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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10/A-3
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OPTIMARK HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-3730995
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10 EXCHANGE PLACE CENTRE, 24TH FLOOR, JERSEY CITY, NJ 07302
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (201) 536-7112
Securities to be registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH EACH CLASS IS TO BE
TO BE SO REGISTERED REGISTERED
------------------- ----------
None None
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
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TABLE OF CONTENTS
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PAGE
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Item 1. Business............................................................................................. 1
Item 2. Financial Information................................................................................ 21
Item 3. Properties........................................................................................... 31
Item 4. Security Ownership of Certain Beneficial Owners and Management....................................... 31
Item 5. Directors and Executive Officers..................................................................... 36
Item 6. Executive Compensation............................................................................... 38
Item 7. Certain Relationships and Related Transactions....................................................... 42
Item 8. Legal Proceedings.................................................................................... 45
Item 9. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters...... 45
Item 10. Recent Sales of Unregistered Securities.............................................................. 45
Item 11. Description of Registrant's Securities to be Registered.............................................. 47
Item 12. Indemnification of Directors and Officers............................................................ 50
Item 13. Financial Statements and Supplementary Data.......................................................... 51
Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 51
Item 15. Financial Statements and Exhibits.................................................................... 51
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FORWARD-LOOKING STATEMENTS
This registration statement on Form 10 includes forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. These statements are based on our beliefs and assumptions, and
on information currently available to us. Forward-looking statements include the
information concerning our possible or assumed future results of operations set
forth in Item 2 - "FINANCIAL INFORMATION Management's Discussion and Analysis of
Financial Condition and Results of Operations". Forward-looking statements also
include statements in which words such as "expect", "anticipate", "contemplate",
"intend", "plan", "believe", "estimate", "consider" or similar expressions are
used.
Forward-looking statements are not guarantees of future performance.
They involve risks, uncertainties and assumptions, including the risks discussed
under the heading "BUSINESS - Risk Factors" and elsewhere in this registration
statement. Our future results and stockholder values may differ materially from
those expressed in these forward-looking statements. Many of the factors that
will determine these results and values are beyond our ability to control or
predict. Investors are cautioned not to put undue reliance on any
forward-looking statements. In addition, we do not have any intention or
obligation to update forward-looking statements after the effectiveness of this
registration statement, even if new information, future events or other
circumstances have made them incorrect or misleading. For these statements, we
claim the protection of the safe harbor for forward-looking statements contained
in Section 21E of the Exchange Act.
ITEM 1. BUSINESS
We conceive, develop and implement software that matches buyers and
sellers who trade products or services, which we refer to as matching engines,
and systems for marketplaces that operate electronically. While our initial
focus has been on the global equities markets, we operate today in two business
segments, our electronic markets business and our US equities business.
In the electronic markets business, we license matching engines and
systems to exchanges, markets and managers of communities where buyers and
sellers exchange information about a particular topic or product. We generate
revenue from consulting fees related to customizing the matching engine and
systems to the market and from royalties from the licensing of our matching
engine technology. In our effort to obtain upside value, we also seek an equity
position in the markets and communities with whom we consult and license our
technology. We believe our matching engine technology has applications in many
securities or business-to-business markets where goods are traded. An example of
one of our initiatives in this area is Japan OptiMark Systems' license of a
matching engine for buying and selling equity securities traded on the Osaka
Securities Exchange in Japan. We have also entered into agreements to develop
the OptiMark matching engine technology for an established financial exchange
located offshore and a technology provider located in South Africa.
In the US equities business, we have created, developed and implemented
matching engines for the buying and selling of equities for the Pacific
Exchange, Inc. and The Nasdaq Stock Market, Inc., which we refer to as the
OptiMark equities trading system. Unlike the electronic markets business, where
we license our matching engine technology to third parties, in the US equities
business we have so far chosen to maintain full management and ownership of the
business. The volume of shares matched through these facilities has remained low
since the implementation of the OptiMark equities trading system.
Our matching engine technology is based upon a proprietary matching
algorithm designed to allow buyers and sellers to trade products and services
anonymously and confidentially, expressing differing levels of satisfaction with
various trading outcomes. We believe that our matching engine technology offers
a unique combination of capabilities different from those offered by our
competitors. These capabilities include the ability to:
- mimic the negotiation process among buyers and sellers,
- define the product or service being bought or sold by as many
variables as desirable,
- convert the multiple variables expressed by buyers and sellers
into a price or allow multiple parties to negotiate a mutually
acceptable price,
- match buyers and sellers based on their individual preferences
in a manner that maximizes the mutual satisfaction of the
buyers and sellers,
- accommodate the simultaneous interaction of many buyers and
many sellers, and
- operate on a continuous or less frequent basis based upon the
particular needs and constraints of a market.
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We were founded in 1996 as the successor to a company that had begun
developing the OptiMark matching engine technology in 1994. During the period
through 1999, we patented key technology, entered into agreements with the
Pacific Exchange, Nasdaq and, through a joint venture, the Osaka Securities
Exchange, and raised $236 million in four rounds of preferred equity financing.
On June 12, 2000 we established a holding company and placed our electronic
markets business and US equities businesses in two separate operating
subsidiaries, OptiMark, Inc. and OptiMark US Equities, Inc.
With respect to the US equities business, following receipt of
necessary Securities and Exchange Commission approvals, the OptiMark equities
trading system was implemented on the Pacific Exchange in January 1999 and on
Nasdaq in October 1999. The OptiMark equities trading system is operated through
two wholly-owned subsidiaries of OptiMark US Equities, Inc., OptiMark Services,
Inc., which operates the Pacific Exchange facility, and OptiMark OTC Services,
Inc., which operates the Nasdaq facility.
STRATEGY
Our goal is to become the leading provider of software and systems for
the matching of buyers and sellers to facilitate trading on exchanges and in
markets. The key elements of our strategy are:
Aggressively work to improve the volume of shares traded and ease of
use in our US equities business. We believe that the OptiMark matching engine
technology will succeed only if users are confident their trades will be
executed at acceptable prices over time. This requires that the system be used
regularly by users who trade significant volumes in many different stocks. To
date the OptiMark equities trading system has not had significant volume. We are
taking steps to address these issues and increase system volume, including:
- modifying the Nasdaq system in May 2000 to trade those
additional stocks that comprise the Nasdaq 100 Index
components after certain electronic communications networks,
ECNs, made necessary modifications to their computer systems.
We are also working to correct the remaining systems issues
related to the Nasdaq market, including access to other ECN's
liquidity, improved risk management tools for broker/dealers,
and improved ability for the market makers to manage their
positions in the OptiMark equities trading system,
- modifying the OptiMark equities trading system so that users
can better assess the liquidity available in the system,
including posting transaction data on a real-time basis,
selective electronic messaging of trading interest between
users and automatic trade negotiation that should make users
more willing to enter customized expressions of trading
interest, referred to as profiles,
- working intensively with a core group of institutional users
to help integrate the system better into their internal
operations,
- educating users to create better profiles, stressing ease of
use,
- modifying the system to provide for the ability to trade large
lists of stocks without having to enter each stock separately
into the system,
- adjusting pricing if necessary for some categories of users,
and
- focusing users on profiles to include a specific list of
actively traded stocks.
While we are working diligently to accomplish these steps, several of the steps
are not solely in our control. Therefore, we cannot estimate accurately the time
it will take to accomplish these steps or the costs involved in doing so.
Continue to expand our electronic markets business. We believe the
OptiMark matching engine technology can be implemented in many different markets
beyond US equities. We intend to enter other securities and business-to-business
electronic markets through direct participation, licensing our technology to
electronic commerce providers for inclusion in their infrastructure and
operating system products, and establishing relationships with key consulting
organizations. Examples of markets we are targeting include ship brokering,
European energy, data transfer over networks and communication channels, funds
and options trading, and Canadian equities. We have announced several ventures
in this area, although none has yet become operational.
Employ a business model that focuses on those areas of a business
opportunity where we can add the most value. We believe that we have expertise
in the areas of design and development of systems, creating technology and
delivering turn-key
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systems for the matching of buyers and sellers of products and services. We
believe this expertise gives us a competitive advantage in these areas. We
believe we add less value in operating these systems and managing the
enterprises they serve. We have begun to employ a business model in which we
provide matching engines and the related intellectual property, recovering our
development costs and receiving development fees, royalties and minority equity
stakes, to parties that will supply relevant market expertise, management,
liquidity and capital.
Invest in and develop the best personnel. We believe that investing in
personnel is key to delivering fully functional matching engines and high
quality customer service. We intend to continue our practice of aggressively
recruiting high caliber personnel and retaining these personnel by providing
appropriate compensation incentives.
US EQUITIES BUSINESS
Background. During recent years, the United States market for equity
securities has experienced dramatic growth in trading volumes. In addition to
the increasing volume of shares traded, holdings by institutional investors have
steadily increased over the last several decades.
Traditionally, orders for publicly traded equity securities to be
executed on an exchange are brought to the floor and executed by open outcry or,
if there is not enough liquidity "in the crowd", are filled by or left with the
specialist for that stock. Orders to be executed in the over-the-counter market
are filled by market makers, dealers that hold themselves out as willing to
trade the security in question on a regular, continuous basis.
Advances in telecommunications and information technology have produced
several alternatives to traditional exchange trading and the over-the-counter
market. Alternative trading systems such as ECNs and crossing networks allow
institutions to electronically execute trades in a variety of ways. ECNs allow
participants to display firm, priced orders to other participants and to execute
automatically against other orders in the system. Crossing networks allow
participants to enter unpriced orders, which are then executed with matching
interest at a single price, typically derived from the primary public market
price for each crossed security.
A problem for traders using both traditional and alternative means of
trading of equity securities is that disclosing the size, price or source of an
order, especially a large one, may cause the price of the stock to rise or fall
before the order is filled. To avoid this market impact, traders often hold back
liquidity, entering smaller orders that do not reflect the full scope of their
desire to trade. However, while disguising trading desires in this manner helps
avoid market impact, it is inefficient, resulting in missed opportunities for
the trader and others in the market if the market moves before all of their
orders are executed, slower adjustment of prices to reflect all available
information, smaller trades with higher transaction costs, and less liquidity in
the market.
The OptiMark equities trading system. We have designed, built and
implemented the OptiMark equities trading system as a computer-based matching
facility that uses a proprietary matching algorithm to allow traders to submit
profiles, including the total number of shares each trader is willing to buy or
sell in a particular security, on an anonymous and confidential basis, without
the risk of the information becoming available to other market participants. The
ability of a buyer or seller to submit these profiles to the OptiMark equities
trading system on a confidential and anonymous basis should encourage them to
enter orders that fully reflect the scope of their desire to trade without fear
of market impact, thus increasing market liquidity, creating better trade
execution and lowering the cost of trading. In addition, the OptiMark equities
trading system is designed to allow retail traders, trading individually,
through a broker, to trade directly with institutional investors that are system
users, thereby obtaining access to additional supply and demand to which such
orders previously did not have access. This should result in better trade
execution for the individuals. Generally, we believe that institutional
investors and broker/dealers will be the primary users of the OptiMark equities
trading system.
Users access the OptiMark equities trading system by submitting
profiles. In addition to reflecting prices and sizes of trades, profiles reflect
an investor's willingness to trade and can be as simple as a limit order or
represent a complex trading strategy. A complex profile may reflect an
investor's willingness to trade at a variety of prices and sizes, including the
level of satisfaction, on a sliding scale, of trading at a given price and size.
For example, an investor could create a profile indicating that
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the investor would be 100% satisfied to buy 100,000 shares of XYZ Company at a
price up to $1.00 above the current market price, but only 50% satisfied to buy
that number of shares at a price $1.50 above it, and not at all satisfied to pay
more than $2.00 above it. The investor expresses its satisfaction levels in a
profile as a number from zero to one for each coordinate on a price/size grid.
Depending on the levels of trading satisfaction of trades expressed by other
system users, an investor's profile could match at levels of satisfaction less
than 100% down to the cut-off point at which the investor has indicated in its
profile that it would not be satisfied at all to trade at particular prices and
sizes.
These profiles, which are entered through computer terminals and
expressed graphically for ease of use, are not disclosed to other users or
market participants. Accordingly, the user's presence, identity and strategy
remain confidential. The profiles are transmitted over a secure network and are
received and logged in by the OptiMark equities trading system.
All profiles are centrally processed by the OptiMark equities trading
system to obtain the optimal matches among users, currently as frequently as
every two minutes and as infrequently as every fifteen minutes, depending on the
individual security. The OptiMark equities trading system employs a computer
algorithm that matches buy and sell profiles in a manner that takes into
account, and is intended to maximize, mutual satisfaction with the trade. Orders
generated are typically executed immediately. For orders to be executed, both
parties must be system users. However, system users can access orders at other
exchanges through aggregate order books like the Intermarket Trading System
which themselves are system users.
Transactions that result from matches through the OptiMark equities
trading system clear and settle regular way, as would any other transaction. All
users receive a report of any execution resulting from processing the profiles
submitted by them as soon as possible after the execution takes place.
Pacific Exchange and Nasdaq Applications
Pacific Exchange. In January 1999, we launched the OptiMark equities
trading system on the Pacific Exchange. Our wholly-owned subsidiary, OptiMark
Services, Inc., provides the system as a facility of the Pacific Exchange. The
Pacific Exchange system provides for the matching and execution of equity
securities listed or traded on the Pacific Exchange under an agreement dated
August 27, 1996. We developed and maintain the central computer-based matching
facility and the related communications network and the Pacific Exchange
developed and makes available the necessary computer hardware and software for
the system to communicate with the exchange's computerized order system. As of
May 31, 2000, the Pacific Exchange system is available for trades in all of the
over 2,600 securities listed or traded on the Pacific Exchange.
The Pacific Exchange system is available to all members of the Pacific
Exchange and, through those members, to non-members like institutional investors
and other non-member broker/dealers. Each user of the system must enter into a
user agreement with OptiMark Services that establishes the basis on which a user
communicates with the system. As of May 31, 2000, 141 buy-side institutions and
46 sell-side institutions were party to user agreements with OptiMark Services
and were authorized to trade using the OptiMark equities trading system. We
believe that the Pacific Exchange benefits from the system because its features
may help users obtain better trade executions at lower cost, which should
attract additional volume to the market.
The Pacific Exchange assesses its members acting as users, or
sponsoring non-member users, a transaction charge per share matched using the
system. The exchange generally remits $.01 per share matched to OptiMark
Services for its services as an exchange facility operator responsible for
operating portions of the Pacific Exchange system. Although daily volumes
through the Pacific Exchange facility peaked at about 3.0 million shares shortly
after it was implemented in early 1999, and reached this level again in
September 1999, volumes have since substantially subsided.
In August 1996, we also entered into a revenue sharing agreement with
the Pacific Exchange. The agreement provides that each month after the date of
the agreement through December 31, 2005, we will credit a revenue accrual
account with 1 1/2% of our consolidated gross revenues for such month, up to an
aggregate amount of $3,855,580. Distributions are made from the account to the
Pacific Exchange quarterly after the commencement of use of the system by the
Pacific Exchange and other exchanges to trade listed equities, equity securities
traded after normal trading hours, options and equities securities with unlisted
trading privileges, as applicable. We began making distributions from the
accrual account to the Pacific Exchange at the end of the first quarter of 1999
in connection with the Pacific Exchange's use of the system to trade listed
equities. As of May 31, 2000,
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we have distributed to the Pacific Exchange $94,197 and accrued an amount of
$30,675 for future distribution. We have a similar revenue sharing arrangement
with the Chicago Board Options Exchange, Inc. to credit an account with up to
$2,250,000 of our gross revenues. No distributions have been made under that
arrangement to date.
The Nasdaq Stock Market. In October 1999, we launched the OptiMark
equities trading system on a pilot basis on Nasdaq. Our wholly-owned subsidiary,
OptiMark OTC Services, Inc., provides the system as a facility of Nasdaq. The
Nasdaq system provides for the matching and execution of equity securities
traded over-the-counter in Nasdaq pursuant to an agreement dated September 1,
1998. We adapted the OptiMark equities trading system from the Pacific Exchange
for use within the existing Nasdaq market structure. We make available to Nasdaq
a version of the OptiMark equities trading system and Nasdaq developed and makes
available the networks through which profiles may be transmitted from the Nasdaq
workstation environment. Nasdaq also manages the facility in Trumbull,
Connecticut, which houses the Nasdaq system.
The Nasdaq system was approved by the SEC to handle trades in 250
companies traded over-the-counter in Nasdaq. The SEC recently approved an
extension of the pilot program through September 30, 2000. We believe the SEC
will continue to extend the pilot program and may remove the restrictions in the
pilot program when we resolve the technical issues described below.
The Nasdaq system is available to any NASD member that is a clearing
broker, and through such members, to NASD members that are non-clearing brokers
and non-members. Each user of the system must enter into a user agreement with
OptiMark OTC Services that establishes the basis on which a user communicates
with the system. As of May 31, 2000, 78 buy-side institutions and 96 sell-side
institutions were party to user agreements with OptiMark OTC Services and were
authorized to trade using the OptiMark equities trading system. We believe
Nasdaq benefits from the system because its specific features may help users
obtain better trade executions at lower cost, which should attract additional
volume to the market.
Nasdaq assesses its members acting as a user, or sponsoring a
non-member user, the following transaction charges:
- no charge for trades matched against an ECN or market-maker
quote,
- $0.005/share for trades matched against a NASD member acting
as principal, and
- $0.01/share for all other trades matched.
Nasdaq remits from 90% to 100% of these amounts to OptiMark OTC
Services for its services as an exchange facility operator responsible for
operating portions of the Nasdaq system, based on our agreement with Nasdaq.
When we launched the Nasdaq system, it was available for the trading of
ten over-the-counter stocks. After the launch of the Nasdaq system, we delayed
expanding beyond ten stocks due to:
- the unwillingness of certain key ECN's to modify their
computer systems to process trades transmitted from the system
in spite of the fact that, in not doing so, they are in our
view breaching SEC regulations. At this time both the SEC and
the NASDR, the regulatory body of Nasdaq, have in our view
chosen not to enforce their regulations,
- Nasdaq's not delivering the necessary software modifications
to allow market makers to update their positions immediately
after trades are executed through the system. Without these
modifications, market makers are unwilling to use the system
and expose themselves to higher than acceptable perceived
risk, and
- Nasdaq's not yet delivering the necessary software
modifications to allow designated brokers to obtain
information concerning the account balances, and to decrease
trading limits, of sponsored users during the course of the
trading day.
In May 2000, after one of the three largest ECNs and the next five largest ECNs
made the necessary modifications to their computer systems to process trades
transmitted from the OptiMark equities trading system, we expanded the Nasdaq
facility to trade those additional stocks that comprise the Nasdaq 100 Index
components. However, while we continue to work with Nasdaq, the ECNs and the SEC
to encourage them to correct the remaining issues as rapidly as possible so that
we can achieve higher usage on the Nasdaq system, we are dependent to a
significant extent on Nasdaq, the ECNs and the SEC to cooperate with us to make
these important modifications and enhancements. Because overcoming these
impediments is not within our
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direct control, we cannot estimate accurately when or whether these issues will
be corrected and the costs that we may incur in making these corrections.
However, we do not believe that these costs will be material to our business
operations.
Operations. We have entered into agreements with IBM Canada Ltd. and
its affiliate ISM Information Systems Management Corp. relating to the
operations of the OptiMark equities trading system, including a license
agreement and related services agreements. Under the license agreement we
license certain software used in the OptiMark equities trading system to
maintain a record of orders in the system; schedule the times during the trading
day when the system runs matches; receive from, record and notify users of
trades that have been matched; and manage the credit limits that are established
for each user. The license is perpetual, subject to termination only in the
event we fail to pay. We are also party to an agreement with IBM relating to
maintenance services for IBM software and an agreement under which IBM performs
and manages information systems activities and responsibilities in connection
with the computer system for the Pacific Exchange system. We currently pay
approximately $1,100,000 per month for these services.
IXnet, a subsidiary of IPC Information Systems, Inc., provides network
services and support to our customers for the operation of our US equities
business. We currently pay IXnet approximately $770,000 per month for the
network services and support. IXnet's service commitment continues until March
31, 2002. We are currently in discussions with IXnet to renegotiate the terms of
this arrangement to reduce the monthly cash requirement.
Competition. We derive substantially all of our revenues in the US
equities business from the volume of shares traded using the OptiMark equities
trading system. We expect competition for orders to continue and intensify in
the future. We compete for orders primarily with wholesale, national, and
regional broker/dealers, as well as ECNs, which are third-party trading systems
typically operated by broker/dealers, the New York and American Stock Exchanges,
regional exchanges, and third market competitors, as follows:
- Island, Instinet and Tradebook and other ECNs allow
participants to display firm, priced orders without disclosing
their identities to other participants and to execute
automatically against other orders in the system,
- POSIT and other "crossing systems" allow participants to enter
unpriced orders, which are then executed with matching
interest at a single price, typically derived from the primary
public market price for each crossed security,
- the Arizona Stock Exchange and other "single-price auction"
systems allow participants to enter priced orders, which the
system compares to determine the single price at which the
largest volume of orders can be executed, matching and
executing all orders at that price, and
- "upstairs" brokers, the bulge bracket, full-service brokerage
firms, employ their own capital enabling them to take large
positions from a trader.
We also face competition from existing markets and exchanges in their
traditional forms, as well as from the potential of these markets and exchanges
to deploy technological advances. In addition, the NYSE has announced that it
will establish its own alternative trading system.
