company, its
affiliates, officers, directors, shareholders and representatives, any
underwriter (as defined in the Securities Act) and each person, if any, who
controls the Company or the underwriter (within the meaning of the Securities
Act or the Exchange Act), against any losses, claims, damages, or liabilities
(joint or several) to which they may become subject under the Securities Act,
the Exchange Act or other federal or state laws, insofar as such losses, claims,
damages or liabilities (or
<PAGE>
actions and respect thereof) including, without limitation, reasonable attorneys
fees or expenses, arise out of or are based upon any statements or information
provided by Lender or the holder of this Warrant to the Company in connection
with the offer or sale of the Warrant Shares.
10.4 Notice; Right to Defend. Promptly after receipt by an
indemnified party under this Section 10 of a notice of the commencement of any
action (including any governmental action), such indemnified party shall, if a
claim in respect thereof is to be made against any indemnifying party under this
Section 10, deliver to the indemnifying party a written notice of the
commencement thereof and the indemnifying party shall have the right to
participate in the defense of such action. If the indemnifying party agrees in
writing that it will be responsible for any costs, expenses, judgments, damages
and losses incurred by the indemnified party with respect to such claim, then
the indemnifying party, jointly with any other indemnifying party similarly
noticed, shall have the right to assume the defense of such action with counsel
mutually satisfactory to the parties; provided, however, that an indemnified
party shall have the right to retain its own counsel, with the fees and expenses
to be paid by the indemnifying party, if the indemnified party reasonably
believes that representation of such indemnified party by the counsel retained
by the indemnifying party would be inappropriate due to actual or potential
differing interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement of
any such action shall relieve such indemnifying party of any liability to the
indemnified party under this Section 10 only if and to the extent that such
failure is prejudicial to its ability to defend such action, and the omission so
to deliver written notice to the indemnifying party will not relieve it of any
liability that it may have to any indemnified
<PAGE>
party otherwise than under this Section 10.
10.5 Contribution. If the indemnification rights provided for in
this Section 10 are held by a court of competent jurisdiction to be unavailable
to an indemnified party with respect to any loss, liability, claim, damage or
expense referred to therein, then the indemnifying party, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of such loss, liability,
claim, damage or expense in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other hand in connection with the statements or omissions which
resulted in such loss, liability, claim, damage or expense as well as any other
relevant equitable considerations. The relative fault of the indemnifying party
and the indemnified party shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. Notwithstanding the foregoing, the amount Lender or the
holder of this Warrant shall be obligated to contribute pursuant to this Section
10.5 shall be limited to an amount equal to the proceeds to Lender or the holder
of this Warrant of the Warrant Shares sold pursuant to the registration
statement which gives rise to such obligation to contribute (less the aggregate
amount of any damages which Lender or the holder of this Warrant has otherwise
been required to pay in respect of such loss, claim, damage, liability or action
or any substantially similar loss, claim, damage, liability or action arising
from the sale of such Warrant Shares).
The indemnification and contribution rights provided by this Section 10
shall be
<PAGE>
continuing rights and shall survive the registration and sale of any securities
by any person entitled to indemnification or contribution hereunder and shall
survive the expiration or termination of this Agreement.
11. Miscellaneous.
(A) The terms of this Warrant shall be binding upon and shall inure to the
benefit of any successors or permitted assigns of the Company and of the holder
or holders hereof and of the Warrant Shares.
(B) No holder of this Warrant, as such, shall be entitled to vote or receive
dividends or be deemed to be a stockholder of the Company for any purpose, nor
shall anything contained in this Warrant be construed to confer upon the holder
of this Warrant, as such, any rights of a stockholder of the Company or any
right to vote, give or withhold consent to any corporate action, receive
dividends or subscription rights, or otherwise.
(C) Receipt of this Warrant or the Warrant Shares shall constitute agreement to
all the terms and conditions contained herein including, but not limited to, the
securities laws restrictions, and shall be deemed a representation of investment
intent without a view toward distribution or resale.
(D) This Warrant and the performance of the parties hereunder shall be construed
and interpreted in accordance with the laws of the State of New York and New
York County shall have exclusive jurisdiction with respect to all controversies
and disputes arising hereunder.
(E) All notices permitted or required herein shall be given as provided in the
Loan Agreement.
12. Disposition of this Warrant and the Warrant Shares
and Registration Under Securities Laws.