We believe the main competitive factors are liquidity, quality of
execution, especially price and speed, scope of coverage and ease of learning
and use. The primary disadvantages of the OptiMark equities trading system to
date have been the perceived difficulty using the system and the high costs
associated with network connectivity and maintenence, which is reflected in the
costs paid by system users. Our current initiatives to reduce costs include the
use of hardware that is less expensive to operate and maintain than our existing
hardware, as well as the use of the Internet to connect users of the system.
Regulation. We provide the OptiMark equities trading system through
facilities of the Pacific Exchange and Nasdaq, and in our facility capacity we
are subject to regulation by the SEC. The facilities are provided pursuant to
the rules of the Pacific Exchange and Nasdaq in their capacities as self
regulatory organizations, and these rules must be approved by the SEC. This
approval process includes possible public notice and comment periods which both
invite industry and competitor opposition to our initiatives and cause those
initiatives to be known publicly before they are actually implemented, which
could result in competitive harm to us. Before obtaining SEC approval, any rule
changes affecting the OptiMark equities trading system must first be approved by
the exchanges themselves. This approval process can be cumbersome and uncertain
because the self regulatory organizations operate in a not-for-profit mutual or
member-controlled form of ownership, and governance initiatives must often be
approved by internal member committees and other responsible officials before
being reviewed at executive levels.
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Although we are not directly registered with the SEC in a formal
registration category (such as a broker-dealer or an ECN), as a facility of a
registered exchange we have agreed to SEC oversight and audit of our activities.
This oversight includes screening of our employees for past disciplinary
violations or other violations which would cause those individuals to
potentially be disqualified if they did work for a registered entity. The SEC
also has authority to audit our policies and procedures and books and records to
insure our adequacy and integrity as a facilities manager of a registered
exchange. We are also subject to audit and review by the internal regulatory
departments of the exchanges of which we are a facility for compliance with
applicable exchange rules. We are required to maintain extensive books and
records including detailed transaction logs in order to respond to regulatory
inquiries about the market conduct of our users in addition to our own conduct.
Our failure to comply with these laws, rules and regulations or perform our role
or maintain our policies and procedures in accordance with the applicable
standards could result in exchange or SEC imposed restrictions on or termination
of the operation of our facilities.
The OptiMark equities trading system in use on the Pacific Exchange
obtains access to prices and liquidity at other U.S. securities exchanges
through a system called the Intermarket Trading System, which is governed by a
plan approved by the SEC and may be amended only with the unanimous consent of
all plan participants. The Intermarket Trading System plan is currently
administered by the Intermarket Trading System Operating Committee, which
consists of representatives of the regional stock exchanges and the New York
Stock Exchange. The Intermarket Trading System plan imposes ceilings on our use
of the Intermarket Trading System and limitations and restrictions on our access
to the Intermarket Trading System if the facilities exceed those ceilings. If we
exceed these ceilings, the Intermarket Trading System plan provides that the
Pacific Exchange cannot send trades through the OptiMark equities trading system
that would be matched with orders on another exchange. While trades matched
entirely within the OptiMark equities trading system would not be affected, the
loss of access to orders on other exchanges will result in fewer completed
trades and could discourage users from using the system. Because of the SEC
approval process and the unanimous consent provision, it is extremely difficult
for us to obtain changes to or relief from these ceilings. We have exceeded
these ceilings in the past and, as a result, have experienced restricted access
to the other securities exchanges and may experience restricted access in the
future.
The regulatory environment in which we operate our US equities business
is subject to change. We cannot predict what effect these changes might have.
Both regulations directly applicable to us and regulations of general
application could have a material adverse effect on our business, financial
condition, and operating results. In particular, the SEC is weighing and seeking
public comment on the disadvantages of market fragmentation resulting from the
existence of separate market centers, such as multiple exchanges and ECNs, which
may result in customers in some markets receiving better prices available in the
same securities at the same time than those in other markets, against the
benefits of technological innovation provided by those centers. We cannot
predict whether or how the SEC will act to address this situation. However, we
do not expect SEC action in this area to have a material adverse impact on our
business, since we would expect to have access to any central limit order book
mandated by the SEC through our exchange facilities. We provide the OptiMark
equities trading system to two exchanges, and our business may be materially
affected by new rules mandating changes in market linkages, order display and
handling, duties of best execution and the regulation of exchanges generally.
ELECTRONIC MARKETS BUSINESS
Industry Background. The fast growth of the Internet as a means of
communicating with consumers and businesses globally has encouraged companies to
take advantage of the Internet to enter new markets, lower costs and improve
efficiency. Today the use of the Internet for business-to-business transactions
can be broken down into three basic categories as follows:
- online communities where buyers and sellers meet to exchange
information about particular topics and products,
- electronic distributors that provide a one-stop shopping
source for goods and services produced by a specific vertical
market, and
- business-to-business exchanges that enable buyers and sellers
to find one another efficiently and agree to a fair price.
We believe that the OptiMark matching engine technology can be employed
by companies in transactions with other companies that distribute or exchange
products or services to improve the efficiency and customization of these
business-to-business interactions. While currently we do not create or maintain
a system that connects our users over the Internet, our matching technology
software can be used by third parties who are creating and maintaining
Internet-based (as well as private network-based) exchanges. We believe our
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expertise in the areas of design and development of matching engines, creating
technology and delivering turn-key systems can aid businesses in many different
sectors to create more efficient systems and interactions between businesses.
We have adopted a business model that focuses on the delivery of
turn-key trading systems to a market, while aligning with organizations that
have specific geographic or relevant market expertise that will direct and
manage the market, thereby providing the capital and liquidity to the market. We
intend to provide the matching engines and related intellectual property,
recovering our development costs and receiving development fees, royalties and
minority equity stakes, with parties that will supply relevant market expertise,
management, liquidity and capital.
The following are specific initiatives in this area:
Osaka Securities Exchange. In September 1998 Nihon Keizai Shimbun and
QUICK Corp. established a joint venture with us in Japan called Japan OptiMark
Systems, Inc. Japan OptiMark Systems was formed to implement the OptiMark
equities trading system for Japanese equity securities. Japan OptiMark Systems
has entered into an agreement with the Osaka Securities Exchange to create a new
independent market using the OptiMark equities trading system to trade Japanese
listed equities. System users will be connected through a private data center
and network. The Osaka Securities Exchange is one of Japan's oldest stock
markets and trades over 1,200 Japanese equity securities.
We have licensed to Japan OptiMark Systems technology and other
intellectual property that permits Japan OptiMark Systems to develop and operate
a version of the OptiMark equities trading system for trading Japanese equity
securities on exchanges and/or markets in Japan. Japan OptiMark Systems will pay
us a royalty for the license based on gross revenues generated from its
operation of the OptiMark equities trading system. For at least an initial
period of time, the license of the technology is exclusive to Japan OptiMark
Systems for trading Japanese equity securities on exchanges and/or markets in
Japan. Under certain circumstances, the license may become non-exclusive.
We have begun to develop portions of the OptiMark equities trading
system for trading Japanese equity securities on the Osaka Securities Exchange
in Japan. Japan OptiMark Systems pays us fees, and reimburses us for expenses
incurred in providing development and maintenance services. Japan OptiMark
Systems will operate the OptiMark equities trading system on a daily basis, deal
with the Osaka Securities Exchange and Japan's Ministry of Finance for market
control and regulatory supervision, and perform sales, marketing, and customer
relations functions in connection with this application of the OptiMark equities
trading system.
Japan OptiMark Systems has begun marketing the system to Japanese users
and testing of the final system began in the second quarter of 2000. Subject to
Japan OptiMark Systems and the Osaka Securities Exchange obtaining all required
regulatory approvals, the system is scheduled to be launched on the Osaka
Securities Exchange in September 2000.
We own 15% and Nihon Keizai Shimbun and QUICK together own 53% of the
common stock of Japan OptiMark Systems. The remaining 32% of the common stock of
Japan OptiMark Systems is owned by unaffiliated third party investors. We have a
representative on the board of directors of Japan OptiMark Systems and have a
veto right over significant transactions and actions that may materially affect
Japan OptiMark Systems.
Offshore Financial Exchange. In April 2000, we entered into an
agreement with an established offshore financial exchange to license certain
portions of the OptiMark matching engine technology in consideration for 20% of
the equity of the exchange on a fully diluted basis. This offshore financial
exchange intends to utilize the OptiMark matching engine technology for trading
a variety of financial products in a variety of markets. Users will access the
exchange through the Internet. We also have an option to purchase up to an
additional 10% of the equity of the exchange on a fully diluted basis for
$1,650,000, for a period of time after the achievement of specified targets.
The software license requires the exchange to pay us a royalty equal to
45% of the net revenue generated from the use of the OptiMark matching engine
technology in the respective markets. In addition, we have agreed to provide to
the exchange certain information technology and support services. We will have a
representative on the board of directors of the exchange and have a veto right
over certain transactions that may materially affect the exchange and our equity
ownership. We anticipate that this transaction will be consummated in the third
quarter of 2000, subject to the satisfaction of customary closing conditions.
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South African Technology Provider. In April 2000, we entered into an
agreement with a South African technology provider to establish a joint venture
for the purpose of providing the OptiMark matching engine technology for the
trading of private equity securities of South African companies. Users will
access the private equities system through the Internet. We will own 50% and our
joint venture partner will own 50% of the joint venture company.
We will license to the joint venture company certain portions of the
OptiMark matching engine technology in exchange for our 50% equity ownership in
the joint venture company and a royalty equal to 20% of the transaction revenues
of the joint venture company for the first twelve months after it begins using
the technology and 10% thereafter. Our joint venture partner will contribute the
equivalent of approximately $750,000 in South African Rand in exchange for its
50% equity ownership in the joint venture company.
We will have three representatives and our joint venture partner will
have three representatives on the board of directors of the joint venture
company. We also have a veto right over significant transactions and actions
that may materially affect the joint venture company. We anticipate this
transaction will be consummated in the third quarter of 2000, subject to the
satisfaction of customary closing conditions.
Other Foreign and Domestic Exchanges and Markets. We have signed a
letter of intent to license our matching engine technology to a company engaged
in the shipping industry in exchange for approximately 14% of its equity. We
have also had exploratory discussions with other securities exchanges, option
exchanges, and other providers of non-financial products, but have no agreements
or commitments.
Competition. In the growing Internet area many companies provide
services and products to the market for business-to-business commerce.
Competition in this market is rapidly increasing, and we expect that competition
will further increase in the future. Our competition, both direct and indirect,
potentially comes from a wide range of companies involved in electronic
commerce, including:
- companies that provide software that allows for the
establishment of digital marketplaces,
- companies that develop and operate trading systems,
- companies that operate websites that provide auction features
to buyers and sellers,
- providers of stand-alone software products that make available
to buyers technology for conducting online auctions of goods
and services, and
- professional service and consulting firms offering similar
services.
Many of our competitors have had more experience in this field and have
developed a greater customer base than we have to date. Because many of these
potential competitors are more established and larger than we are, they may be
able to commit more resources to promotions and marketing of their products. The
services we provide may look similar to those of our competitors, despite actual
differences, which may hurt our customer base and recognition of our product. We
also face the potential risk that customers will be dissatisfied with our
products or services which will make it difficult to maintain our client base
and attract new clients.
RESEARCH AND DEVELOPMENT
We originally began developing the OptiMark matching engine technology
in 1994 and we continue to enhance the technology on an ongoing basis. As of May
31, 2000, our research and development team included approximately 132 employees
and consultants. The research and development team includes a number of key
members that have extensive experience with trading systems, advanced
mathematics and computer programming.
We believe our technical personnel and core technologies represent a
significant competitive advantage. We believe a technically skilled and highly
productive research and development team is a key component for the success of
new and better product offerings.
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We expect that most of our technology and enhancements to existing and
future systems will be developed internally. However, we currently license
certain externally-developed technologies and will continue to evaluate
externally-developed technologies to integrate with our systems.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
As of May 31, 2000, we held five issued United States patents, as well
as two allowed and nine pending United States patent applications. As of that
date, we also held 11 issued international patents, as well as 100 pending
international patent applications. We plan to file additional patent
applications, both domestically and internationally, as we discover new
inventions.
We seek to protect our trade secrets, service marks, trademarks, and
copyrights through a combination of contractual restrictions and laws, such as
confidentiality and license agreements. We attempt to register our trademarks
and service marks in the United States and internationally. We have registered
our corporate logo and the mark "OPTIMARK," among others, in the United States
and internationally in several countries. However, effective trademark, service
mark, trade secret, and copyright protection may not be available in every
country in which OptiMark's matching engine technology may be made available.
We currently own the Internet domain name "OptiMark.com". Domain names
generally are regulated by Internet regulatory bodies. The relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary rights is unclear. We therefore could be unable to prevent third
parties from acquiring domain names that infringe or otherwise decrease the
value of our trademarks and other proprietary rights.
SALES AND MARKETING
In our US equities business, we offer the OptiMark equities trading
system through our direct sales organization. As of May 31, 2000, our direct
sales force consisted of 15 sales professionals. We typically target our sales
and marketing efforts at portfolio managers and traders within user
organizations. When a prospective user is interested in becoming a user of the
OptiMark equities trading system, we will provide the appropriate user
agreements and account opening forms, provide connectivity to the system through
a proprietary network or other order routing system and offer training and
guidance in the use of the system to appropriate persons in the user
organization.
In our electronic markets business, we have two individuals primarily
responsible for identifying and establishing strategic relationships with
parties who will supply relevant market expertise, management and capital to
ventures that we establish and to whom we license the OptiMark matching engine
technology. We contemplate that the marketing of the matching engine technology
product that is utilized in these ventures will be undertaken by the parties
with whom we enter into these ventures who primarily operate and manage these
enterprises.
We market our US equities and electronic markets businesses through
advertising on our website and a public relations program. In addition, for the
OptiMark equities trading system operating on Nasdaq, we offer a web-based,
self-paced training course accessible from our website. This training course
allows participants to understand the features and benefits of the Nasdaq system
and to enter profiles and see the results of the matches.
EMPLOYEES
As of May 31, 2000, we had 257 full-time employees, 128 of whom were
engaged in research and development, 31 in sales and marketing, 18 in customer
support, and 80 in executive, finance, administration and operations. We have
never had a work stoppage and our employees are not represented by any
collective bargaining unit.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Refer to the financial statements for financial information about our
industry segments.
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FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Financial information about our foreign and domestic operations and
export sales, as applicable, is included in the financial statements and is
incorporated by reference.
RISK FACTORS
The risks and uncertainties described below are not the only ones we
face. Additional risks and uncertainties not presently known to us may also
adversely impact our business operations. If any of the following risks actually
occur, our business, financial condition or operating results could be
negatively affected.
Unless we can obtain additional financing we will run out of cash by October
2000. Since our inception, our operating and investing activities have used
substantially more cash than they have generated. Because we will continue to
need substantial amounts of working capital to fund the growth of our business,
we expect to continue to experience significant negative operating and investing
cash flows for the foreseeable future. We currently anticipate that our
available cash resources will be sufficient to meet our anticipated working
capital and capital expenditure requirements through the middle of October 2000.
This estimate is a forward-looking statement that involves risks and
uncertainties. The actual time period may differ materially from that indicated
as a result of a number of factors so that we cannot assure you that our cash
resources will be sufficient for anticipated or unanticipated working capital
and capital expenditure requirements for this period. We will need to raise
additional capital in the future to meet our operating and investing cash
requirements. We may not be able to find additional financing on favorable terms
or at all. If we raise additional funds through the issuance of securities,
these securities may have rights, preferences or privileges senior to those of
our common stock and existing series of preferred stock, and our stockholders
may experience additional dilution to their equity ownership.
We have a history of losses and have never been profitable. We have not achieved
profitability, we expect to continue to incur losses for the foreseeable future
and we may never be profitable. If we do achieve profitability in any period, we
cannot be certain that we will sustain or increase such profitability on a
quarterly or annual basis.
We had no revenues from our current operations until January 1999.
Through December 31, 1999, we generated revenue of only approximately $3.0
million, and we incurred total expenses of approximately $141.0 million during
that same period. We have incurred net losses each year since our inception. We
incurred a net loss of $22.8 million for the three months ended March 31, 2000,
$135.1 million for 1999, $57.2 million for 1998, $20.4 million for 1997, and
$7.2 million for 1996. As of March 31, 2000, we had an accumulated deficit of
$252.1 million.
We have received a report from our independent auditors for our fiscal
year ended December 31, 1999 containing an explanatory paragraph that describes
the uncertainty as to our ability to continue as a going concern due to our
historical negative cash flow and because we did not have access to sufficient
committed capital to meet our projected operating needs for fiscal year 2000.
Our quarterly operating results may fluctuate. We expect to experience
fluctuations in future quarterly operating results that may be caused by many
factors, including the following:
- fluctuations in the volume of trades using the OptiMark
matching engine technology in both our US equities business
and electronic markets business,
- issuance or exercise of warrants,
- trends in securities and other markets,
- competition,
- domestic and international regulation,
- changes in strategy,
- the success of or costs associated with acquisitions, joint
ventures or other strategic relationships,
- changes in key personnel,
- international expansion,
- changes in the level of operating expenses to support
projected growth, and
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- general economic conditions.
Due to these factors, quarterly revenues and operating results are
difficult to forecast. We believe that period-to-period comparisons of our
operating results will not necessarily be meaningful and you should not rely on
them as any indication of future performance. Our future quarterly operating
results may not consistently meet the expectations of securities analysts or
investors, which in turn may have an adverse effect on the market price of our
common stock.
We have relationships with service providers and equipment lessors that limit
our ability to reduce our fixed costs at a time when we are generating limited
revenue. In addition to other operating expenses, which include research and
development, general and administrative and US equities business development,
which are relatively fixed in the short term, we have relationships with several
service providers and equipment lessors under which we pay approximately $2.5
million per month. These expenses are relatively fixed and were based on the
anticipation of future revenues. To date our revenues have not been significant.
If we fail to generate sufficient revenues in relation to these expenses then we
may be unable to adjust our costs in a timely manner, or at all, and our
operating results will be negatively affected.
Our financial results may be adversely affected by the accounting treatment of
certain warrants. We have agreed to issue warrants to purchase up to 11,250,000
shares of our common stock to the Nasdaq Stock Market on the achievement of
specified levels of trading volume using the OptiMark equities trading system.
We have also agreed to issue up to a maximum of approximately 31,000,000 shares
of common stock to the Knight/Trimark Group, Inc. contingent on the execution of
transactions originated by Knight/Trimark in listed or over-the-counter equity
securities using the OptiMark equities trading system. At the time it becomes
reasonably probable that these warrants will be earned by Nasdaq and
Knight/Trimark, we will begin to record a non-cash warrant compensation expense
equal to the fair value of the warrants to be earned. This expense will be
calculated using the Black-Scholes model and will reduce our net income, or
increase our net loss, as the case may be, until the warrant is earned. In 1999,
we recorded an expense of approximately $34 million when Nasdaq earned warrants
to acquire 4,500,000 shares of common stock.
Our limited operating history makes evaluating our business and prospects
difficult. We have a limited operating history on which you can base an
evaluation of our business and future prospects. You should carefully consider
our prospects in light of the risks and difficulties frequently encountered by
early stage companies in new and rapidly evolving markets. Our success will
depend in part upon our ability to implement and execute our business and
marketing strategy in our US equities business and electronic markets business.
There is a risk that we will not be able to accomplish our objectives. Failure
to achieve any of our objectives could negatively affect our business, financial
condition and results of operations.
We depend on the Pacific Exchange, Nasdaq and Japan OptiMark Systems for
substantially all of our revenues. We currently do not have any revenues other
than revenues derived from trading US equity securities on the Pacific Exchange
and Nasdaq and revenues derived from consulting services we provide to Japan
OptiMark Systems. The Pacific Exchange, Nasdaq and Japan OptiMark Systems
represented all of our revenues in 1999 and for the three months ended March 31,
2000. We do not expect any other significant sources of revenues until the
OptiMark matching engine technology has been implemented on other markets and
exchanges. Therefore, our business would be harmed if the Pacific Exchange or
Nasdaq stopped using the OptiMark equities trading system or if Japan OptiMark
Systems stopped making payment for the consulting services we provide to them.
We currently anticipate that the services we provide to Japan OptiMark Systems
and the fees from such services will decrease substantially upon the launch of
the OptiMark equities trading system on the Osaka Securities Exchange.
We depend significantly on a small group of users for a substantial portion of
our revenues from our US equities business. Approximately 75% of our revenues
from our US equities business in 1999 were derived from four users of the
OptiMark equities trading system, one of whom accounted for 54% of our revenues
and the other three of whom each accounted for less than 10% of our revenues. We
anticipate these users will continue to account for a significant percentage of
our revenues in our US equities business. Neither these users, nor any other
user, is obligated contractually to use the OptiMark equities trading system.
There is a risk that we will not be able to retain these users in the future. A
decision by one or more of these users to discontinue using or decrease its
usage of the OptiMark equities trading system would have a material adverse
effect on our business, financial condition and results of operations.
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Our business-to-business strategy is unproven and may not be successful. After
an evaluation of our business prospects, we have adopted a new strategy to make
the OptiMark matching engine technology available for use in
business-to-business marketplaces where buyers and sellers can conduct
electronic commerce. We contemplate entering these business-to-business
electronic markets through direct participation, licensing the OptiMark matching
engine technology to electronic commerce providers for inclusion in their
infrastructure and operating system products and establishing relationships with
key consulting organizations. If this business strategy is flawed, or if we are
unable to execute it effectively, our business, operating results and financial
condition will be substantially harmed. Our strategy is unproven, our management
team has limited experience in business-to-business marketplaces and we have
never implemented our OptiMark equities trading system or the OptiMark matching
engine technology outside of our US equities business.
In addition, we may incur losses in the future as we enter new markets
and exchanges. Implementation of the OptiMark matching engine technology in new
markets will require us to incur substantial expenses. We may incur significant
research and development expenses to adapt the OptiMark matching engine
technology for use in these markets and exchanges. We may experience long delays
between these implementation expenses and any resulting revenues. For example,
we incurred significant expenses prior to implementing the OptiMark equities
trading system on the Pacific Exchange and Nasdaq before we received any
revenues. We may incur even greater expenses if we enter non-financial markets.
Therefore, entering new markets may affect our short-term profits and cash
position. Furthermore, these efforts may divert management attention or
inefficiently use our resources.
Our business model depends on establishing relationships with parties with
relevant market expertise to develop and successfully operate electronic
marketplaces. A key element of our business model is to provide matching engines
and related intellectual property to parties through strategic alliances both
domestically and internationally that will supply relevant market expertise,
management, liquidity and capital. We cannot assure you that we will be able to
identify, attract and reach agreement with these parties or that if we reach
agreement, these agreements will be on terms favorable to us. In addition, given
the potential complexity of these relationships, there may be significant delay
between the identification of parties and reaching the necessary agreements.
Even if we reach the necessary agreements with one or more parties, we cannot
assure you that these parties will be able to implement our systems and
technology effectively, that they will develop and launch electronic
marketplaces or that buyers and sellers in the respective markets in which the
OptiMark matching engine technology is deployed will participate in the
marketplace. Operating through these strategic alliances can be complex, we may
be a minority equity holder in these alliances with limited control over the
venture, and we may not be able to reach agreement with our counterparties on
important matters regarding the direction of the venture.
Because the business-to-business market place is highly competitive and has low
barriers to entry, we cannot assure you that we will be able to compete
effectively. The market for business-to-business electronic commerce solutions
is extremely competitive. We expect competition to intensify as current
competitors expand their product offerings and new competitors like us enter the
market. We cannot assure you that we will be able to compete successfully
against current or future competitors, or that competitive pressures we face
will not harm our business, operating results or financial condition.
Because there are relatively low barriers to entry in the electronic
commerce market, competition from other established and emerging companies may
develop in the future. In addition, our customers and parties with whom we enter
strategic alliances may become competitors in the future. Certain of our
competitors may be able to negotiate alliances on more favorable terms than we
are able to negotiate. Many of our competitors may also have well-established
relationships with our existing and prospective customers. Increased competition
is likely to result in price reductions, lower average sales prices, reduced
margins, longer sales cycles or loss of market share, any of which could harm
our business, operating results or financial condition.
Many of our competitors will have, and potential competitors may have,
more experience developing software and matching solutions, larger technical
staffs, larger customer bases, greater brand recognition and greater financial
and other resources than we have. In addition, competitors may be able to
develop products and services that are superior to our products and services,
that achieve greater customer acceptance or that have significantly improved
functionality as compared to our existing and future products and services.
There is a risk that the business-to-business electronic commerce solutions
offered by our competitors now or in the future will be perceived as superior to
ours.
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Users may not use the OptiMark equities trading system at levels sufficient to
sustain our business. We believe our success depends in part upon our ability to
attract users. A significant portion of our revenues is directly related to the
volume of shares traded through the OptiMark equities trading system. In order
to encourage use of the OptiMark equities trading system, we need to ensure that
users' trades are adequately matched. This will require a large volume of shares
to be processed through our system. If we do not achieve sufficient trading
volume, we may not be able to attract additional users to generate the trading
volume necessary for widespread acceptance.
User acceptance of the OptiMark equities trading system has been slow
to date and is subject to a high level of uncertainty going forward. The
OptiMark equities trading system is a new approach to securities trading that
requires intensive marketing and sales efforts to educate prospective customers
as to its uses and benefits. Users of our system must adopt a new, computerized
approach to trading equity securities that is different from traditional
methods, particularly execution of orders by "open outcry" in the U.S. listed
equities market.
Institutions may be reluctant or slow to change.
Factors that may affect our ability to attract users include:
- failure to achieve sufficient liquidity in our system to
ensure that trades will get done,
- perception that using the system is difficult and
time-consuming,
- perception that using the system does not create a trading
advantage,
- inability to price our services at a competitive level,
- failure to provide adequate customer service and support,
- security or privacy breaches, and
- actual or perceived system "bugs" or failures.
There is a risk that we will not be able to adequately address these
issues such that enough users will use the system at sufficient levels to
sustain our business.
We depend heavily on third parties over whom we have limited control in order to
obtain regulatory approvals and make systems modifications. Our US equities
business is heavily dependent on third parties, primarily the Pacific Exchange
and Nasdaq, to submit for regulatory approval and implement modifications and
enhancements to our equities trading system. In many cases the business
priorities of these third parties will not necessarily be the same as ours. If
we are unable to obtain the timely cooperation of these third parties in
connection with these approvals, modifications and enhancements, it could have a
material adverse effect on our business, financial condition and operating
results. We have experienced delays of this nature in the past.
Markets and exchanges may not adopt the OptiMark matching engine technology.
Currently, the only application of our matching engine technology is for trading
equity securities. Acceptance of the OptiMark matching engine technology by
other stock markets and exchanges is highly uncertain. Our growth may be limited
if we are unable to establish additional relationships with other markets and
exchanges.
The OptiMark matching engine technology may suffer from system failures. Our
technology requires the successful operation of an entire chain of software,
hardware and telecommunications equipment. A significant disruption in our
service could seriously undermine our users' confidence in our system. Heavy
stress placed on our systems during peak trading times could cause our systems
to operate at unacceptably low speed or fail. If our systems or any other
systems in the trading process slow down significantly or fail even for a short
time, users may suffer delays in trading, causing substantial losses and
possibly subjecting us to claims for the losses. The perception of a failure or
bad publicity may lead users to stop using the OptiMark trading technology. We
have experienced these systems failures in the past, and this may occur in the
future.
Some of these elements are not within our control, such as network
connectivity and software, hardware and telecommunications equipment and service
we purchase from others. In addition, hardware and software are potentially
vulnerable to interruption from power failures, telecommunications outages,
network service outages and disruptions, natural disasters, and vandalism and
other misconduct.
We cannot assure you that our network structure will operate
appropriately in any of the following events:
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- subsystem, component or software failure or power or
telecommunications failure,
- an earthquake, fire or other natural disaster, or
- an act of God or war.
There is a risk that in any such event, we will not be able to prevent
an extended systems failure. Any systems failure that interrupts our operations
could harm our business.
We may not be able to guarantee confidentiality and security. A significant
component of the OptiMark matching engine technology is the secure transmission
of confidential information over private networks. A compromise of security on
our network would decrease confidence of users to enter profiles anonymously. We
rely on encryption and authentication technology to provide secure transmission
of confidential information. There is a risk that advances in computer and
cryptography capabilities or other developments will compromise the algorithms
we use to protect customer transaction data.
We rely on third parties to provide services important to our US equities
business. We rely on certain third-party service providers, including:
- IXnet, a subsidiary of IPC Information Systems, Inc., to
provide private network services, and
- ISM, a subsidiary of IBM, to operate our data center for the
Pacific Exchange system and provide consulting and integration
services.
If we are no longer able to obtain these services, we will need to
provide these services internally or find other third-party providers of these
services. We cannot assure you that we will be able to provide these services
internally or secure these services on acceptable terms.
Our revenues may be affected by diminished market activity due to adverse
economic, political and market conditions. Our revenues in our business segments
are directly related, particularly in our US equities business, to the volume of
trades matched using our technology. Numerous national and international factors
that are beyond our control may affect our businesses, including:
- economic, political and market conditions,
- the availability of short-term and long-term funding and
capital,
- the level and volatility of interest rates,
- legislative and regulatory changes, and
- currency values and inflation.
Any decline in market volume, liquidity or price or any other of these
factors could have a material adverse effect on our business, financial
condition and operating results. Any of these factors may contribute to reduced
levels of activity in the markets in which we operate, which could result in
lower revenues from our activities.
We face substantial competition in our US equities business. The market for
alternative trading systems is new, rapidly evolving and intensely competitive.
We expect competition to continue and intensify in the future. We face direct
and indirect competition from alternative trading systems including the
following:
- Island, Instinet and Tradebook and other ECNs allow
participants to display firm, priced orders to other
participants and to execute automatically against other orders
in the system,
- POSIT and other "crossing systems" allow participants to enter
unpriced orders, which are then executed with matching
interest at a single price, typically derived from the primary
public market price for each crossed security,
- the Arizona Stock Exchange and other "single-price auction"
systems allow participants to enter priced orders, which the
system then compares to determine the single price at which
the largest volume of orders can be executed. All orders are
then matched and executed at that price, and
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- more than 18 broker/dealers have notified the SEC that they
operate some type of alternative trading system, either
internally for their own traders or for their customers and
other market participants.
Existing alternative trading systems currently handle approximately 30%
of the volume of Nasdaq over-the-counter securities traded and 17% of the volume
of NYSE-listed securities traded. These alternative trading systems already have
relationships with potential users of the OptiMark equities trading system.
In addition, we may face competition from existing markets and
exchanges. The NYSE has announced that it will establish its own alternative
trading system. Accordingly, it is possible that new competitors or alliances
among existing competitors may significantly reduce the volume of securities
traded using the OptiMark equities trading system.
Many of our competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than
we do. Many of our competitors offer a wider range of services and financial
products than we do, and thus may be able to respond more quickly to new or
changing opportunities, technologies and customer requirements. Many of our
competitors also have greater name recognition and larger customer bases that
could be leveraged, thereby inhibiting our ability to gain market share.
Moreover, certain competitors have established cooperative relationships among
themselves or with third parties to enhance their services and products.
We face significant regulation. General. We provide the OptiMark equities
trading system through facilities of the Pacific Exchange and Nasdaq, and in our
facility capacity we are subject to regulation by the SEC. The facilities are
provided pursuant to the rules of the Pacific Exchange and Nasdaq in their
capacities as self regulatory organizations, and these rules must be approved by
the SEC. As a facility of a registered exchange, we have also agreed to SEC
oversight and audit of our activities. The SEC also has authority to audit our
policies and procedures and books and records to insure our adequacy and
integrity as a facilities manager of a registered exchange. We are also subject
to audit and review by the internal regulatory departments of the exchanges of
which we are a facility for compliance with applicable exchange rules. Our
failure to comply with theses laws, rules and regulations or perform our role or
maintain our policies and procedures in accordance with the applicable standards
could result in exchange or SEC imposed restrictions on or termination of the
operation of our facilities.
The OptiMark equities trading system in use on the Pacific Exchange
obtains access to prices and liquidity at other U.S. securities exchanges
through a system called the Intermarket Trading System. The Intermarket Trading
System plan is currently administered by the Intermarket Trading System
Operating Committee, which consists of representatives of the regional stock
exchanges and the NYSE. The Intermarket Trading System plan imposes ceilings on
our use of the Intermarket Trading System and imposes limitations and
restrictions on our access to the Intermarket Trading System if the facilities
exceed those ceilings. If we exceed these ceilings, the Intermarket Trading
System plan provides that the Pacific Exchange cannot send trades through the
OptiMark equities trading system that would be matched with orders on another
exchange. While trades matched entirely within the OptiMark equities trading
system would not be affected, the loss of access to orders on other exchanges
will result in fewer completed trades and could discourage users from using the
system. Because of the SEC approval process and the unanimous consent provision,
it is extremely difficult for us to obtain changes to or relief from these
ceilings. We have exceeded these ceilings in the past and, as a result, have
experienced restricted access to the other securities exchanges. There is a risk
that we will exceed these plan ceilings again in the future and that could have
a material adverse effect on our business, financial condition and operating
results.
In connection with our approval of the OptiMark equities trading system
on Nasdaq, the SEC approved the system on a pilot basis. The SEC recently
approved an extension of the pilot program through September 30, 2000. We
believe that the SEC will continue to extend the pilot program and will
eventually remove the restrictions in the pilot program. However, there is a
risk that the SEC will not grant any further extension of the pilot program or
remove the pilot program restrictions. This would have a material adverse effect
on our business, financial condition and operating results.
The SEC recently requested public comment on the subject of market
fragmentation. Market fragmentation involves the trading of stocks in multiple
markets such as traditional exchanges, third markets and ECNs, in a manner which
may result in customers in some markets receiving better prices available in the
same securities at the same time than those in other markets. We cannot predict
whether or how the SEC will act to address this situation. However, we do not
expect SEC action to have a
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<PAGE> 19
material adverse impact on our business, since we would expect to have access
through our exchange facilities to any central limit order book mandated by the
SEC.
The regulatory environment in which we operate our US equities business
is subject to change. We cannot predict what effect any such changes might have.
Both regulations directly applicable to us and regulations of general
application could have a material adverse effect on our business, financial
condition, and operating results.
We may face other regulation. There is a risk that other federal, state or
foreign agencies will attempt to regulate our activities, especially as we enter
new markets. We anticipate that we may be required to comply with record
keeping, data processing and other regulatory requirements as a result of
proposed federal legislation or otherwise. Federal or state authorities could
enact laws, rules or regulations affecting our business or operations. If such
laws are enacted or deemed applicable to us, our business or operations would be
rendered more costly or burdensome, less efficient or even impossible.
We face significant regulation in foreign countries. We intend to expand the use
of the OptiMark matching engine technology to other countries. Through the joint
venture we created in Japan, we have entered into agreements with the Osaka
Securities Exchange. We intend to enter into other foreign markets. In order to
expand our services globally, we must comply with the regulations of each
country in which we operate. Our international expansion will be limited by the
compliance requirements of various national regulatory organizations. We intend
to rely primarily on local third parties for regulatory compliance in
international jurisdictions. The varying compliance requirements of these
different regulatory jurisdictions and other factors may limit our ability to
expand internationally. There is a risk that we will not be successful in
obtaining the necessary regulatory approvals for any such expansion, or if such
approvals are obtained, that we will be able to continue to comply with such
regulations. The failure to obtain or comply with such approvals could have a
material adverse effect on our business, financial condition and operating
results.
Regulation of the Internet. Our business segments, both directly and indirectly,
rely on the Internet and other electronic communications gateways. We intend to
expand our use of these gateways. To date, the use of the Internet has been
relatively free from regulatory restraints. However, the SEC, self-regulatory
organizations and states are beginning to address the regulatory issues that may
arise in connection with the use of the Internet. Accordingly, new regulations
or interpretations may be adopted that constrain our own and our customers'
abilities to transact business through the Internet or other electronic
communications gateways. There is a risk that any additional regulation of the
use of such gateways could have a material adverse effect on our business,
financial condition and operating results.
We depend on key personnel and may need to recruit new personnel. In connection
with our recent change in business strategy, we laid off 80 employees, primarily
in the technology and operations areas. As we attempt to implement our new
business model and expand into other financial and non-financial markets, we may
need to add additional key personnel. If we cannot attract and retain enough
qualified and skilled staff, the growth of our business may be limited. Our
ability to provide services to clients and expand our business depends, in part,
on our ability to attract and retain staff with college and graduate degrees, as
well as professional experiences that are relevant to technology development and
other functions we perform. Competition for personnel with these skills is
intense. Some technical job categories are under conditions of severe shortage
in the United States. In addition, restrictive immigration quotas could prevent
us from recruiting skilled staff from outside the United States. We may not be
able to recruit or retain the caliber of staff required to carry out essential
functions at the pace necessary to sustain or expand our business.
We believe our future success will depend in part on the following:
- the continued employment and performance of our senior
management,
- our ability to retain and motivate our other officers and key
employees, and
- our ability to identify, attract, hire, train, retain and
motivate other highly skilled technical, managerial, marketing
and customer service personnel.
We face risks associated with international expansion. One component of our
strategy is to implement the OptiMark matching engine technology in countries
other than the United States. We have established a joint venture in Japan and
have entered into agreements with an established financial exchange located
offshore and a technology provider located in South Africa to use our
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<PAGE> 20
matching engine technology. Our experience in implementing our matching engine
technology in foreign markets is very limited. We cannot assure you that our
international partners and licensees will be able to implement our trading
technology successfully in international markets. In addition, there are certain
risks inherent in doing business in international markets, particularly in the
heavily regulated securities and financial services industries, such as:
- unexpected changes in regulatory requirements, tariffs and
other trade barriers,
- difficulties in staffing and managing foreign operations,
- political instability,
- fluctuations in currency exchange rates,
- reduced protection for intellectual property rights in some
countries,
- seasonal reductions in business activity in various parts of
the world, and
- potentially adverse tax consequences.
Any of the foregoing could adversely affect the success of our
international operations.
We depend on intellectual property rights and protection is uncertain. Our
success and ability to compete depend to a significant degree on our proprietary
technology. If we are not successful in protecting and enforcing our
intellectual property, there could be a material adverse effect on our business.
Effective trademark protection may not be available for our trademarks.
Although we have registered the trademark "OptiMark" in the United States and
various other countries and have other registered trademarks, there is a risk
that we will not be able to secure significant protection for and successfully
enforce these trademarks. Our competitors or others may adopt product or service
names similar to "OptiMark" impeding our ability to build brand identity and
possibly leading to customer confusion. Our inability to adequately protect the
name "OptiMark" would harm our business.
Effective patent protection may not be available for our technology.
While we believe that our patents, together with our pending patent
applications, help protect our business, there is a risk that
- our patents cannot be successfully defended against challenges
by third parties,
- the pending patent applications will not result in the
issuance of patents,
- our competitors or potential competitors will devise new
methods of competing with us that are not covered by our
patents or patent applications,
- because of variations in the fungible goods and services to be
traded using our matching engine technology, our patents may
not be effective in preventing one or more third parties from
utilizing a copycat system to offer the same matching services
for one or more goods or services, or
- a third party will have or obtain one or more patents that
prevent us from practicing features of our business or will
require us to pay for a license to use those features.
Despite any precautions we take, a third party may be able to copy or
otherwise obtain and use our software or other proprietary information without
authorization or develop similar software independently. The laws of other
countries may afford us little or no effective protection for our intellectual
property. We cannot assure you that the steps we have taken or will take will
prevent misappropriation of our technology or that agreements entered into for
that purpose will be enforceable.
Litigation may be necessary in the future to:
- enforce our intellectual property rights,
- protect our trade secrets,
- determine the validity and scope of the proprietary rights of
others, or
- defend against claims of infringement or invalidity.
This litigation, whether successful or unsuccessful, could result in substantial
costs and diversions of resources, either of which could harm our business.
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<PAGE> 21
We may infringe intellectual property rights of third parties. Litigation
regarding intellectual property rights is common in the software and technology
industries. We have in the past received letters suggesting that we are
infringing the intellectual property rights of others. We were also the subject
of a claim for infringement of a third party's intellectual property rights,
which was settled and had no material adverse effect on our business or
operations. We may in the future be the subject of claims for infringement or
invalidity, or indemnification claims based on such claims of other parties'
proprietary rights. These claims, with or without merit, could be time consuming
and costly to defend or litigate, divert our attention and resources or require
us to enter into royalty or licensing agreements. There is a risk that such
licenses would not be available on reasonable terms, or at all. Although we
believe we have the ability to use our intellectual property to use, market and
license our existing products without incurring liability to third parties,
there is a risk that our products and services infringe the intellectual
property rights of third parties.
Our products and technology depend on the continued availability of licensed
technology from third parties. We license and will continue to license certain
technology and software from third parties, including certain software from IBM
Canada that comprises a portion of our OptiMark equities trading system in use
at the Pacific Exchange and Nasdaq. These licenses are integral to our business.
If any of these relationships were terminated or if any of these third parties
were to cease doing business, we would be forced to spend significant time and
money to replace the licensed software. We cannot assure you that we would be
able to replace these licenses. This could have a material adverse effect on our
business, financial condition and operating results.
Officers and directors may be able to influence stockholder actions. Executive
officers, directors and entities affiliated with them, in the aggregate,
beneficially own over 50% of our outstanding voting stock. These stockholders
acting together would be able to significantly influence matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other business combination transactions in a manner that
could conflict with our other stockholders.
Shares eligible for future sale may reduce our stock price. As of June 12, 2000,
we had outstanding 68,999,929 shares of common stock (on an as converted basis).
These shares will become eligible for sale in the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
<S> <C>
18,421,158 On the effective date of this registration statement
50,578,771 After 90 days from the effective date of this
registration statement subject to certain
restrictions under the federal securities
laws
</TABLE>
A number of our stockholders, representing approximately 40,113,000
shares of our common stock (on an as converted basis), have registration rights.
By exercising their registration rights and causing a large number of shares to
be registered and sold in the public market, these holders may cause the price
of our common stock to fall. In addition, any demand to include these shares in
a registration statement could have an adverse effect on our ability to raise
needed capital.
You will incur dilution on the exercise of outstanding warrants we have granted.
We have issued warrants or agreed to issue warrants upon the achievement of
certain levels of trading volume through the OptiMark equities trading system to
purchase up to approximately 46,000,000 shares of our common stock. If the
holders of these warrants exercise these warrants you will incur dilution.