(A) The holder of this Warrant or the Warrant Shares, by acceptance hereof
agrees,
<PAGE>
prior to the disposition of any such Warrant or Warrant Shares, to give written
notice to the Company expressing such holder's intention to effect such
disposition and describing the manner thereof.
(B) The holder also understands (i) that the Warrant and the Warrant Shares have
not been and will not be registered under the Securities Act or any applicable
state securities law and that the Company is and will be relying upon an
exemption from the registration requirements providing for issuance of
securities not involving any public offering, and (ii) that the Company has
relied upon the fact that the Warrant and Warrant Shares will be held for
investment and without a view to distribution. The holder confirms to the
Company that it is acquiring the Warrant and the Warrant Shares for its own
account for investment and not with a view to the resale or distribution
thereof, however that Lender or the holder of this Warrant shall be entitled to
assign any portion of the Warrant or Warrant Shares to any party who
participates with Lender or the holder of this Warrant ("Participant") in this
transaction or any member of Lender or the holder of this Warrant without any
such transfer being deemed a prohibited distribution of the Warrant or Warrant
Shares, provided that nothing herein shall be interpreted as an opinion that
such transfer complies with applicable federal or state securities laws. The
Company acknowledges that each Participant shares in the same rights or
obligations that Lender or the holder of this Warrant has obtained hereunder to
the extent of their respective participation interests in the event they were to
become a registered holder of their respective participation interest.
(C) Any substitute Warrant and each certificate for the Warrant Shares shall
contain a legend on the face thereof, in form and substance satisfactory to
counsel for the Company, setting forth the restrictions on transfer thereof
contained in this Warrant (including, but not limited to, the Put, and the above
securities law restrictions).
<PAGE>
(D) Prior to the date hereof, Lender or the holder of this Warrant has made an
investigation of the Company and its business and has had available to it all
information with respect thereto which it needed to make an informed investment
decision.
13. Amendment to Warrant.
Notwithstanding any of the provisions of this Warrant to the contrary,
any of the provisions of this Warrant may be changed by a writing executed by
the Company and by the holder hereof.
14. Board Visitation
Lender or the holder of this Warrant shall be given notice of all
meetings of the Board of Directors, receive copies of minutes of all meetings of
the Board of Directors and Lender or the holder of this Warrant shall be
entitled to send an observer to all meetings of the Board of Directors of the
Company from closing of the Loan until one (1) year following the exercise of
the Warrant hereunder. The rights granted herein shall not be in addition to the
rights granted in Section 15 of the Warrant to purchase up to 87,500 shares of
Common Stock, dated October 2, 1998, as amended by that certain Amendment to
Warrant, dated as of October 2, 1998, and as further amended by that certain
Second Amendment to Warrant, dated as of January 18, 1999 (the "Initial
Warrant"). At all times, the Lender or the holder of this Warrant and the
Initial Warrant shall have the right to send only one (1) observer to all
meetings of the Board of Directors.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officers and its corporate seal to be affixed hereto.
INTERNET FINANCIAL SERVICES INC.
By: /s/ Steven Malin
--------------------------------
Steven Malin,
Chief Executive Officer
Attest:
- -------------------------------
Agreed to and Accepted:
NEW YORK COMMUNITY INVESTMENT
COMPANY L.L.C.
By: /s/ Howard Sommer
---------------------------
Howard Sommer, President
<PAGE>
SUBSCRIPTION FORM
(To be executed by New York Community Investment Company L.L.C.
if they desire to exercise the Warrant)
TO: INTERNET FINANCIAL SERVICES INC.
The undersigned hereby exercises the right to purchase _____ shares of
the Common Stock of Internet Financial Services Inc. and its wholly owned
subsidiary, A.B. Watley, Inc., evidenced by the attached Warrant and herewith
makes payment of the purchase price of such shares in full, all in accordance
with the conditions and provisions thereof.
The undersigned requests that certificates for such shares be issued
pursuant to the Warrant in the name of:
-----------------------------------------------------------------------
Name
-----------------------------------------------------------------------
Address
-----------------------------------------------------------------------
Dated:
-----------------------------------------------------------------------
Signature
-----------------------------------------------------------------------
Name of Registered Holder
(Please Print)
-----------------------------------------------------------------------
<PAGE>
EXERCISE OF WARRANTS EVIDENCED BY THIS WARRANT CERTIFICATE
Number of Shares
of Stock for Date of
which exercised Exercise Notation Made by
- --------------- -------- ----------------
<PAGE>
ASSIGNMENT FORM
(To be executed by Lender or the holder of this Warrant in the
event of an Assignment or Transfer of the Warrant)
TO: INTERNET FINANCIAL SERVICES INC. and
its wholly owned subsidiary, A.B. Watley, Inc.