Antitakeover provisions may prevent an acquisition. Provisions of our
certificate of incorporation, bylaws and Delaware law could make it more
difficult for a third party to acquire us, even if doing so would be beneficial
to our stockholders. Our certificate of incorporation authorizes the board to
determine the terms of our unissued series of preferred stock and to fix the
number of shares of any series of preferred stock without any vote or action by
our stockholders. As a result, the board can authorize and issue shares of
preferred stock with rights that could adversely affect the rights of holders of
our common stock or junior classes of preferred stock. In addition, the issuance
of preferred stock may have the effect of delaying or preventing a change of
control, because the rights given to the holders of a series of preferred stock
may prohibit a merger, reorganization, sale, liquidation or other extraordinary
corporate transaction.
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<PAGE> 22
We have no intention of paying dividends. We have never declared or paid any
cash dividends on our capital stock. We currently intend to retain any future
earnings for funding growth and, therefore, do not expect to pay any dividends
for the foreseeable future.
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<PAGE> 23
ITEM 2. FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
Our selected financial data for and as of each of the years ended
December 31, 1999, 1998, 1997, 1996 and 1995 have been derived from our audited
consolidated financial statements, including notes thereto. Our selected
financial data for the three month periods ended March 31, 2000 and March 31,
1999 and as of March 31, 2000 have been derived from our unaudited financial
statements and we believe this data reflects all normally recurring adjustments
necessary for a fair statement of results for the interim periods. The
information set forth below is qualified in its entirety by reference to, and
should be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto included elsewhere in this registration statement.
OptiMark Technologies, Inc. was formed in July 1996 in order to effect
the reorganization of MJT Holdings, Inc. On August 1, 1996, MJT Holdings was
merged with and into OptiMark Technologies, Inc. The merger was a transaction
among companies under common control and, accordingly, has been accounted for in
a manner similar to a pooling of interests. Accordingly, our financial
statements include the results of operations of MJT Holdings and its wholly
owned subsidiaries for 1995 and 1996. From January 1, 1995 to May 31, 1996, MJT
Holdings operated as a broker/dealer and therefore had commissions and fees
included in revenue. On June 12, 2000 we established a holding company and
placed our electronic markets and US equities businesses in separate operating
subsidiaries.
21
<PAGE> 24
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Consolidated Statements of
Operations and Comprehensive
Loss Data:
Revenue $ 3,012,244 $ - $ -
Operating expenses 140,957,751 59,119,384 21,005,912
Other (income) net (2,866,998) (1,912,289) (562,366)
------------- ------------ ------------
Net loss $(135,078,509) $(57,207,095) $(20,443,546)
============= ============ ============
Net loss per common share (basic
and diluted)* $ (3.84) $ (1.84) $ (0.75)
============= ============ ============
Weighted average common
shares outstanding (basic
and diluted)* 35,193,208 31,067,059 27,199,653
============= ============ ============
*As restated. See Note 19 to the 1997, 1998 and 1999 consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, Three Months Ended March 31,
1996 1995 2000 1999
(unaudited)
Consolidated Statements of
Operations and Comprehensive
Loss Data:
<S> <C> <C> <C> <C>
Revenue $ 781,231 $ 2,352,971 $ 3,078,772 $ 340,418
Operating expenses 8,173,598 8,036,215 26,397,279 17,167,330
Other (income) net (176,053) (52,650) (483,831) (459,496)
------------ ------------ ------------ ------------
Net loss $ (7,216,314) $ (5,630,594) $(22,834,676) $(16,367,416)
============ ============ ============ ============
Net loss per common share (basic
and diluted)* $ (0.27) $ (0.24) $ (10.62) $ (0.51)
============ ============ ============ ============
Weighted average common
shares outstanding (basic
and diluted)* 26,297,577 23,201,191 36,585,057 32,091,978
========== ========== ========== ==========
*As restated. See Note 11 to the March 31, 2000 consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of March
31,
1999 1998 1997 1996 1995 2000
---- ---- ---- ---- ---- ----
(unaudited)
Consolidated Balance Sheets
Data:
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 62,637,410 $63,839,270 $ 7,416,760 $4,100,165 $1,558,064 $ 39,576,288
Working capital 50,234,094 53,088,565 3,961,824 3,261,025 1,869,420 31,904,169
Property and equipment, net 19,967,364 8,623,431 1,509,827 212,129 492,534 17,889,443
Capitalized software costs, net 10,816,389 -- -- -- 96,762 9,791,544
Intangible assets, net 27,849,752 -- -- -- -- 27,198,201
Total assets 129,680,107 75,458,361 10,467,386 4,780,298 2,778,010 106,522,849
Stockholders' equity $106,524,760 $59,318,827 $ 6,016,090 $3,914,270 $2,672,968 $ 85,692,453
</TABLE>
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<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the
financial statements and the notes included elsewhere in this registration
statement. This registration statement contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed below, as well as those discussed elsewhere
in this registration statement. See "Item 1 - "BUSINESS - Risk Factors".
LOSS PER SHARE RESTATEMENT
Subsequent to the issuance of the Company's consolidated financial statements
for the year ended December 31, 1999, and unaudited consolidated financial
statements for the three months ended March 31, 2000, the company's management
determined that the consolidated financial statements contained an error in the
determination of the number of shares included in the calculation of basic and
diluted loss per share. Previously, the weighted average number of shares
outstanding included the outstanding shares of preferred stock (Series A, Series
B, Series C and Series D). However, the preferred stock has certain liquidation
preferences which causes it to be materially different from the common stock and
therefore should have been excluded from the calculation of the weighted average
shares used in calculating the Company's basic and diluted loss per share.
The basic and diluted loss per common share, as previously reported and
as restated are as follows:
<TABLE>
<CAPTION>
Years Ended December 31 Three Months Ended March 31
--------------------------------- ---------------------------
1999 1998 1997 2000 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
As previously reported ($2.12) ($1.13) ($0.54) ($0.33) ($0.29)
As restated ($3.84) ($1.84) ($0.75) ($0.62) ($0.51)
</TABLE>
The weighted average number of shares outstanding, as previously
reported and as restated are as follows:
<TABLE>
<CAPTION>
Years Ended December 31 Three Months Ended March 31
--------------------------------- ---------------------------
1999 1998 1997 2000 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
As previously reported 63,790,247 50,417,641 37,848,932 68,545,051 63,790,247
As restated 35,193,208 31,067,059 27,199,653 36,585,057 35,193,208
</TABLE>
General
OptiMark was founded in 1996 as the successor to a company that had
begun developing the OptiMark equities trading system in 1994. We operate in two
business segments, our electronic markets business and our US equities business.
On June 12, 2000 we established a holding company and placed our electronic
markets and US equities businesses in separate operating subsidiaries, OptiMark,
Inc. and OptiMark US Equities, Inc., respectively.
The electronic markets business comprises the development and
implementation of matching engines and trading systems for existing and emerging
electronic marketplaces through a combination of consulting, licensing,
servicing and equity agreements, focused on both the securities and
non-securities marketplaces. We believe the OptiMark matching engine technology
offers a unique combination of capabilities different than those of our
competitors that will complement transactions where multiple buyers and sellers
exchange information about a particular topic or product and buyers and sellers
put a premium on confidentiality.
The US equities business, operated through two wholly-owned
subsidiaries of OptiMark US Equities, Inc., OptiMark Services, Inc. and OptiMark
OTC Services, Inc., makes the OptiMark equities trading system available to
users as facilities of the Pacific Exchange and Nasdaq, respectively. The
OptiMark equities trading system uses a computer implemented matching algorithm
designed to allow traders to submit customized expressions of trading interest
referred to as profiles, including the total number of shares each trader is
willing to buy or sell in a particular security, on an anonymous and
confidential basis, without the risk of the information becoming available to
other market participants. The ability of a buyer or seller to submit profiles
to the OptiMark equities trading system on a confidential and anonymous basis is
designed to help traders overcome the problem of market impact, thus increasing
market liquidity, creating better trade execution and lowering the cost of
trading.
Continuation as a Going Concern
Our financial statements disclose that while the financial statements
have been prepared assuming we will continue to operate as a going concern,
there is substantial doubt as to our ability to do so. To date, we have
generated insufficient revenue to meet our operating expenses and have met our
cash needs through equity financing and equipment leasing. See "Liquidity and
Capital Resources".
At May 31, 2000, we had about $30 million of cash. At current rates of
expenditure, we believe this cash would suffice to allow us to continue
operations through the middle of October 2000. In order to be able to continue
operations beyond that point, we are pursuing the following initiatives:
Reduce expenses. The major focus of our plan is to reduce expenses,
chiefly in our US equities business. We are currently in discussions with IXnet,
our network services provider, to renegotiate the terms of our arrangement to
reduce the monthly cash requirements. We believe we can achieve substantial
further savings in the near term through renegotiation of data equipment
contracts. In addition, through efforts currently underway to consolidate, or
possibly sell, the US equities business, we believe we can substantially reduce
operating expenses. With these measures we expect to be able to reduce operating
costs enough to allow us to continue operations with existing cash into the
first quarter of 2001.
Additional capital. We have commenced discussions with several parties,
including major existing stockholders, with a view to raising additional equity
capital, and believe that we could obtain significant funds in this manner.
However, we believe that the terms on which such financing would be available
will improve substantially as we make progress in
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<PAGE> 26
reducing expenses and pursuing our current business strategy. Accordingly, at
this point we do not plan to seek firm financing commitments before late in the
third quarter of 2000.
Pursue business strategy. As discussed elsewhere in this registration
statement, we are actively pursuing applications of our technology through
strategic alliances in electronic business-to-business markets, and have
recently announced several such alliances. In addition, we expect that our
system will be operational as a facility of the Osaka Stock Exchange by the end
of the third quarter. While any short-term revenue impact of these initiatives
is likely to be modest, we believe they are nonetheless important in the near
term in convincing potential sources of additional financing to invest on the
most favorable terms.
We believe these steps will enable us to continue operations beyond
March 31, 2001.
History of Losses
We have experienced losses since our inception, and losses are expected
to continue for the foreseeable future. As of March 31, 2000, our accumulated
deficit was approximately $252,119,000.
Limited Operating History and Changing Business Model
We have a limited operating history that makes it difficult to forecast
future operating results. Prior to late 1998, our main business focus was the US
equities business. We have spent most of our capital to develop and implement
the OptiMark equities trading system for use on the Pacific Exchange and Nasdaq.
During late 1998, we began to expand our focus to include financial markets
other than US equities through our electronic markets business. As of March 31,
2000, we had entered into one venture through this business segment, Japan
OptiMark Systems.
In our US equities business we incur all traditional operating expenses
including research and development, business development including sales and
marketing and operations expense including data center, customer network and
customer support. In this business model, we have so far chosen to maintain full
management and ownership of the business.
In our electronic markets business we intend to enter additional new
markets through joint venture relationships with partners who have relevant
market expertise in the market being entered. We anticipate that the capital for
these ventures will be contributed mainly by our joint venture partner or by
outside investors, not by us. We will license our matching engine technology and
intend to charge royalties. We will support the joint ventures through
development and service agreements and intend to charge for these services. This
may allow us to enter many markets simultaneously. We have limited experience
with this new business model and there is a risk that it will not be successful.
See "Item 1-BUSINESS - Risk Factors".
Income Taxes
We have net operating loss carry-forwards of approximately $173,911,000
and research and development credit carry-forwards of approximately $2,121,000
at December 31, 1999. These carry-forwards expire during the period from 2004
through 2018. Based on the issuance of additional shares of stock resulting from
our financing activities, a change in ownership occurred during 1998 for tax
purposes, which may limit future use of these carry-forwards.
Results of Operations
Revenue. We began to recognize revenue in January 1999 when the
OptiMark equities trading system was launched on the Pacific Exchange. In June
1999, we began to recognize revenue for consulting services to Japan OptiMark
Systems for development of the OptiMark equities trading system for the Osaka
Securities Exchange. In October 1999, the OptiMark equities trading system was
launched on the Nasdaq.
Transaction revenue is recorded on a trade date basis and recognized
when securities are traded through the system based on a fee per share
contractual agreement with both the Pacific Exchange and Nasdaq. Consulting
revenue is recorded as
24
<PAGE> 27
services are performed. We record transaction and consulting revenue net of our
revenue sharing agreements with both the Pacific Exchange and the Chicago Board
Options Exchange.
Three months ended March 31, 2000 compared to three months ended March
31, 1999.
Revenue. All of the $340,418 of revenue for the first quarter of 1999
was earned from the Pacific Exchange. Of the $3,078,772 of revenue in the first
three months of 2000, $2,905,189 was earned from consulting services to Japan
OptiMark Systems and $173,583 was earned from transaction fees from the use of
the OptiMark equities trading system on both the Pacific Exchange and Nasdaq.
Operating Expense. Total operating expenses for the quarter ended March
31, 2000 totaled $26,397,279 as compared to $17,167,330 for the first quarter of
1999. The following is an explanation of the increases or decreases in the
components of each operating expense:
Research and Development Expense. We incurred research and development
expense for the first quarter of 2000 of $8,778,409 as compared to $5,408,595
for the first quarter in 1999. This increase of $3,369,814 is primarily
attributable to research and development costs being capitalized in 1999 in
accordance with SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. There were no such costs capitalized in
the period ended March 31, 2000. Approximately $2,855,000 in research and
development costs was capitalized in the first quarter of 1999 in connection
with the development of the Pacific Exchange and Nasdaq application. Costs
expensed and incurred in the first quarter of 2000 were related primarily to the
support and enhancement of the Pacific Exchange and Nasdaq systems of
approximately $6,545,000, consulting services associated with the development of
the Osaka Securities application of approximately $1,740,000 and research of new
business ventures of approximately $493,000.
Communications and Data Center Expense. We incurred communications and
data center expense for the first quarter of 2000 of $7,445,858 as compared to
$5,283,982 for the first quarter of 1999. This increase of $2,161,876 is
attributable primarily to the expansion of our OptiMark Information Center to
provide customer support for the Pacific Exchange system and the Nasdaq system
and the implementation of the Nasdaq production data center, as well as an
increase in the number of users who were given network access to the system.
US Equities Business Development. We incurred US equities business
development expense for the first quarter of 2000 of $2,276,540 as compared to
$2,985,475 for the first quarter of 1999. This decrease of $708,935 is primarily
attributable to not incurring any costs associated with a third party
attestation over certain capacity, integrity and security elements of the
OptiMark equities trading system in the first quarter of 2000. These costs
amounted to approximately $647,000 in the first quarter of 1999. It is
anticipated that any costs associated with such attestation will be incurred in
the second quarter of 2000.
General and Administrative Expense. We incurred general and
administrative expense for the first quarter of 2000 of $2,100,322 as compared
to $2,521,969 for the first quarter of 1999. This decrease of $421,647 is
attributable primarily to a decrease in professional fees, corporate travel and
entertainment and general office expenses, offset somewhat by an increase in
executive and staff employees.
Depreciation and Amortization Expense. We incurred depreciation and
amortization expense in the first quarter of 2000 of $3,764,494 as compared to
$964,885 in the first quarter of 1999. The increase of $2,799,609 is
attributable primarily to depreciation of computer equipment, software and the
amortization of certain intangible assets. The computer equipment and software
are used primarily in the development and production areas to support the
OptiMark equities trading system for both the Pacific Exchange and the Nasdaq.
The intangible assets include purchased software licenses used for development
and production, capitalized internal software development costs for the Pacific
Exchange and Nasdaq systems, production software licenses from a third party
software developer and an intangible asset created by the issuance of 2,000,000
shares of our common stock in consideration for the termination of a license
previously granted to High Performance Markets, Ltd. to use our matching engine
technology in non-financial markets.
Restructuring Expense. We recorded a restructuring charge in the first
quarter of 2000 of $2,024,385 associated with a workforce reduction of seven
employees. Included in this amount is approximately $1,835,000 representing the
charge
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<PAGE> 28
associated with the revaluation of options of these terminated employees. The
remaining balance of approximately $189,000 includes notice period salaries of
approximately $121,000, severance of approximately $41,000 and vacation pay and
other employee related costs of approximately $27,000. This restructuring
resulted in a reduction of personnel-related costs of approximately $800,000
annually.
Other Income and Expense. Other income and expense includes interest
income and interest expense. Other income, net, was $483,831 for the first
quarter of 2000 compared to $459,496 for the first quarter of 1999. This
increase of $24,335 was attributable primarily to additional interest income as
a result of additional cash on hand from the issuance of series C convertible
preferred stock and series D convertible preferred stock, partially offset by
the increase in interest expense attributable to capital lease payments.
Year ended December 31, 1999 compared to year ended December 31, 1998
Revenue. Of the $3,012,244 of revenue for 1999, $1,620,454 was earned
from consulting services to Japan OptiMark Systems and $1,391,790 was earned
from transaction fees for use of the system on both the Pacific Exchange and
Nasdaq.
Operating Expense. Total operating expenses for the year ended December
31, 1999 totaled $140,957,751 as compared to $59,119,384 for 1998. The following
is an explanation of the increases in the components of each operating expense:
Research and Development Expense. We incurred research and development
expense for 1999 of $31,635,548 as compared to $23,124,775 for 1998. This
increase of $8,510,773 is attributable primarily to an increase in employees and
consultants, equipment and related expense, telephone expense, travel
expenditures and rent and related expense. These costs were incurred primarily
to support and enhance the Pacific Exchange system and develop the Nasdaq
system. During 1999, in accordance with recent accounting pronouncements,
approximately $12,298,000 of related software development costs were capitalized
and are being amortized over a three-year period.
Communications and Data Center Expense. We incurred communications and
data center expense for 1999 of $28,227,012 as compared to $13,585,922 for 1998.
This increase of $14,641,090 is attributable primarily to the expansion of our
OptiMark Information Center to provide customer support for the Pacific Exchange
system and the Nasdaq system, as well as an increase in the number of users who
were given network access to the system. This increase resulted in increases in
employees, equipment and related costs, communications expense and rent and
related costs.
US Equity Business Development. We incurred US equity business
development expense for 1999 of $12,230,190 as compared to $11,081,296 for 1998.
This increase of $1,148,894 is attributable primarily to increases in employee
and consultant costs to train and support users of the OptiMark equities trading
system, offset by reduced marketing and promotional expenses such as trade
shows.
General and Administrative Expense. We incurred general and
administrative expense for 1999 of $11,220,729 as compared to $9,196,446 for
1998. This increase of $2,024,283 is attributable primarily to an increase in
executive and staff employees, and obtaining errors and omissions liability
insurance as well as directors and officers liability insurance. These insurance
policies were deemed necessary once the OptiMark equities trading system was
launched in January 1999.
Depreciation and Amortization Expense. We incurred depreciation and
amortization expense in 1999 of $9,334,424 as compared to $1,584,339 in 1998.
The increase of $7,750,085 is attributable primarily to depreciation of computer
equipment, software and the amortization of certain intangible assets. The
computer equipment and software leased as capital leases or purchased for cash
are utilized primarily in the development and production areas to support the
OptiMark equities trading system for both the Pacific Exchange and Nasdaq. The
intangible assets include purchased software licenses used for development and
production, capitalized internal software development costs for the Pacific
Exchange and Nasdaq systems, production software licenses from a third party
software developer and an intangible asset created by the issuance of 2,000,000
shares of our common stock in consideration for the termination of a license
previously granted to High Performance Markets, Ltd. to use our matching engine
technology in non-financial markets.
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<PAGE> 29
Restructuring Expense. We recorded a restructuring expense of
$7,693,026 in the fourth quarter of 1999 associated with a workforce reduction
of 72 employees (mainly in our technology areas). Included in this amount is
approximately $5,811,000 representing the charge associated with the revaluation
of options of these terminated employees. The remaining balance of approximately
$1,882,000 includes notice period salaries of approximately $876,000, severance
of approximately $706,000 and vacation pay and other employee-related costs of
approximately $300,000. As of December 31, 1999, approximately $522,000 of these
costs had been paid and we anticipate that the remaining accrued restructuring
costs will be paid in 2000. This restructuring resulted in a reduction of
personnel-related costs of approximately $6,100,000 annually.
Warrant Compensation Expense. We incurred a non-cash warrant
compensation expense in 1999 of $40,616,822 as compared to $546,606 in 1998.
This increase of $40,070,216 is due to warrants being charged to expense in
accordance with the Emerging Issues Task Force 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services.
In September 1998, in connection with our agreement with Nasdaq to
implement the Nasdaq system, we entered into a warrant agreement with Nasdaq
whereby Nasdaq has the ability to earn warrants to purchase up to 11,250,000
shares of our common stock. The Nasdaq warrants are earned in tranches based
upon the achievement of specified milestones. In connection with the launch of
the Nasdaq system in October 1999, warrants to acquire an aggregate of 4,500,000
shares of common stock were earned by Nasdaq. One warrant to acquire 2,250,000
shares of common stock is exercisable at $5 per share and the other warrant to
acquire the remaining 2,250,000 shares of common stock is exercisable at $7 per
share. We recorded a non-cash expense of $33,800,000 (the value using the
Black-Scholes model) in 1999. The exercise price of the remaining warrants to
acquire 6,750,000 shares of common stock, if earned, will be $7 per share. The
Nasdaq warrants expire on the earlier of October 11, 2004 or the last day the
Nasdaq system is available to Nasdaq users.
During 1999, we issued to five holders of series B convertible
participating preferred stock warrants to acquire 1,666,667 shares of our common
stock at $10 per share. In connection with this issuance, we recorded a non-cash
expense of approximately $6,786,000 (the value using the Black-Scholes model) in
1999. All of these warrants expired unexercised in June 1999.
During 1999, warrants to acquire 25,000 shares of common stock were
granted to two consultants. Of these warrants, a warrant to acquire 5,000 shares
was issued with an exercise price of $10 per share and expires in January 2002.
The non-cash expense from the issuance of this warrant in 1999 was approximately
$6,300 (the value using the Black-Scholes model). The second warrant to acquire
20,000 shares of common stock was issued to a former board member with an
exercise price of $14 per share and expires in February 2009. The non-cash
expense from the issuance of this warrant was approximately $38,800 (the value
using the Black-Scholes model), to be amortized over the term of the consulting
agreement. The amount expensed in 1999 was approximately $24,200.
Other Income and Expense. Other income and expense includes interest
income, interest expense, equity in income of investee and gain on recovery of
bad debt. Other income, net, was $2,866,998 for 1999 compared to $1,912,289 for
1998. This increase of $954,709 was attributable primarily to additional
interest income as a result of additional cash on hand from the issuance of
series B convertible participating preferred stock, series C convertible
preferred stock and series D convertible preferred stock and the recovery of
$700,000 in bad debt, partially offset by the increase in interest expense
attributable to capital lease payments.
Year ended December 31, 1998 compared to year ended December 31, 1997
Operating Expense. Total operating expenses for the year ended December
31, 1998 were $59,119,384 as compared to $21,005,912 for 1997. The following is
an explanation of the increases in the components of each operating expense:
Research and Development Expense. We incurred research and development
expense for 1998 of $23,124,775 as compared to $11,701,821 for 1997. This
increase of $11,422,954 is attributable primarily to increases in employees and
consultants and equipment and related expenses. These costs were incurred in the
development of the Pacific Exchange system.
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<PAGE> 30
Communications and Data Center Expense. We incurred communications and
data center expense for 1998 of $13,585,922. These costs include primarily
employees, equipment and related expenses, communications expense and rent and
related expenses. We began to incur costs for the data center in Toronto, Canada
and the OptiMark Information Center in 1998 and therefore had no costs in 1997.
US Equity Business Development. We incurred US equity business
development expense for 1998 of $11,081,296 as compared to $4,171,720 for 1997.
This increase of $6,909,576 is attributable primarily to increases in employee
costs to train and support customers as well as marketing and promotional
expenses such as trade shows.
General and Administrative Expense. We incurred general and
administrative expense for 1998 of $9,196,446 as compared to $4,890,097 for
1997. This increase of $4,306,349 is attributable primarily to increases in
executive management, professional fees and rent and related expenses.
Depreciation and Amortization Expense. We incurred depreciation and
amortization expense in 1998 of $1,584,339 as compared to $242,274 in 1997. The
increase of $1,342,065 is attributable primarily to depreciation of computer
equipment, primarily for development and production machines that were leased as
capital leases or purchased for cash.
Warrant Compensation Expense. The Company incurred warrant compensation
expense in 1998 of $546,606. This increase is due to certain warrants we issued
being charged to expense in accordance with the Emerging Issues Task Force
96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services.
In 1998, a warrant to acquire 42,500 shares of common stock was issued
in connection with a master equipment lease agreement with a third party and
expires in June 2003. Warrants to acquire 45,000 shares of common stock were
granted to two consultants and have an exercise price of $10 per share. Of these
warrants, 40,000 expire in August 2003 and the remaining 5,000 were exercised in
August 1999. The non-cash expense from the issuance of the above warrants in
1998 was approximately $109,000 (the value using the Black-Scholes model).
During 1996, we granted a warrant to purchase 1,000,000 shares of
common stock in connection with an anticipated agreement with the Chicago Board
Options Exchange to implement the OptiMark matching engine technology. The
warrant is exercisable in tranches based upon the achievement of certain
milestones. The exercise price of the warrant was $2.25 per share, subject to
certain adjustments. Subsequent to the issuance of this warrant, as a result of
certain adjustments, the number of shares under this warrant increased by
227,828 and the exercise price was reduced to approximately $1.83 per share. In
connection with these adjustments, we recorded a non-cash expense of
approximately $438,000 in 1998.
There was no warrant compensation expense in 1997.
Other Income and Expense. Other income and expense includes interest
income and interest expense. Other income, net, was $1,912,289 for 1998 compared
to $562,366 for 1997. This increase of $1,349,923 was attributable primarily to
additional interest income as a result of additional cash on hand from the
issuance of series B convertible participating preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
Since June 1996, we have been financed through a series of preferred
stock private placements of approximately $235,019,000, net after expenses,
common stock issuances of approximately $5,300,000, the exercise of warrants for
approximately $14,141,000 and the exercise of employee and director stock
options for approximately $1,560,000, for an aggregate of approximately
$256,020,000.
We received the following proceeds from our preferred equity private
placements: $99,989,000 in 1999, $109,032,000 in 1998, $21,198,000 in 1997 and
$4,800,000 in 1996. In 1998, $10,000,000 of these proceeds were used to purchase
series A convertible participating preferred stock from one investor. As of
December 31, 1999, these shares were held as treasury stock.
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<PAGE> 31
We received the following proceeds from our sale of common stock:
$50,000 from a consultant in 1999, $3,500,000 from one of our officers and
$250,000 from two consultants in 1998 and $1,500,000 from one of our directors
in 1997.
We received the following proceeds from our issuance of warrants:
$13,562,000 from warrants exercised by investors in connection with our series A
convertible participating preferred stock private placement, $529,000 from
former employees and $50,000 from a warrant issued to a consultant. Of this
amount, $5,984,000 was raised in 1999, $7,477,000 in 1998, $380,000 in 1997 and
$300,000 in 1996.
Of the $1,560,000 in employee and director stock options exercised, we
received $852,000 in 1999 and $708,000 in 1998.
During 1998 and 1999, we also entered into a number of three-year
capital and operating leases to finance the purchase of production and
development computer equipment. As of December 31, 1999, we had leased
approximately $30,400,000 of equipment under operating leases and approximately
$12,700,000 under capital leases. Included in capital leases is a three-year
term loan for computer equipment located in Canada, as well as a sale-leaseback
transaction of approximately $2,576,000. As of December 31, 1999, including
interest payments, there was approximately $23,100,000 remaining to be paid for
operating leases and approximately $10,300,000 remaining to be paid for capital
leases.
As of March 31, 2000 we had cash and cash equivalents of $39,576,288
and working capital of $31,904,169 as compared to cash and cash equivalents of
$62,637,410 and working capital of $50,234,094 as of December 31, 1999.
Net cash used in operating activities was $21,829,872 and $15,278,874
for the three-month periods ended March 31, 2000 and 1999, respectively. Net
operating cash flows were primarily attributable to quarterly net losses and
increases in prepaid expenses associated with warranty and support agreements,
as well as increases in accounts receivable and decreases in accounts payable
and accrued liabilities, partially offset by non-cash charges for depreciation
and amortization and the value assigned to options in connection with the
restructuring.
Net cash used in investing activities was $409,767 and $6,251,657 for
the three-month periods ended March 31, 2000 and 1999, respectively. The uses in
2000 consisted of purchases of marketable securities and purchases of fixed
assets, offset by brokerage borrowings and proceeds from the disposal of assets.
The uses in 1999 resulted primarily from the acquisition of capital assets to
build the Nasdaq data center and payments for personnel related expenses
associated with the development of the Pacific Exchange and Nasdaq applications.
Net cash used in financing activities of $821,483 and net cash provided
by financing activities of $1,163,431 for the three-month periods ended March
31, 2000 and 1999, respectively, resulted from proceeds relating to the exercise
of employee options in both periods, offset by payments on capital leases in
both periods in addition to the receipt of approximately $1,000,000 in the first
quarter of 1999 from a term loan from a certain leasing company.
As of December 31, 1999, we had cash and cash equivalents of
$62,637,410 and working capital of $50,234,094 as compared to cash and cash
equivalents of $63,839,270 and working capital of $53,088,565 as of December 31,
1998.
Net cash used in operating activities was $82,564,466 and $49,811,140
for the years ended December 31, 1999 and 1998, respectively. Net cash used in
operating activities for 1999 were primarily attributable to quarterly net
losses and increases in prepaid expenses associated with warranty and support
agreements, as well as increases in accounts receivable and decreases in
accounts payable, partially offset by non-cash charges for depreciation,
amortization, the value assigned to warrants issued as compensation and the
value assigned to employee options in connection with their termination.
Net cash used in investing activities was $25,060,563 and $5,766,386
for the years ended December 31, 1999 and 1998, respectively. The net cash used
in investing activities for 1999 consisted of purchases of hardware and software
for the build out and deployment of the Pacific Exchange and the Nasdaq systems,
in addition to salaries and other employee related costs associated with the
development of such systems. The uses in 1998 resulted primarily from the
acquisition of hardware and software for the Pacific Exchange system.
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<PAGE> 32
Net cash provided by financing activities of $106,423,169 and
$112,000,036 for the years ended December 31, 1999 and 1998, respectively,
resulted primarily from proceeds relating to the issuance of preferred stock,
the exercise of warrants and the exercise of employee options. This was offset
by payments on capital leases in both periods in addition to the purchase and
sale of treasury stock in 1998. Additional cash receipts in 1999 of
approximately $2,740,000 resulted from the repayment of certain loans of
approximately $1,740,000 and the receipt of a term loan of approximately
$1,000,000.
We are still generating losses and expect to do so for the foreseeable
future. Presently we have cash to fund operations through the middle of October
2000. Through certain recent expense reductions we have been able to extend our
available cash from September to the middle of October. Additional expense
reductions and additional equity financing will be required during 2000 to meet
our operating and investing cash requirements. There is no assurance that we
will be successful in achieving these expense reductions and in raising this
money on acceptable terms or at all. If we do not succeed, we will be unable to
continue as a going concern.
MARKET RISK
Our exposure to market risk is related to changes in interest rates,
foreign currency exchange rates and equity prices. This discussion contains
forward-looking statements that are subject to risks and uncertainties. Actual
results could vary materially as a result of a number of factors including those
mentioned in the risk factors in this registration statement.
Interest Rate Risk. As of March 31, 2000 and December 31, 1999, we had
cash and cash equivalents of $39,576,288 and $62,637,410, respectively, that
consisted of cash and highly liquid short-term investments with original
maturities of 90 days or less at the date of purchase. These investments may be
subject to interest rate risk and would decrease in value if the market interest
rate increased. A hypothetical increase or decrease in market interest rates at
December 31, 1999 or March 31, 2000 of 10 percent would have caused the fair
value of these short-term investments to change by an immaterial amount.
Declines in interest rates over time will, however, reduce our interest income.
Foreign Currency Exchange Rate Risk. Substantially all of our revenues
recognized to date have been denominated in U.S. dollars from our U.S. customers
as well as our international customers. Although revenues from international
customers to date have been U.S. dollar denominated, we cannot be certain that
future international customers or future business ventures will result in U.S.
dollar denominated revenue, royalties or dividends. As a result, our operating
results could become subject to significant fluctuations based upon changes in
the exchange rates of certain currencies in relation to the U.S. dollar.
Equity Price Risk. As of March 31, 2000, we had short term equity
investments of $1,373,750. Management does not hold these investments for a
significant period of time and therefore does not consider these investments to
have a material equity price risk exposure.
RECENT ACCOUNTING PRONOUNCEMENTS
During 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. We are
currently evaluating the impact, if any, of this standard, which will be
applicable to our December 31, 2001 consolidated financial statements. We do not
believe the impact will be material.
During 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued SOP No. 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. This statement is applicable to and has been adopted in our 1999
consolidated financial statements and requires us to capitalize certain payroll
and payroll related costs and other costs that are directly related to the
development of certain of our systems.
During March 2000, the Financial Accounting Standards Board issued
Interpretation 44, Accounting for Certain Transactions Involving Stock
Compensation. This interpretation will be applicable to our third quarter
consolidated financial statements. We do not expect the adoption of such
interpretation to have a material effect on our consolidated financial
statements.
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ITEM 3. PROPERTIES
Our headquarters are located in Jersey City, New Jersey. We sublease
approximately 32,000 square feet under a sublease that expires in February 2014.
We also lease approximately 31,000 square feet for our operations center in
Jersey City, New Jersey and offices in Boston, Massachusetts; Chicago, Illinois;
Durango, Colorado; Los Angeles, California; New York, New York; Toronto, Canada;
and Tokyo, Japan. We believe that our present facilities are adequate for our
current needs.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables give information as of June 12, 2000 regarding the
ownership of our common stock, series A convertible participating preferred
stock, series B convertible participating preferred stock, series C convertible
preferred stock and series D convertible preferred stock by:
- each person who is known by us to own more than 5% of the
shares of the class or series of stock,
- each named executive officer,
- each of our directors, and
- all of our directors and executive officers as a group.
The percentage of shares beneficially owned is based on 35,871,657
shares of common stock, 3,222,068 shares of series A convertible participating
preferred stock, 11,000,000 shares of series B convertible participating
preferred stock, 8,250,000 shares of series C convertible preferred stock and
250,000 shares of series D convertible preferred stock outstanding as of June
12, 2000. Beneficial ownership is determined in accordance with the rules of the
SEC. Shares subject to options that are exercisable currently or within 60 days
following June 12, 2000 are deemed outstanding and beneficially owned by the
optionee in computing share and percentage ownership of that optionee, but are
not deemed outstanding in computing the percentage ownership of any other
person. Shares entitled to vote include shares of common stock held and shares
of series A convertible participating preferred stock, series B convertible
participating preferred stock, series C convertible preferred stock and series D
convertible preferred stock held, on an as converted basis. The percentage of
shares entitled to vote is based on a total of 68,259,929 voting shares
outstanding (on an as converted basis, which excludes 740,000 shares of
non-voting common stock) as of June 12, 2000. Except as indicated in the
footnotes to these tables, and as affected by applicable community property
laws, all persons listed have sole voting and investment power for all shares
shown as beneficially owned. Unless otherwise indicated, the address of each
person named in the following tables is c/o OptiMark Holdings, Inc., 10 Exchange
Place, 24th Floor, Jersey City, New Jersey 07302.
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<PAGE> 34
COMMON STOCK
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES PERCENT OF SHARES NUMBER OF SHARES SHARES ENTITLED TO
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED ENTITLED TO VOTE VOTE
<S> <C> <C>
Peter L. Bloom............................. 12,453,184(1) 27.6% - -
General Atlantic Partners, L.L.C........... 12,428,184(1) 27.6 12,428,184 18.2%
SOFTBANK Affiliates........................ 8,250,000(2) 18.7 8,250,000 12.1
Ronald D. Fisher........................... 8,250,000(2) 18.7 - -
William A. Lupien.......................... 5,624,867(3) 15.7 5,572,448 8.2
Dow Jones & Company, Inc................... 5,318,792(4) 13.6 5,318,792 7.8
Richard W. Jones........................... 4,767,427(5) 13.3 4,767,427 7.0
The Nasdaq Stock Market, Inc............... 4,500,000(6) 11.1 - -
American Century Companies, Inc............ 2,800,000(7) 7.6 2,060,000 3.0
Virginia Surety Company, Inc............... 2,500,000(8) 6.5 2,000,000 2.9
DH Management, Inc......................... 2,000,000(9) 5.6 2,000,000 2.9
Morton H. Meyerson......................... 1,521,417(10) 4.2 1,521,417 2.2
Phillip J. Riese........................... 750,000(11) 2.1 350,000 *
John T. Rickard............................ 464,104(12) 1.3 13,818 *
Paul I. Kasnetz............................ 65,000(13) * 25,000 *
Michael D. O'Halleran...................... 15,000 * 15,000 *
Jerome H. Bailey........................... - - - -
Kenneth D. Pasternak....................... - - - -
Robert J. Warshaw.......................... - - - -
All directors and executive officers
as a group (13 persons)................. 33,845,999 62.5% 12,240,110 18.0%
</TABLE>
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<PAGE> 35
* Less than one percent
(1) Represents:
- 2,763,699 shares of common stock held by General Atlantic
Partners 35, L.P. ("GAP 35"),
- 6,976,520 shares of common stock issuable currently on
conversion of 1,744,130 shares of series A convertible
participating preferred stock held by GAP 35,
- 478,945 shares of common stock held by GAP Coinvestment
Partners, L.P. ("GAPCo"),
- 1,209,020 shares of common stock issuable currently on
conversion of 302,255 shares of series A convertible
participating preferred stock held by GAPCo,
- 813,220 shares of common stock issuable currently on
conversion of 203,305 shares of series A convertible
participating preferred stock held by General Atlantic
Partners 52, L.P. ("GAP 52"), and
- 186,780 shares of common stock issuable currently on
conversion of 46,695 shares of series A convertible
participating preferred stock held by GAP Coinvestment
Partners II, L.P. ("GAPCo II").
In addition, includes options to purchase 25,000 shares of common stock
exercisable within 60 days of June 12, 2000 held by Peter L. Bloom. Mr.
Bloom, a director, is a managing member of General Atlantic Partners,
LLC ("GAP LLC"). GAP LLC is the general partner of GAP 35 and GAP 52.
The managing members of GAP LLC are also the general partners of GAPCo
and GAPCo II. Mr. Bloom disclaims beneficial ownership of the shares
referred to above, except to the extent of his pecuniary interest. GAP
LLC is not a beneficial owner of the options held by Mr. Bloom. The
address of GAP LLC is 3 Pickwick Plaza, Greenwich, Connecticut 06830.
(2) Represents 8,136,150 and 113,850 shares of common stock issuable
currently on conversion of 8,136,150 and 113,850 shares of series C
convertible preferred stock held by SOFTBANK Capital Partners L.P. and
SOFTBANK Capital Advisors Fund L.P., respectively. Ronald D. Fisher, a
director, is a managing director of the general partner of each of
these SOFTBANK entities. Mr. Fisher disclaims beneficial ownership of
these shares, except to the extent of his pecuniary interest. The
address of the SOFTBANK entities is 10 Langley Road, Suite 403, Newton
Center, Massachusetts 02159.
(3) Includes 4,725,676 shares held jointly by Mr. Lupien and his spouse,
792,400 shares held by a family partnership controlled by Mr. Lupien,
52,372 shares held by Mr. Lupien's spouse and 47 shares held by a
retained annuity trust of which Mr. Lupien is the beneficiary. Mr.
Lupien disclaims beneficial ownership of the shares held by his spouse
and the retained annuity trust.
(4) Includes 3,157,028 shares of common stock issuable currently on
conversion of 789,257 shares of series A convertible participating
preferred stock. The address of Dow Jones & Company, Inc. is 200
Liberty Street, New York, New York 10281.
(5) Includes 3,772,047 shares held by a trust for which Mr. Jones is the
trustee and 90,004 shares held by a trust of which Mr. Jones is the
beneficiary.
(6) Represents shares of common stock issuable on exercise of warrants
exercisable within 60 days of June 12, 2000. The address of The Nasdaq
Stock Market, Inc. is 1735 K Street, N.W., Washington, D.C. 20006.
(7) Includes 740,000 shares of common stock issuable currently on
conversion of 740,000 shares of non-voting common stock. The address of
American Century Companies, Inc. is 4500 Main Street, Kansas City,
Missouri 64141-9210.
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<PAGE> 36
(8) Represents 2,000,000 shares of common stock issuable currently on
conversion of 2,000,000 shares of series B convertible participating
preferred stock and 500,000 shares of common stock issuable on exercise
of a warrant exercisable within 60 days of June 12, 2000. The address
of Virginia Surety Company, Inc. is 123 North Wacker Dr., 29th Floor,
Chicago, Illinois 60606.
(9) Represents 2,000,000 shares of common stock held by High Performance
Markets, Ltd., of which DH Management, Inc. is the general partner. The
address of DH Management, Inc. is 3005A Booth Falls Road, Vail,
Colorado 81657.
(10) Includes 1,482,717 shares of common stock held by a partnership
controlled by Mr. Meyerson.
(11) Includes 400,000 shares of common stock issuable on exercise of options
exercisable within 60 days of June 12, 2000.
(12) Represents 13,818 shares of common stock held by a trust of which Mr.
Rickard is the trustee and beneficiary, 4,000 shares of common stock
held by minor children of Mr. Rickard and 446,286 shares of common
stock issuable on exercise of options exercisable within 60 days of
June 12, 2000. Mr. Rickard disclaims beneficial ownership of the shares
held by his minor children.
(13) Includes 40,000 shares of common stock issuable on exercise of options
that are exercisable within 60 days of June 12, 2000. Mr. Kasnetz
resigned from OptiMark in May 2000.
SERIES A CONVERTIBLE PARTICIPATING PREFERRED STOCK
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES BENEFICIALLY OWNED PERCENT OF SHARES BENEFICIALLY OWNED
------------------------------------ ----------------------------------- ------------------------------------
<S> <C> <C>
Peter L. Bloom (1).............................. 2,296,385 71.3%
General Atlantic Partners, L.L.C.(1)............ 2,296,385 71.3
Dow Jones & Company, Inc........................ 789,257 24.5
All directors and executive officers as
a group (13 persons)......................... 2,296,385 71.3%
</TABLE>
(1) Represents 1,744,130 shares held by GAP 35, 302,255 shares held by
GAPCo, 203,305 shares held by GAP 52, and 46,695 shares held by GAPCo
II. Mr. Bloom, a director, is a managing member of GAP LLC. GAP LLC is
the general partner of GAP 35 and GAP 52. The managing members of GAP
LLC are also the general partners of GAPCo and GAPCo II. Mr. Bloom
disclaims beneficial ownership of the shares referred to above, except
to the extent of his pecuniary interest.