The undersigned hereby assigns/transfers the Warrant to:
-----------------------------------------------------------------------
Name
-----------------------------------------------------------------------
Address
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Signature
-----------------------------------------------------------------------
Name of Registered Holder
(Please Print)
Dated:
<PAGE>
EXHIBIT 5
HARTMAN & CRAVEN LLP
460 Park Avenue
New York, New York 10022
May 26, 2000
A.B. Watley Group Inc.
40 Wall Street
New York, New York 10005
Re: Registration Statement on Form S-3
----------------------------------
Dear Sirs:
We are acting as counsel to A.B. Watley Group Inc., a Delaware
corporation (the "Company"), in connection with the preparation and filing with
the Securities and Exchange Commission (the "Commission") of a Registration
Statement on Form S-3 (the "Registration Statement") under the Securities Act of
1933, as amended (the "Act"). The Registration Statement relates to 474,714
shares (the "Shares") of the Company's common stock, $.001 par value per share
("Common Stock"), which (i) were issued to the selling stockholders named
therein upon the exercise of warrants to purchase shares of Common Stock held by
such selling stockholders and (ii) are issuable to the selling stockholders
pursuant to presently outstanding warrants to purchase shares of Common Stock
held by the selling stockholders.
In connection with this opinion, we have examined and relied upon copies
certified or otherwise identified to our satisfaction of: (i) the Registration
Statement (including the exhibits thereto) and the Prospectus contained therein;
(ii) the Company's Certificate of Incorporation, as amended and By-laws, as
amended; and (iii) the minute books and other records of corporate proceedings
of the Company, as made available to us by officers of the Company; and have
reviewed such matters of law as we have deemed necessary or appropriate for the
purpose of rendering this opinion.
For purposes of this opinion we have assumed the authenticity of an
documents submitted to us as originals, the conformity to originals of all
documents submitted to us as certified or photostatic copies, and the
authenticity of the originals of all documents submitted to us as copies. We
have also assumed the legal capacity of all natural persons, the genuineness of
all signatures on all documents examined by us, the authority of such persons
signing on behalf of the parties thereto other than the Company and the due
authorization, execution and delivery of all documents by the parties thereto
other than the Company. As to certain factual matters material to the opinion
expressed herein, we have relied to the extent we deemed proper upon
<PAGE>
representations, warranties and statements as to factual matters of officers and
other representatives of the Company. We are members of the Bar of the State of
New York only and express no opinion other than with respect to the laws of the
State of New York, the State of Delaware and the federal laws of the United
States of America. Without limiting the foregoing, we express no opinion with
respect to the applicability thereto or effect of municipal laws or the rules,
regulations or orders of any municipal agencies within any such state.
Based upon and subject to the foregoing qualifications, assumptions and
limitations and the further limitations set forth below, it is our opinion that
the Shares have been validly issued and are fully paid and non-assessable.
This opinion is limited to the specific issues addressed herein, and no
opinion may be inferred or implied beyond that expressly stated herein. We
assume no obligation to revise or supplement this opinion should the present
laws of the States of New York or Delaware or the federal laws of the United
States of America be changed by legislative action, judicial decision or
otherwise.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement. In giving such consent, we do not admit that we are in
the category of persons whose consent is required under Section 7 of the Act or
the rules and regulations of the Commission promulgated thereunder.
This opinion is furnished to you in connection with the filing of the
Registration Statement and is not to be used, circulated, quoted or otherwise
relied upon for any other purpose.
Very truly yours,
HARTMAN & CRAVEN LLP
By: /s/ Edward I. Tishelman
-----------------------
Edward I. Tishelman,
a Partner
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3, No. 333-XXXXX) of A.B. Watley Group Inc. for
the registration of 474,714 shares of its common stock and to the incorporation
by reference therein of our report dated November 22, 1999, with respect to the
consolidated financial statements and schedules of A.B. Watley Group Inc.
included in its Annual Report (Form 10-KSB) for the year ended September 30,
1999, filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
May 26, 2000