SERIES B CONVERTIBLE PARTICIPATING PREFERRED STOCK
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED
------------------------------------ ------------------ ------------------
<S> <C> <C>
Virginia Surety Company, Inc.......................................... 2,000,000 18.2%
Merrill Lynch affiliates (1).......................................... 1,500,000 13.6
Paine Webber affiliate (2)............................................ 1,060,000 9.6
Credit Suisse affiliate (3)........................................... 1,000,000 9.1
Goldman Sachs affiliate (4)........................................... 1,000,000 9.1
CIBC affiliate (5).................................................... 850,000 7.7
Nihon Keizai Shimbun.................................................. 800,000 7.3
</TABLE>
(1) Represents 750,000 shares held by ML IBK Positions, Inc., 562,500
shares held by Merrill Lynch KECALP L.P. 1997 and 187,500 shares held
by Merrill Lynch KEKALP International L.P. 1997. The address of the
Merrill Lynch entities is 250 Vesey St., 5th Floor, New York, New York
10281.
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<PAGE> 37
(2) Represents shares held by PaineWebber Capital, Inc, whose address is
1285 Avenue of the Americas, 14th Floor, New York, New York 10019.
(3) Represents shares held by Credit Suisse First Boston OptiMark
Investors, Inc., whose address is 11 Madison Avenue, 3rd Floor, New
York, New York 10010.
(4) Represents shares held by The Goldman Sachs Group, Inc., whose address
is 85 Broad Street, 12th Floor, New York, New York 10004.
(5) Represents shares held by CIBC Wood Gundy Capital Corp., whose address
is 425 Lexington Avenue, 9th Floor, New York, New York 10017.
SERIES C CONVERTIBLE PREFERRED STOCK
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED
------------------------------------ ------------------ ------------------
<S> <C> <C>
SOFTBANK affiliates (1)..................................... 8,250,000 100%
Ronald D. Fisher (1)........................................ 8,250,000 100
All directors and executive officers as.....................
a group (13 persons)...................................... 8,250,000 100%
</TABLE>
(1) Represents 8,136,150 held by SOFTBANK Capital Partners L.P. and
113,850 shares held by SOFTBANK Capital Advisors Fund L.P. Ronald D.
Fisher, a director, is a managing director of the general partner of
each of these SOFTBANK entities. Mr. Fisher disclaims beneficial
ownership of these shares, except to the extent of his pecuniary
interest.
SERIES D CONVERTIBLE PREFERRED STOCK
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED
------------------------------------ ------------------ ------------------
<S> <C> <C>
Bank Boston affiliate (1)............................................ 250,000 100%
</TABLE>
(1) Represents shares held by BancBoston Capital Inc., whose address is 175
Federal Street, Boston, Massachusetts 02110.
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<PAGE> 38
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers, and their ages as of June 12,
2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
William A. Lupien................... 58 Chairman of the Board of Directors
Phillip J. Riese.................... 50 Chief Executive Officer and Director
John T. Rickard..................... 52 Chief Scientific Officer of OptiMark, Inc. and Director
Robert J. Warshaw................... 46 Executive Vice President and Chief Technology Officer of OptiMark, Inc.
Robert T. Colgan.................... 39 President of OptiMark U.S. Equities, Inc.
James G. Rickards................... 48 Senior Vice President, General Counsel and Secretary
Jerome H. Bailey.................... 47 Director
Peter L. Bloom (1).................. 42 Director
Ronald D. Fisher.................... 52 Director
Richard W. Jones.................... 75 Director
Morton H. Meyerson (1).............. 62 Director
Michael D. O'Halleran............... 50 Director
Kenneth D. Pasternak................ 46 Director
</TABLE>
(1) Member of compensation committee.
William A. Lupien is our founder and a co-inventor of the OptiMark
matching engine technology and currently serves as Chairman of the Board of
Directors. Mr. Lupien served as the Chairman of the Board of Directors of
OptiMark Technologies, Inc. and its predecessor, MJT Holdings, since its
founding in 1988. From inception through November 1998, Mr. Lupien served as
Chief Executive Officer of OptiMark Technologies, Inc. From 1983 to 1988, Mr.
Lupien was President, then Chairman and Chief Executive Officer, of Instinet
Corporation, a computer-based market access network company. From 1965 to 1983,
Mr. Lupien served as a specialist on the floor of the Pacific Exchange. For six
years during that period, he was also a member of the board of the Pacific
Exchange. From 1974 to 1980, Mr. Lupien was President of Mitchum, Jones &
Templeton, Inc., a brokerage firm. Mr. Lupien also serves as a Trustee of the
Securities Industry Institute. Mr. Lupien received his Bachelor of Science
degree from San Diego State University.
Phillip J. Riese currently serves as Chief Executive Officer and has
been a director of OptiMark since November 1998. Mr. Riese also serves as Chief
Executive Officer of OptiMark, Inc. Mr. Riese was Chief Executive Officer of
OptiMark Technologies, Inc. from November 1998 to June 2000. From 1994 to
November 1998, Mr. Riese was President of the Consumer Card Group of American
Express, a credit card company, and Chairman of American Express Centurion Bank.
From 1980 to 1994, Mr. Riese served in a variety of executive positions at
American Express. Mr. Riese received a B. Comm. degree from Leeds University in
the United Kingdom. He received an M.B.A. from the University of Cape Town in
South Africa and an SM degree in Management from MIT.
Dr. John T. (Terry) Rickard is a co-inventor of the OptiMark matching
engine technology and currently serves as Chief Scientific Officer of OptiMark,
Inc. Dr. Rickard has served as a director of OptiMark since July 1994. He
obtained Series 7 (General Securities) and Series 24 (General Securities
Principal) licenses during his service with our predecessor. Dr. Rickard served
as Chief Scientific Officer of OptiMark Technologies, Inc. from February 1999 to
June 2000 and served as President from July 1994 to February 1999. From 1975 to
1994, Dr. Rickard was Senior Vice President and Technical Director of Orincon
Industries, a signal and information processing systems development company. Dr.
Rickard received his bachelor's and master's degrees in electrical engineering
from the Florida Institute of Technology, and his Ph.D. in engineering physics
from the University of California at San Diego.
Robert J. Warshaw currently serves as Executive Vice President and
Chief Technology Officer of OptiMark, Inc. Mr. Warshaw served as Executive Vice
President and Chief Technology Officer of OptiMark Technologies, Inc. from
November 1999 to June 2000. From October 1993 to October 1999, Mr. Warshaw was
the Chief Information Officer at Lazard Freres & Co. LLC, an international
investment banking firm. From January 1990 to October 1993 Mr. Warshaw was a
partner at
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<PAGE> 39
McKinsey & Company, a global management consulting firm. Mr. Warshaw received
his bachelors degree in English from the University of Pennsylvania and a
Masters in Management from Northwestern University's Kellogg School of
Management.
Robert T. Colgan currently serves as President of OptiMark U.S.
Equities, Inc. Mr. Colgan served as President of OptiMark Technologies, Inc.
from January 2000 to June 2000. From 1983 to 1999, Mr. Colgan was at Jefferies &
Co., a third market trading firm where he served in a variety of senior
management positions, including most recently as Executive Vice President and
Director of Equity Capital Markets. Mr. Colgan received his Bachelor of Science
Degree in Business Administration from the University of Colorado.
James G. Rickards currently serves as our Senior Vice President,
General Counsel and Secretary. From 1994 to August 1999, Mr. Rickards was
General Counsel of Long-Term Capital Management, L.P., an investment management
firm. From 1985 to 1994, Mr. Rickards was Senior Vice President, Secretary and
General Counsel of Greenwich Capital Markets, Inc., an investment banking firm.
Mr. Rickards received his Juris Doctoris degree from the University of
Pennsylvania School of Law and his LL.M. in taxation from the New York
University School of Law. Mr. Rickards received his Bachelor of Arts degree in
Political Science from The Johns Hopkins University and his Master of Arts
Degree in International Relations from the Paul H. Nitze School of Advanced
International Studies of The Johns Hopkins University.
Jerome H. Bailey has served as a director of OptiMark since January
1999. In April 1998, Mr. Bailey joined Dow Jones & Company, Inc. as Senior Vice
President and Chief Financial Officer. In October 1998, Mr. Bailey was named
Executive Vice President of Dow Jones & Company, Inc. From 1993 to 1997, Mr.
Bailey was Chief Financial Officer for Salomon Inc and Salomon Brothers. From
1986 until 1993, Mr. Bailey was with Morgan Stanley where he served in a variety
of executive positions. Prior to joining Morgan Stanley, Mr. Bailey was a
partner at Price Waterhouse, a firm he joined in 1974. Mr. Bailey is a member of
the board of directors of Ottaway Newspapers, Inc., the community newspaper
subsidiary of Dow Jones & Company, Inc. Mr. Bailey received his Bachelor of
Science degree from the University of Nebraska.
Peter L. Bloom has served as a director of OptiMark since August 1996.
Mr. Bloom is a Managing Member of General Atlantic Partners, L.L.C., a private
equity investment firm focused exclusively on strategic investments in software
and related services worldwide, and has served in that capacity since 1996. From
1983 to 1996, Mr. Bloom was at Salomon Brothers, an investment banking firm,
where he last was the Managing Director of Salomon's U.S. Technology Division.
He is a member of the board of directors of BindView Development Corporation and
Predictive Systems, Inc., and is a special advisor to the board of directors of
E*TRADE Group, Inc., as well as a board member of selected private companies.
Mr. Bloom received his Bachelor of Arts degree in computer studies and economics
from Northwestern University.
Ronald D. Fisher has served as a director of OptiMark since November
1999. Mr. Fisher is the Vice Chairman of SOFTBANK Holdings Inc. and a director
of SOFTBANK Corp., Japan. Mr. Fisher also currently serves as the Managing
General Partner of SOFTBANK Capital Partners LP and represents SOFTBANK
Corporation in the activities of SOFTBANK Technology Ventures. Before joining
SOFTBANK in 1995, Mr. Fisher was, for six years, the Chief Executive Officer of
Phoenix Technologies, Ltd., a developer and marketer of system software products
for personal computers. Earlier, he was with INTERACTIVE Systems Corporation, a
UNIX software company, where he served for five years in various capacities
including Chief Operating Officer and Chief Executive Officer. Mr. Fisher's
experience before Interactive Systems includes senior executive positions at
Visicorp, TRW, and ICL (U.S.A). Mr. Fisher also serves as a member of the boards
of directors of InsWeb Corporation and Ziff Davis Inc. Mr. Fisher received his
M.B.A. from Columbia University, and Bachelor of Commerce degree from the
University of Witwatersand in South Africa.
Richard W. Jones has served as a director of OptiMark since December
1997. Mr. Jones has served as a business consultant to Paine Webber since 1988.
From 1977 to 1988, Mr. Jones was Senior Vice President and a Director of E.F.
Hutton & Co. From 1962 to 1977, Mr. Jones served in a variety of executive
positions with Mitchum, Jones & Templeton, Inc., a brokerage firm, including
Chairman and Chief Executive Officer. Mr. Jones was a member of the board of
directors of GTE Corporation from 1966 until his retirement in 1998. Mr. Jones
received his Bachelor of Science degree from the University of California, Los
Angeles and earned graduate degrees from the University of California, Los
Angeles and the University of California at Berkeley.
37
<PAGE> 40
Morton H. Meyerson has served as a director of OptiMark since August
1997. From 1992 to 1998, Mr. Meyerson was Chairman of Perot Systems Corporation,
a provider of information technology services and business solutions. From 1979
to 1986, Mr. Meyerson served as President of Electronic Data Systems
Corporation, an information services company. Mr. Meyerson is a member of the
board of directors of Crescent Real Estate Equities, Inc., TeleTech Holdings,
Inc., Energy Services Company International, Inc. and Lante Corporation. Mr.
Meyerson received his Bachelor of Arts degree in economics and philosophy from
the University of Texas at Austin.
Michael D. O'Halleran has served as a director of OptiMark since April
1998. Mr. O'Halleran has served as President and Chief Operating Officer of Aon
Group, Inc., the commercial brokerage and consulting operation of Aon
Corporation, an insurance brokerage company, since 1995. From 1987 to 1995, Mr.
O'Halleran served in a variety of executive positions at Aon Corporation. Mr.
O'Halleran received his Bachelor of Arts degree from the University of
Wisconsin-Whitewater.
Kenneth D. Pasternak has served as a director of OptiMark since
November 1999. Mr. Pasternak is the President, Chief Executive Officer and a
director of Knight/Trimark Group, Inc., which is the largest wholesale market
maker in U.S. equity securities and the leading execution destination for trades
placed via the Internet. Mr. Pasternak founded the predecessor of
Knight/Trimark, Roundtable Partners, LLC, in 1994. From 1979 to 1994, Mr.
Pasternak served as Senior Vice President, limited partner and trading room
manager for Spear Leeds & Kellogg/Troster Singer, a trading firm. He also serves
on the boards of directors of BRASS Utility, the European Association of
Securities Dealers Automated Quotation and the International Securities
Exchange. Mr. Pasternak received his Bachelor of Arts degree from the State
University of New York at New Paltz.
ITEM 6. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The table below summarizes the compensation earned for services rendered to us
in all capacities for the fiscal year ended December 31, 1999 by
- our chief executive officer,
- our next four most highly compensated executive officers who
earned more than $100,000 during the fiscal year ended December
31, 1999, and
- William F. Adiletta, for whom disclosure would have been
required but for the fact that Mr. Adiletta resigned in
November 1999.
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<PAGE> 41
We do not have a restricted stock award program or a long-term incentive plan in
which our executive officers or directors may participate.
<TABLE>
<CAPTION>
SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION
--------------------------- ---------- --------- --------------------- ------------
<S> <C> <C> <C> <C>
Phillip J. Riese................................. $ 425,000 $ 1,000,000 - -
Chief Executive Officer
William A. Lupien................................ 180,000 - - -
Chairman of the Board
John T. Rickard.................................. 180,000 - - -
Chief Scientific Officer of OptiMark, Inc.
Robert J. Warshaw (1)............................ 28,990 175,000 500,000 -
Executive Vice President and
Chief Technology Officer of OptiMark, Inc.
Paul I. Kasnetz (2).............................. 140,000 - - -
Former Vice President Finance
and Administration
William F. Adiletta.............................. 211,505 250,000 - $150,000(3)
Former President OptiMark
Nasdaq Market
</TABLE>
(1) Mr. Warshaw became our executive vice president and chief technology
officer in November 1999.
(2) Mr. Kasnetz resigned from OptiMark in May 2000.
(3) Represents payments made during 1999 under a letter agreement with Mr.
Adiletta in connection with his resignation in November 1999. See
"-Employment and Other Agreements".
OPTION GRANTS IN LAST FISCAL YEAR
The following table describes stock options granted to each of the
named executive officers in the fiscal year ended December 31, 1999, including
the potential realizable value over the ten-year term of the options based on
assumed rates of stock appreciation of 5% and 10% compounded annually. These
assumed rates of appreciation comply with the rules of the SEC and do not
represent our estimate of future stock performance. Actual gains, if any, on
stock option exercises will depend on the future performance of our common
stock. The deemed value for the date of grant was determined after the date of
grant solely for financial accounting purposes.
In the fiscal year ended December 31, 1999, we granted options to
purchase up to an aggregate of 2,074,450 shares of common stock to employees.
All options were granted under our stock option plan with exercise prices at the
fair market value of our common stock on the date of grant, as determined by the
board of directors. All options have a term of ten years. Optionees may pay the
exercise price by cash or check. Options generally vest 20% each year over a
five-year period from the date of hire of the optionee.
39
<PAGE> 42
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
OPTIONS
NUMBER OF GRANTED TO POTENTIAL REALIZABLE VALUE AT
SECURITIES EMPLOYEES EXERCISE ASSUMED ANNUAL RATES OF STOCK
DATE OF UNDERLYING IN FISCAL OR BASE EXPIRATION PRICE APPRECIATION FOR OPTION
GRANT OPTIONS GRANTED YEAR PRICE DATE TERM
----- --------------- ---- ----- ---- ----
5% 10%
-- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Robert J. Warshaw........ 11/15/99 500,000 24.1% $12.00 11/15/09 $ 3,773,368 $ 9,562,455
</TABLE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table describes the named executive officers' option
exercises for the fiscal year ended December 31, 1999, and exercisable and
unexercisable options they held as of December 31, 1999. The "Value Realized" is
based on the fair market value of our common stock as of the date of exercise
and the "Value of Unexercised In-the-Money Options at Fiscal Year End" is the
value as of December 31, 1999, in each case as determined by the board of
directors, less the exercise price. All options were granted under our stock
option plan.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY OPTIONS AT
SHARES UNDERLYING UNEXERCISED FISCAL YEAR-END ($)
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR-END (#)
EXERCISE REALIZED
(#) ($) EXERCISABLE/ UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
--- --- -------------------------- -------------------------
<S> <C> <C> <C> <C>
Phillip J. Riese.................. - - 400,000/800,000 0/0
William A. Lupien................. - - -
John T. Rickard................... 8,000 68,000 426,286/165,715 3,573,431/1,208,569
Robert J. Warshaw................. - - 0/500,000 0/0
Paul I. Kasnetz................... 18,500 151,099 20,000/60,000 163,350/490,050
William F. Adiletta............... 163,704 1,337,052 231,209/0 1,888,400/0
</TABLE>
COMPENSATION OF DIRECTORS
Our directors do not currently receive any cash compensation for their
services as members of the board of directors, although we do reimburse them for
travel and lodging expenses in connection with attendance at board and committee
meetings. Our directors are eligible to receive options under our 1999 stock
plan at the discretion of the board of directors or other administrator of the
plan.
During 1998, the board granted options to purchase an aggregate of
50,000 shares to each of Messrs. Bloom and Meyerson at an exercise price per
share of $4.00. These option shares vest ratably over a four-year period subject
to continuing service on the board and have a term of ten years. During 2000,
the board granted options pursuant to our 1999 stock plan to purchase an
aggregate of 10,000 shares to each of Messrs. Bloom and Meyerson, 50,000 shares
to each of Messrs. Fisher and Pasternak and 60,000 shares to each of Messrs.
Jones and O'Halleran, at an exercise price per share of $10.00. These option
shares vest ratably over a five-year period, subject to continuing service on
the board, and have a term of ten years.
EMPLOYMENT AND OTHER AGREEMENTS
Phillip J. Riese. In November 1998 we entered into an employment
agreement with Mr. Riese pursuant to which Mr. Riese was employed as chief
executive officer and appointed to the board of directors. The agreement
provides that Mr. Riese's employment will continue until terminated by either
party with or without cause. Mr. Riese is entitled to a base salary of $425,000,
subject to annual evaluation and increase as determined by the board of
directors. Mr. Riese received a $1,000,000
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<PAGE> 43
bonus upon joining the company and received a $1,000,000 bonus in November 1999
on the first anniversary of his employment. Mr. Riese is also entitled to a
one-time performance bonus of $1,000,000 if the company achieves pre-tax net
income of at least $10,000,000 in a fiscal year.
Under the agreement, Mr. Riese purchased 350,000 shares of common
stock at a price of $10.00 per share. Of these shares, he purchased 100,000 with
a full recourse promissory note payable to us. The shares purchased with this
loan were subject to restrictions on transfer during the first year of Mr.
Riese's employment. Mr. Riese repaid the note and the restrictions lapsed in
November 1999.
Under the agreement, if we terminate Mr. Riese's employment other than
for "cause" or if Mr. Riese terminates his employment for "good reason",
- we must pay his base salary for two years after termination,
- we must pay a lump sum payment equal to the greater of the
bonus paid to Mr. Riese in the fiscal year before termination
or a pro rata portion of his target bonus for the fiscal year
in which termination occurs, excluding the one-time performance
bonus,
- we must continue his benefits for two years, and
- 60% of Mr. Riese's options will vest if the termination occurs
within three years after the date of his employment, 80% will
vest if the termination occurs thereafter but within four years
from the date of his employment and 100% will vest if the
termination occurs thereafter.
If the termination occurs on or after the first day of the tenth month of our
fiscal year, Mr. Riese is entitled to a lump sum payment equal to the pro rata
portion of his target bonus for the fiscal year, excluding the one-time
performance bonus.
If the one-time performance bonus is earned in the year we terminate
Mr. Riese's employment other than for "cause" or Mr. Riese terminates his
employment for "good reason" or Mr. Riese's employment is terminated by reason
of death or disability, we must pay a prorated portion of that bonus.
In the event of a "change of control", 75% of Mr. Riese's options will
vest if the change of control occurs within two years of the date of his
employment, 60% will vest if the change of control occurs thereafter but within
three years of the date of his employment, 80% will vest if the change of
control occurs thereafter but within four years of the date of his employment
and all will vest if the change of control occurs thereafter. If we terminate
Mr. Riese's employment other than for "cause" or if Mr. Riese terminates his
employment for "good reason" within one year after a change of control, all of
Mr. Riese's options will vest.
William A. Lupien. In August 1996 we entered into an employment
agreement with Mr. Lupien. The agreement provides that Mr. Lupien's employment
will continue until terminated by either party with or without cause. The
agreement further provides that if we terminate Mr. Lupien's employment without
"cause" or Mr. Lupien terminates his employment because of a substantial
diminution in responsibility or pay or because of a forced relocation,
- we will continue to pay Mr. Lupien his base salary for
eighteen months,
- all of Mr. Lupien's stock options will vest, and
- we must loan Mr. Lupien an amount sufficient to pay the
exercise price of his stock options.
John T. Rickard. In August 1996 we entered into an employment agreement
with Mr. Rickard which is substantially identical to our agreement with Mr.
Lupien.
Robert J. Warshaw. In August 1999 we entered into a letter agreement
with Mr. Warshaw. The letter agreement provides that Mr. Warshaw's employment
will continue at the discretion of both parties. Mr. Warshaw is entitled to a
base salary of $225,000 and a guaranteed bonus of $350,000 for the first year of
his employment. One-half of the guaranteed bonus was paid to Mr. Warshaw on
commencement of his employment and the balance is payable on the first
anniversary of Mr.
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<PAGE> 44
Warshaw's employment. In the event of a "change of control", or if we terminate
Mr. Warshaw's employment other than for "cause" or if Mr. Warshaw terminates his
employment for "good reason" within one year after a change of control, Mr.
Warshaw's options will vest in the same manner as Mr. Riese's options, as
described above. If we terminate Mr. Warshaw's employment without "cause" or Mr.
Warshaw terminates his employment for "good reason," we must pay him an amount
equal to 12 times his last gross monthly salary plus the amount of any cash
bonus paid to him during the period 12 months before termination.
William F. Adiletta. In November 1999, we entered into a letter
agreement with William F. Adiletta in connection with his resignation as
President of OptiMark Nasdaq Market and a director. Under this agreement, Mr.
Adiletta received $150,000 on signing and $150,000 on January 3, 2000, and is
receiving $150,000 payable in 12 equal semi-monthly installments beginning in
January 2000. In addition, half of the options granted to Mr. Adiletta which
would have vested after November 1999 were treated as vested on the date of Mr.
Adiletta's termination and all vested options remain exercisable until November
1, 2002.
ADDITIONAL INFORMATION WITH RESPECT TO COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION IN COMPENSATION DECISIONS
Peter L. Bloom and Morton H. Meyerson served as members of our
compensation committee during the fiscal year ended December 31, 1999. Neither
of the members of our compensation committee has ever been an officer or
employee of OptiMark. None of our executive officers serves as a member of the
board of directors or compensation committee of any entity that has one or more
executive officers serving on our board of directors or compensation committee.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Described below are past and proposed transactions involving amounts
exceeding $60,000 in which any of our directors, executive officers, holders of
more than 5% of any class of our voting securities, or any member of their
immediate families had or will have a direct or indirect material interest.
SALES OF SECURITIES
In August 1996 and March and May 1997, we issued an aggregate of
2,046,385 shares of series A convertible participating preferred stock to
General Atlantic Partners 35, L.P. and GAP Coinvestment Partners, L.P., and
1,364,257 shares of series A convertible participating preferred stock to Dow
Jones & Company, Inc. at a purchase price of $7.33 per share. These investors
entered into a stockholders agreement that provides for rights of first offer to
purchase our capital stock on issuance and a registration rights agreement. The
General Atlantic entities and Dow Jones are the beneficial owners of more than
five percent of our common stock.
In May 1997, we issued warrants to purchase up to an aggregate of
3,242,644 shares of common stock to General Atlantic Partners 35 and GAP
Coinvestment Partners and a warrant to purchase up to an aggregate of 2,161,764
shares of common stock to Dow Jones for an initial price of $2.25 per share. In
January 1998, the General Atlantic entities exercised their warrants to acquire
3,242,644 shares of common stock for an aggregate purchase price of $7,295,949.
In April 1999, Dow Jones exercised its warrant to acquire 2,161,764 shares of
common stock for an aggregate purchase price of $5,886,483.
In August 1997, we issued an aggregate of 818,552 shares of common
stock to Big Bend Investments II, L.P., a partnership controlled by Morton H.
Meyerson, one of our directors, for an aggregate purchase price of $1,500,000.
In April 1998, we issued 2,000,000 shares of series B convertible
participating preferred stock to Virginia Surety Company, Inc. at a purchase
price of $10.00 per share. In June 1998, we issued 1,000,000 shares of series B
convertible participating preferred stock to The Goldman Sachs Group, L.P. at a
purchase price of $10.00 per share. In July 1998, we issued 800,000 shares of
series B convertible participating preferred stock to Nihon Keizai Shimbun,
Inc., and an aggregate of 1,500,000 shares of series B convertible participating
preferred stock to ML IBK Positions, Inc., Merrill Lynch KECALP L.P. 1997 and
Merrill Lynch KECALP International L.P. 1997, at a purchase price of $10.00 per
share. In August 1998, we issued 1,000,000 shares of series B convertible
participating preferred stock to Credit Suisse First Boston OptiMark Investors,
Inc. and
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1,060,000 shares of series B convertible participating preferred stock to Paine
Webber Capital, Inc., at a purchase price of $10.00 per share. Each investor
entered into a registration rights agreement. Each of the foregoing series B
investors is the beneficial owner of at least five percent of our series B
convertible participating preferred stock.
In April 1998, we issued to Virginia Surety Company a warrant to
purchase up to 500,000 shares of common stock for $10.00 per share in connection
with its investment in shares of series B convertible participating preferred
stock.
In September 1998, we entered into an agreement to issue warrants to
Nasdaq to purchase up to an aggregate of 11,250,000 shares of common stock for
prices ranging from $5.00 to $7.00 per share in consideration for our agreement
to develop and provide the Nasdaq application of the OptiMark trading
technology. In October 1999, we issued to Nasdaq a warrant to purchase 2,250,000
shares of common stock for a price of $5.00 per share and a warrant to purchase
2,250,000 shares of common stock for a price of $7.00 per share. Nasdaq is the
beneficial owner of more than five percent of our common stock.
In May 1999, we issued warrants to purchase up to an aggregate of
1,500,000 shares of common stock for $10.00 per share to The Goldman Sachs
Group, Inc., ML IBK Positions, Inc., Merrill Lynch KECALP L.P. 1997 and Merrill
Lynch KECALP International L.P. 1997. These warrants expired unexercised
pursuant to their terms in June 1999.
In July 1999, we issued 8,250,000 shares of series C convertible
preferred stock to SOFTBANK Capital Partners L.P. and SOFTBANK Capital Advisors
Fund L.P. at a purchase price of approximately $11.76 per share. In connection
with the SOFTBANK affiliates' investment, they entered into a registration
rights agreement. The SOFTBANK affiliates are the beneficial owners of more than
five percent of our common stock.
In July 1999, we issued 250,000 shares of series D convertible
preferred stock to BancBoston Capital Inc. at a purchase price of $12.00 per
share. In connection with BancBoston's investment, it entered into a
registration rights agreement. BancBoston is the beneficial owner of all of our
series D convertible preferred stock.
In October 1999, we entered into an agreement to issue warrants to
Knight/Trimark Group, Inc. to purchase a number of shares of common stock at an
exercise price to be determined depending on the number of executions matched
through the OptiMark equities trading system resulting from profiles entered
into by Knight/Trimark. Kenneth Pasternak, a member of our board of directors,
is an executive officer and director of Knight/Trimark.
HIGH PERFORMANCE MARKETS, LTD.
High Performance Markets, Ltd., is a limited partnership in which
Messrs. Lupien, Rickard, and Jones indirectly owned a majority of the limited
partnership interests and control the general partner. In July 1996, we sold to
High Performance Markets a royalty-free, exclusive, fully paid, perpetual,
worldwide license to make, use and distribute products, systems and services
under certain of our patent applications within the non-securities industry
field for $650,000. High Performance Markets delivered a non-recourse promissory
note in the original principal amount of $650,000 in payment of the purchase
price. Interest on the principal amount of the loan accrued at a rate of 5.45%
per annum, compounded annually.
In April 1998, we purchased from High Performance Markets for $500,000
a fully paid, perpetual, worldwide license to make, use and distribute products,
systems and services under our patent applications within the insurance
industry.
In March 1999, we entered into a license termination agreement with
High Performance Markets under which High Performance Markets agreed to the
termination of the license granted by us to High Performance Markets in July
1996. In consideration for the termination of the license, we granted to High
Performance Markets 2,000,000 shares of common stock valued at $28,000,000. In
connection with the transaction, the terms of the $650,000 promissory note from
High Performance Markets were amended and restated to provide that the note
would be a recourse obligation. The terms of the transaction were negotiated
over a period of several months and approved by a special independent committee
of the board of directors. The special committee was comprised of four members,
two of whom were professional private equity investors with significant
experience in the valuation and purchase of entities and their assets. In
agreeing on the form of the transaction and the value of the license, the
special committee considered the importance to OptiMark, confirmed by investment
bankers in the context of a proposed initial public offering under consideration
at the time, of having the rights to exploit its technology in all industries.
In
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assessing the value of the license, the special committee also considered the
extensive development of the OptiMark equities trading system that had occurred
since the date of the grant of the license, the significant amount of capital
that had been spent by OptiMark on research and development since that time, and
the recent implementation of the OptiMark equities trading system on the Pacific
Exchange in January 1999.
In August 1999, High Performance Markets paid in full all principal
and accrued interest outstanding on the $650,000 loan. The largest principal
amount outstanding under the loan during 1999 was $650,000.
AON INSURANCE CORPORATION/VIRGINIA SURETY COMPANY, INC.
In April 1998, we granted to Aon Corporation, the parent company of
Virginia Surety Company, Inc., in connection with Virginia Surety's investment
in our series B convertible participating preferred stock, a fully paid,
perpetual, worldwide license to use and distribute products, systems and
services under several of our patent applications within the insurance industry.
We use Aon Risk Services, Inc. of New York, a wholly-owned subsidiary
of Aon Corporation, as broker for our corporate insurance needs including
worker's compensation, general liability, auto, umbrella liability, property,
directors and officers liability, errors and omissions liability, fiduciary and
crime insurance policies. The premiums under these policies were approximately
$817,000 in 1999. We also use Cananwill Inc., another wholly-owned subsidiary of
Aon Corporation, to finance the insurance premiums on the above mentioned
policies. We paid approximately $1,143,000 to Cananwill in 1999.
NIHON KEIZAI SHIMBUN/QUICK CORP.
In September 1998, we established a joint venture in Japan called
Japan OptiMark Systems, Inc. with Nihon Keizai Shimbun and QUICK Corp. Nihon
Keizai Shimbun is the beneficial owner of more than five percent of our series B
convertible participating preferred stock.
DOW JONES & COMPANY, INC.
In December 1998, we purchased from Dow Jones & Company, Inc. 250,000
shares of our series A convertible participating preferred stock for an
aggregate purchase price of $10,000,000. At the time of the transaction, each
share of series A convertible participating preferred stock was convertible into
four shares of common stock and the fair market value of our common stock was
$10.00 per share, as determined by the board of directors. Dow Jones is the
beneficial owner of over five percent of our common stock.
LOANS TO EXECUTIVE OFFICERS
In November 1998, we made a full-recourse loan to Phillip J. Riese in
the principal amount of $1,000,000, the proceeds of which he used to purchase
100,000 shares of our common stock. Interest on the principal amount of the loan
accrued at a rate of 4.33% per annum, compounded annually. Mr. Riese purchased
an additional 250,000 shares at the same time with $2,500,000 of his own funds.
The principal balance and all accrued interest were paid by Mr. Riese in
November 1999. The largest principal amount outstanding under the loan during
1999 was $1,000,000. We made this loan to Mr. Riese because we thought it was
beneficial to our stockholders for our chief executive officer to have a larger
equity stake in OptiMark. Mr. Riese's investment demonstrates his support of
OptiMark and provides an incentive for him to remain committed to our success.
In March 1998, we made a loan to John T. Rickard in the principal
amount of $200,000, the proceeds of which he used to repay other indebtedness.
Interest on the principal amount of the loan accrues at 6% per annum. The
principal balance of the loan and all accrued but unpaid interest are due and
payable on March 31, 2003 or within 30 days of Mr. Rickard's termination of
employment, if earlier. In January 1999 and January 2000, Mr. Rickard paid all
accrued interest on the loan. The largest principal amount outstanding under the
loan during 1999 was $200,000. In April 2000, we forgave the outstanding
principal amount under this loan in consideration for Mr. Rickard's past
services and Mr. Rickard paid all accrued and unpaid interest.
OTHER TRANSACTIONS
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In May 1996, in consideration for the sale of certain technology by a
subsidiary of our predecessor, MJT Holdings, Inc., we received a promissory note
from TOMCAT, LLC in the principal amount of $700,000. TOMCAT is a limited
liability company in which Messrs. Lupien, Rickard, and Jones indirectly owned a
majority of the membership interests. Interest on the principal amount of the
note accrues at 5.45% per annum, compounded annually. The principal balance and
all accrued but unpaid interest on the note are due and payable on May 31, 2005.
The largest principal amount outstanding under the note during each of 1997,
1998 and 1999 was $700,000. During 1997, we determined that the note was
uncollectible and wrote it off against the reserve we set up in 1996.
In May 1996, in consideration for the sale of certain technology from
MJT Holdings, we received a promissory note from Durango Holdings, Ltd. in the
principal amount of $1,900,000. Durango Holdings is a limited partnership in
which Messrs. Lupien, Rickard, and Jones owned a majority of the limited
partnership interests and controlled the general partner. Interest on the
principal amount of the note accrues at 5.45% per annum, compounded annually.
The principal balance and all accrued but unpaid interest on the note are due
and payable on May 31, 2005. The largest principal amount outstanding under the
note during each of 1997, 1998 and 1999 was $1,900,000. During 1997, we recorded
a valuation allowance for the full amount of the note. In May 1999, Durango
Holdings assigned its rights and obligations under the note to Pegasus
Technologies, Ltd., a limited partnership in which Messrs. Lupien, Rickard, and
Jones owned a majority of the limited partnership interests and control the
general partner. In August 1999, Pegasus Technologies paid us approximately
$59,000 on the note.
ITEM 8. LEGAL PROCEEDINGS
We are not currently a party to any legal proceedings, an adverse
outcome of which, individually or in the aggregate, could have a material
adverse effect on our business, financial condition or operating results. We
have been subject to legal proceedings in the past and may be subject to legal
proceedings in the future.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
There is no established public trading market for the shares of common
stock and we do not currently intend to seek inclusion of the shares of common
stock in any established public trading market. As of June 12, 2000 we had
36,611,657 outstanding shares of common stock, including 740,000 shares on
non-voting common stock owned by approximately 627 holders.
There are 68,999,929 outstanding shares of common stock on an as
converted basis that can be sold pursuant to Rule 144 within 90 days after the
effective date of this registration statement. As of June 12, 2000 we have
- issued options to purchase an aggregate of 14,413,139 shares
of common stock to our directors, officers and employees,
- issued warrants to purchase an aggregate of 8,458,328 shares
of common stock to investors and strategic partners, and
- granted registration rights to holders of approximately
40,113,000 shares of common stock, on an as converted basis.
We have not declared any dividends or other distributions on our
shares of common stock. We do not anticipate paying any other cash dividends in
the foreseeable future and anticipate that future earnings will be retained to
finance operations.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of our transactions since April 1997
involving sales of our securities that were not registered under the Securities
Act of 1933.
In May 1997, we issued 1,364,256 shares of series A convertible
participating preferred stock and warrants to purchase up to an aggregate of
5,404,408 shares of common stock for an initial price of $2.25 per share to
three accredited investors for an
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aggregate purchase price of $10,000,000. Each share of series A convertible
participating preferred stock is currently convertible into four shares of
common stock.
In August 1997, we issued 818,552 shares of common stock to Big Bend
Investments II, L.P., a partnership controlled by Morton H. Meyerson, a
director, for $1,500,000.
In January 1998, in connection with the exercise of warrants we issued
in May 1997, we issued an aggregate of 3,242,644 shares of common stock to
General Atlantic Partners 35 and GAP Coinvestment Partners for an aggregate
purchase price of $7,295,949.
From April to December 1998, we issued an aggregate of 11,000,000
shares of series B convertible participating preferred stock to 54 accredited
investors for an aggregate purchase price of $110,000,000.
In April 1998, we issued a warrant to Virginia Surety Company, Inc. to
purchase up to 500,000 shares of common stock for $10.00 per share in
consideration for Virginia Surety Company's investment in series B convertible
participating preferred stock.
In April 1998, we granted options to purchase an aggregate of 200,000
shares of common stock at an exercise price of $4.00 per share to four
non-employee directors.
In June 1998, in connection with the exercise of options we granted in
April 1998, we issued an aggregate of 100,000 shares of common stock to two
non-employee directors for an aggregate purchase price of $400,000.
In June 1998, we issued a warrant to Transamerica Business Credit
Corporation to purchase up to 42,500 shares of common stock for $10.00 per share
in consideration for Transamerica Business Credit Corporation providing
equipment lease financing to us.
In August 1998, we issued a warrant to Francis X. Egan, a consultant,
to purchase up to 40,000 shares of common stock for $10.00 per share.
In October 1998, we issued 20,000 shares of common stock to Yehoshua
Benjamin, a consultant, for $200,000.
In October 1998, we issued 5,000 shares of common stock to Ramsey
Beirne Partners, L.L.C., a consulting firm, for $50,000 and also issued a
warrant to Ramsey Beirne to purchase up to 5,000 shares of common stock for
$10.00 per share.
In December 1998, we issued 100,000 shares of common stock to Phillip
J. Riese, our chief executive officer, for $1,000,000.
In December 1998, we issued 250,000 shares of common stock to Phillip
J. Riese for $2,500,000.
In January 1999, we issued a warrant to BIOS Group LP, a consulting
firm, to purchase up to 5,000 shares of common stock for $10.00 per share.
In February 1999, we granted an option to purchase 20,000 shares of
common stock at an exercise price of $14.00 per share to Carl M. Valenti, a
former director, for certain consulting services.
In March 1999, we issued 300,000 shares of common stock to Dow Jones
pursuant to Dow Jones's conversion of 75,000 shares of series A convertible
participating preferred stock.
In March 1999, we issued 2,000,000 shares of common stock to High
Performance Markets in consideration for the cancellation of certain license
rights we had previously granted to High Performance Markets.
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In April 1999, in connection with the exercise of warrants we granted
in May 1997, we issued 2,161,764 shares of common stock to Dow Jones for
$5,886,483.
In May 1999, we issued warrants to B.T. Investment Partners, Inc., The
Goldman Sachs Group, Inc., ML IBK Positions, Inc., Merrill Lynch KECALP L.P.
1997, and Merrill Lynch KECALP International L.P. 1997 to purchase up to an
aggregate of 1,666,667 shares of common stock for $10.00 per share. These
warrants expired unexercised in June 1999.
In July 1999, we issued 8,250,000 shares of series C convertible
preferred stock to SOFTBANK Capital Partners L.P. and SOFTBANK Capital Advisors
Fund L.P. for $97,000,000.
In July 1999, we issued 250,000 shares of series D convertible
preferred stock to BancBoston Capital Inc. for $3,000,000.
In August 1999, in connection with the exercise of warrants we granted
in October 1998, we issued 5,000 shares of common stock to Ramsey Beirne for
$50,000.
In August 1999, we issued 4,167 shares of common stock to Ramsey
Beirne for $50,000.
Between April 1997 and April 1998, we granted options to purchase
1,219,000 shares of common stock at an exercise price of $1.8325 per share and
granted options to purchase 777,000 shares of common stock at an exercise price
of $2.56 per share to employees. Between April 1998 and June 1998, we granted
options to purchase 845,000 shares of common stock at an exercise price of $4.00
per share to employees. Between July 1998 and August 1998, we granted options to
purchase 267,500 shares of common stock at an exercise price of $7.50 per share
to employees. Between September 1998 and February 1999, we granted options to
purchase 1,560,350 shares of common stock at an exercise price of $10.00 per
share to employees. Between February 1999 and July 1999, we granted options to
purchase 781,950 shares of common stock at an exercise price of $14.00 per share
to employees. From July 1999 to November 1999, we granted options to purchase
1,136,900 shares of common stock at an exercise price of $12.00 per share to
employees. From January 2000 to June 12, 2000, we granted options to purchase
8,762,100 shares of common stock at an exercise price of $10.00 per share to
employees and directors.
Between December 1997 and June 2000, we issued an aggregate of 851,514
shares of common stock upon the exercise of stock options for aggregate
consideration of approximately $1,590,000.
These issuances of securities were exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act or Rule 701
promulgated under the Securities Act, as transactions by an issuer not involving
a public offering or transactions under compensatory benefit plans and contracts
as provided under Rule 701. The recipients of securities in each of these
transactions represented their intention to acquire the securities for
investment only and not with view to or for sale in connection with any
distribution, and appropriate legends were affixed to the share certificates and
instruments issued. All recipients were accredited investors as defined in the
Securities Act and/or were sophisticated and had adequate access, through their
relationship with us, to information about us.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
Our authorized capital stock consists of 150,000,000 shares of common
stock, par value $.01 per share, and 40,000,000 shares of preferred stock, par
value $.01 per share. As of June 12, 2000 there were issued and outstanding
- 36,611,657 shares of common stock, including 740,000 shares of
non-voting common stock,
- 3,222,068 shares of series A convertible participating
preferred stock,
- 11,000,000 shares of series B convertible participating
preferred stock,
- 8,250,000 shares of series C convertible preferred stock, and
- 250,000 shares of series D convertible preferred stock.
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COMMON STOCK
There are 1,500,000 shares of the authorized common stock that are
designated as non-voting common stock. As of June 12, 2000 there were issued and
outstanding 740,000 shares of non-voting common stock. These shares have no
voting rights, except as provided by law. The remainder of the authorized common
stock is voting common stock, the holders of which are entitled to one vote per
share. Votes are not cumulated in the election of directors. Under our
certificate of incorporation, the holders of common stock have no preemptive or
similar rights or redemption or conversion privileges. The holders of common
stock are entitled to receive dividends as and when declared by the board of
directors from legally available funds and are entitled on liquidation to share
ratably in all assets remaining after payment of liabilities and liquidation
preferences to holders of preferred stock.
Under an amended and restated stockholders agreement, dated April 23,
1998, stockholders holding an aggregate of 29,203,657 shares of common stock (on
an as converted basis) have preemptive rights with respect to the issuance of
new shares of common stock or securities convertible into or exchangeable for
common stock before an initial public offering of the common stock.
The agreement also entitles General Atlantic Partners 35, GAP
Coinvestment Partners, General Atlantic Partners 52 and GAP Coinvestment
Partners II, together as a group, and Dow Jones to designate two individuals to
the board of directors for as long as each stockholder owns at least five
percent of the total common stock outstanding on an as converted basis. They are
entitled to designate one individual for as long as each stockholder owns less
than five percent and at least two percent of the total common stock outstanding
on an as converted basis. Virginia Surety Company is entitled to designate one
individual to the board of directors for so long as it owns at least two-thirds
of the series B convertible participating preferred stock it purchased from us.
These stockholders will no longer be entitled to designate any directors once
they own less than two percent of the total common stock outstanding on an as
converted basis.
PREFERRED STOCK
Shares of preferred stock we acquire must be retired and canceled
promptly after acquisition. These shares on cancellation become authorized but
unissued shares of preferred stock. Shares of series A convertible participating
preferred stock may be reissued only as part of another series of preferred
stock, and shares of other series of preferred stock may be reissued as part of
the same or another series of preferred stock.
Voting Rights. The holders of preferred stock are entitled to vote on
all matters to be voted on by the holders of common stock as a single class with
other shares entitled to vote. Each share of preferred stock is entitled to a
number of votes equal to the number of shares into which it is convertible. As
of June 12, 2000, each share of series A convertible participating preferred
stock is entitled to four votes per share and each other share of preferred
stock is entitled to one vote per share.
Dividends. The holders of preferred stock are entitled to dividends
and other distributions in an amount equal to the amount of dividends or
distributions paid on the number of shares of common stock into which the
preferred shares are convertible on the record date for the dividend or
distribution.
Liquidation. On liquidation, dissolution or winding up:
- the holders of series A convertible participating preferred
stock are entitled to a liquidation preference of $7.33 per
share,
- the holder of series B convertible participating preferred
stock are entitled to a liquidation preference of $10.00 per
share,
- the holders of series C convertible preferred stock are
entitled to a liquidation preference of approximately $11.76
per share, and
- the holders of series D convertible preferred stock are
entitled to a liquidation preference of $12.00 per share, each
plus all declared and unpaid dividends.
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If our assets available for distribution to the stockholders are not sufficient
to pay the liquidation preferences of each series of preferred stock, the
holders of each series share ratably in the distribution of available assets.
The liquidation preference for each series of preferred stock must be paid in
full before any payments are made or assets distributed to the holders of common
stock.
Redemption. No shares of any series of preferred stock are redeemable,
whether at our option or at the option of any holder of such shares.
Conversion Right. Each share of series A convertible participating
preferred stock may currently be converted, at the option of the holder, into
four shares of common stock. Each other share of preferred stock may be
converted, at the option of the holder, into shares of common stock on a
one-for-one basis. The conversion ratio for each share of preferred stock will
be adjusted in the event of:
- stock dividends or distributions,
- combinations, subdivisions or reclassifications,
- our sale of common stock at a price per share that is less
than the conversion price then in effect, and
- the board of directors determining that it would be equitable
to adjust the conversion price as a result of other actions we
may take affecting the common stock.
None of these adjustments to the conversion ratio of the series A
convertible participating preferred stock will be made unless the adjustment
would require an increase or decrease of at least one percent of the conversion
price.
Each share of preferred stock will be automatically converted to
common stock, at the then applicable conversion price as determined above, upon
the occurrence of the following events:
- we achieve average volumes of at least 5,000,000 shares per
day transacted through the OptiMark equities trading system
for the latest twelve month period and operating profit over
the same twelve-month period of at least $10,000,000, or
- following an initial public offering of the common stock at a
price per share that is at least 2.00 times the then
applicable conversion price of the series B convertible
participating preferred stock and 1.67 times the then
applicable conversion price of the series C convertible
preferred stock and series D convertible preferred stock and
with aggregate proceeds to us of at least $10,000,000.
WARRANTS
We have issued warrants or entered into agreements to issue warrants
to purchase up to an aggregate of approximately 46 million shares of common
stock.
We issued a warrant to purchase up to 2,104,000 shares of common stock
to the Pacific Exchange on August 27, 1996, for an exercise price of $1.8325 per
share. The number of shares depends on the dates on which certain amounts of
securities are traded on any exchange and on the Pacific Exchange using our
technology, including equity options, after-hours trading and securities with
unlisted trading privileges. The warrant is currently exercisable for 841,600
shares of common stock. The warrant will expire on December 31, 2010 or two
years following an initial public offering of the common stock if earlier, but
in no case before December 31, 2005.
We issued a warrant to purchase up to 1,227,828 shares of common stock
to the Chicago Board Options Exchange on December 31, 1996, for an exercise
price of $1.8325 per share. The number of shares depends on the dates on which
different types of options, including equity options, index options and other
options, representing at least 80% of the average daily options of the same type
are traded using our technology on the Chicago Board Options Exchange. The
warrant is not currently exercisable. The warrant will expire on December 31,
2010 or two years following an initial public offering of the common stock if
earlier, but in no case before December 31, 2005.
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We issued a warrant to purchase up to 500,000 shares of common stock
to Virginia Surety Company, Inc. on April 23, 1998, for an exercise price of
$10.00 per share. The warrant will expire on December 31, 2001.
We entered into an agreement with Nasdaq to issue warrants to purchase
up to 11,250,000 shares of common stock. In October 1999 in connection with the
launch of the Nasdaq system we issued to Nasdaq one warrant to purchase
2,250,000 shares of common stock for an exercise price of $5.00 per share and a
second warrant to purchase 2,250,000 shares of common stock for an exercise
price of $7.00 per share. Nasdaq has the opportunity to earn additional warrants
to purchase up to 6,750,000 additional shares at an exercise price of $7.00 per
share depending on the average daily volume and transaction revenues of
securities traded in Nasdaq using our equities trading system. The warrants and
the right to earn warrants will expire on the earlier of October 11, 2004, or
the last date on which the trading technology is made available on Nasdaq
workstations.
We entered into an agreement to issue warrants to Knight/Trimark
Group, Inc. to purchase shares of common stock. The amount and exercise price,
ranging from $2 per share to $9 per share, of the warrants will be determined
depending on the number of executions entered into, matched through and reported
out of the OptiMark equities trading system resulting from profiles entered by
Knight/Trimark. At progressively earlier satisfaction of the performance
criteria by Knight/Trimark, the exercise prices are progressively lower. At
progressively smaller percentages of total executions in the system represented
by Knight/Trimark executions, the exercise prices are also progressively lower.
The warrants for the appropriate number of shares of common stock will be issued
to Knight/Trimark no later than June 30, 2002, and will expire six months after
issuance.
The exercise price of these warrants and the number of shares issuable
upon exercise will be subject to adjustment to protect against dilution in the
event of:
- stock dividends, stock splits, combinations, subdivisions and
reclassifications,
- mergers, consolidations and sales of assets,
- our taking any action affecting the common stock and the board
of directors determining in good faith that it would be
equitable to adjust the exercise price of the warrants, and
- our issuing shares of common stock at a price per share that
is less than the exercise price for the warrant, except in the
case of the Knight/Trimark agreement and, in the case of the
Knight/Trimark agreement, if we issue shares to all of our
stockholders at a price less than the fair market value of the
common stock.
The Pacific Exchange, Virginia Surety Company, Nasdaq and Knight/
Trimark each is entitled to registration rights with respect to the common stock
underlying its warrants.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
grants corporations the power to indemnify their directors, officers, employees
and agents.
Our bylaws and certificate of incorporation provide that we will
indemnify any person who was or is a party or is threatened to be made a party
to any proceeding because he was a director or officer, or was serving at our
request as a director, officer, partner, trustee, employee or agent of another
enterprise. The indemnity covers expenses, including attorneys' fees, judgments,
fines and amounts paid in settlement reasonably incurred in connection with the
proceeding, to the fullest extent permitted by the Delaware General Corporation
Law. The indemnity is payable only if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to our best interests, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. Any of our other employees or agents may be
indemnified to the maximum extent permitted by law as authorized by the board of
directors. Our bylaws provide that this indemnification is not exclusive of
other rights to which these persons may be entitled.
Our certificate of incorporation, as amended, also contains provisions
exculpating a director from liability for breaches of fiduciary duty as a
director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders,
- for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law,
50
<PAGE> 53
- in respect of certain unlawful dividend payments or stock
redemptions or repurchases, or
- for any transaction from which the director derived an
improper personal benefit.
Our certificate of incorporation also provides that we will have the
power to maintain insurance covering our directors, officers and employees
against any liability or loss whether or not we could indemnify them against the
liability or loss under Delaware law. We currently maintain directors' and
officers' liability insurance.
Our certificate of incorporation, as amended, and bylaws are included
in this filing as Exhibits 3.1 and 3.2 and are incorporated here by reference.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item
are filed as part of this Form 10. See "Index to Financial Statement
Information" at page F-1 of this Form 10.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
Our consolidated financial statements are filed as part of this
registration statement. See "Index to Financial Statement Information" at page
F-1.
The report of Deloitte & Touche LLP, dated March 17, 2000, is filed as
part of this registration statement. See "Index to Financial Statement
Information" at page F-1.
(b) Exhibits:
INDEX TO EXHIBITS
These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-K:
(a) The following documents are filed as part of this report:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
2.1** Agreement and Plan of Merger dated June 12, 2000
3.1** Certificate of Incorporation of OptiMark Holdings
3.2** By-Laws of OptiMark Holdings
4.1* Specimen Common Stock Certificate
4.2* Specimen Preferred Stock Certificate
4.3* Series A Stock Purchase Agreement dated August 27, 1996 by and among OptiMark and the
parties named therein
4.4* Registration Rights Agreement dated August 27, 1996 by and among OptiMark and the
parties names therein
4.5* Amendment to Stock Purchase Agreement and Registration Rights Agreement dated
March 19, 1997 by and among OptiMark and the parties named therein
4.6* Amendment to Stock Purchase Agreement, Stockholders Agreement and Registration Rights
Agreement dated May 29, 1997 by and among OptiMark and the parties named therein
</TABLE>
51
<PAGE> 54
<TABLE>
<S> <C>
4.7* Amendment to Series A Registration Rights Agreement dated January 1999 by and among
OptiMark and the parties named therein
4.8* Series B Stock Purchase Agreement dated December 22, 1998 by and among OptiMark and the
parties named therein
4.9* Registration Rights Agreement dated April 23, 1998 by and among OptiMark and the parties
named therein
4.10* Series C Stock Purchase Agreement dated June 11, 1999 by and among OptiMark and the
parties named therein
4.11* Registration Rights Agreement dated July 26, 1999 by and among OptiMark and the parties
named therein
4.12* Series D Stock Purchase Agreement dated July 30, 1999 by and between OptiMark and
BancBoston Capital Inc.
4.13* Registration Rights Agreement dated July 30, 1999 by and between OptiMark and BancBoston
Capital Inc.
4.14* Registration Rights Agreement dated September 19, 1998 by and between OptiMark and The
NASDAQ Stock Market, Inc.
4.15* Amended and Restated Stockholders Agreement dated April 23, 1998 by and among OptiMark
and the parties named therein
10.1* Revenue Sharing Agreement dated August 27, 1996 by and between OptiMark and The Pacific
Exchange, Inc.
10.2* Revenue Sharing Agreement dated December 31, 1996 by and between OptiMark and the
Chicago Board Options Exchange, Inc.
10.3* PSE-OptiMark Agreement dated August 27, 1996 between OptiMark and The Pacific Exchange,
Inc.
10.4* NASDAQ/OptiMark Agreement dated September 1, 1998 by and between OptiMark and The NASDAQ
Stock Market, Inc.
10.5(a)* OptiMark 1999 Stock Plan (adopted November 29, 1999)
10.5(b)** Amendment No. 1 to the OptiMark 1999 Stock Plan
10.6* OptiMark Stock Option Plan (Amended & Restated January 27, 1999)
10.7* Form of Stock Option Agreement (1999 Stock Plan)
10.8* Form of Stock Option Agreement (Amended and Restated Stock Option Plan)
10.9* Form of Non-Employee Director Option Agreement
10.10* Employment Agreement dated November 1, 1998 by and between OptiMark and
Phillip J. Riese
10.11* Employment, Trade Secret and Non-Competition Agreement dated August 27, 1996 by and
between OptiMark and William A. Lupien
10.12* Employment, Trade Secret and Non-Competition Agreement dated August 27, 1996 by and
between OptiMark and John T. Rickard
10.13* Letter Agreement dated November 15, 1999 by and between OptiMark and
William F. Adiletta
10.14* Restricted Stock Purchase Agreement dated December 1, 1998 by and between OptiMark and
Phillip J. Riese
10.15* Stock Purchase Agreement dated December 18, 1998 by and between OptiMark and Phillip J.
Riese
10.16* Stock Option Agreement dated November 1, 1998 by and between OptiMark and Phillip J.
Riese
10.17* Stock Option Agreement dated November 1, 1998 by and between OptiMark and Phillip J.
Riese
10.18+** Services Agreement dated January 1, 1999 by and between OptiMark and ISM Information
Systems Management Corporation
10.19+** OptiMark/IBM Ops Agreement dated February 2, 1999 by and between OptiMark and the
parties named therein
10.20+** Agreement for Information Technology Services dated May 6, 1999 by and between
</TABLE>
52
<PAGE> 55
<TABLE>
<S> <C>
OptiMark and IBM Canada Limited
10.21* License Termination Agreement dated March 19, 1999 by and between OptiMark and High
Performance Markets, Ltd.
10.22* Common Stock Purchase Warrant dated August 27, 1996 in favor of The Pacific Exchange,
Inc.
10.23* Common Stock Purchase Warrant dated December 31, 1996 in favor of The Chicago Board
Options Exchange, Inc.
10.24* Common Stock Purchase Warrant dated April 23, 1998 in favor of Virginia Surety Company,
Inc.
10.25* Common Stock Purchase Warrant dated June 19, 1998 in favor of Transamerica Business
Credit Corporation
10.26* Common Stock Purchase Warrant dated August 24, 1998 by and between OptiMark and Francis
X. Egan
10.27* NASDAQ Warrant Agreement dated September 1, 1998 by and between OptiMark and The NASDAQ
Stock Market, Inc.
10.28* Common Stock Purchase Warrant dated January 27, 1999 by and between OptiMark and BIOS
Group LP
10.29* Warrant Agreement dated October 27, 1999 by and between OptiMark and Knight/Trimark
Group, Inc.
21.1** Subsidiaries of OptiMark Holdings
27.1** Financial Data Schedule
</TABLE>
* Previously filed as an exhibit to the Registrant's Registration
Statement on Form 10 (No. 000-30527) and incorporated by reference thereto.
** Previously filed as an exhibit to the Registrant's Registration
Statement on Form 10/A-1 (No. 000-30527) and incorporated by reference thereto.
+ Confidential treatment is requested for certain confidential portions of
this exhibit pursuant to Rule 24b-2 under the Exchange Act. In accordance with
Rule 24b-2, these confidential portions have been omitted from this exhibit and
filed separately with the Commission.
53
<PAGE> 56
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
OPTIMARK HOLDINGS, INC.
Dated: November 14, 2000 By: /s/ DAVID C. JOHNSON, JR.
-----------------------------------
Name: David C. Johnson, Jr.
Title: Co-Chief Executive Officer
By: /s/ ROBERT J. WARSHAW
-----------------------------------
Name: Robert J. Warshaw
Title: Co-Chief Executive Officer
54
<PAGE> 57
OPTIMARK HOLDINGS, INC. (FORMERLY OPTIMARK TECHNOLOGIES, INC.) AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT............................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997:
Balance Sheets.......................................................... F-3
Statements of Operations and Comprehensive Loss (Restated).............. F-4
Statements of Changes in Stockholders' Equity........................... F-5
Statements of Cash Flows................................................ F-12
Notes to Financial Statements........................................... F-13
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 2000 AND MARCH 31, 1999 (Unaudited)...........................
Balance Sheets.......................................................... F-28
Statements of Operations and Comprehensive Loss (Restated).............. F-29
Statements of Changes in Stockholders' Equity........................... F-30
Statements of Cash Flows................................................ F-31
Notes to Financial Statements........................................... F-32
</TABLE>
<PAGE> 58
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
OptiMark Technologies, Inc.
We have audited the accompanying consolidated balance sheets of OptiMark
Technologies, Inc. and subsidiaries (the "Company") as of December 31, 1999 and
1998, and the related consolidated statements of operations and comprehensive
loss, changes in stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for costs of computer software developed or
obtained for internal use in 1999.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company's recurring losses from operations raise substantial
doubt about its ability to continue as a going concern. Management's plans
concerning these matters are also described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
As discussed in Note 19, the accompanying financial statements have been
restated.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 17, 2000
(April 19, 2000 as to Note 18 and
August 14, 2000 as to Note 19)
F-2
<PAGE> 59
\OPTIMARK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................................. $ 62,637,410 $ 63,839,270
Receivable from affiliate (Note 3).......................................... 521,580 --
Receivables (Note 3) ....................................................... 151,302 --
Other current assets (Note 4) .............................................. 5,140,562 2,014,549
------------ ------------
Total current assets .................................................... 68,450,854 65,853,819
PROPERTY AND EQUIPMENT - Net (Note 5) ......................................... 19,967,364 8,623,431
CAPITALIZED SOFTWARE COSTS - Net (Note 2) ..................................... 10,816,389 --
INTANGIBLE ASSETS - Net (Note 6) .............................................. 27,849,752 --
OTHER ASSETS (Note 4) ......................................................... 2,595,748 911,999
INVESTMENT IN JOINT VENTURE (Note 1) .......................................... -- 69,112
------------ ------------
TOTAL ASSETS .................................................................. $129,680,107 $ 75,458,361
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Accounts payable and accrued liabilities ................................... $ 10,453,825 $ 9,379,941
Accrued compensation (Note 7) .............................................. 1,613,613 1,609,212
Current portion of capital leases payable (Note 9) ......................... 4,186,624 1,625,598
Accrued restructuring (Note 8) ............................................. 1,360,761 --
Other current liabilities .................................................. 601,937 150,503
------------ ------------
Total current liabilities ............................................... 18,216,760 12,765,254
CAPITAL LEASES PAYABLE, NET OF CURRENT PORTION (Note 9)........................ 4,814,696 3,208,463
OTHER LIABILITIES ............................................................. 123,891 165,817
------------ ------------
Total liabilities ....................................................... 23,155,347 16,139,534
------------ ------------
COMMITMENTS AND CONTINGENCIES .................................................
(Notes 9 and 13) ..............................................................
STOCKHOLDERS' EQUITY:
Preferred stock, authorized and unissued, 16,952,932 and 25,452,932 as of
December 31, 1999 and 1998, respectively Series A preferred stock,
convertible and participating $0.01 par value; 3,547,068 shares authorized;
3,472,068 and 3,547,068 shares issued and outstanding as of
December 31, 1999 and 1998, respectively (Note 14) .......................... 34,721 35,471
Series B preferred stock, convertible, $0.01 par value; 11,000,000 shares
authorized, issued and outstanding as of December 31, 1999 and 1998 (Note 14) 110,000 110,000
Series C preferred stock, convertible, $0.01 par value; 8,250,000 shares
authorized; 8,250,000 and 0 shares issued and outstanding at December 31,
1999 and 1998, respectively (Note 14) ....................................... 82,500 --
Series D preferred stock, convertible, $0.01 par value; 250,000 shares
authorized; 250,000 and 0 shares issued and outstanding at December 31, 1999
and 1998, respectively (Note 14) ............................................ 2,500 --
Common stock, $0.01 par value; 150,000,000 shares authorized; 36,496,057 and
31,558,922 shares issued and outstanding at December 31, 1999 and 1998,
respectively (Note 14) ...................................................... 364,961 315,589
Warrants, common stock (Note 14) ............................................... 35,686,523 1,845,467
Additional paid-in capital ..................................................... 309,564,789 162,221,792
Accumulated deficit ............................................................ (229,284,323) (94,205,814)
Notes receivable - officer (Note 14) ........................................... -- (1,003,678)
Accumulated other comprehensive loss ........................................... (36,911) --
Treasury stock, Series A preferred; 250,000 shares, at
cost (Note 14) .............................................................. (10,000,000) (10,000,000)
------------- -------------
Total stockholders' equity .................................................. 106,524,760 59,318,827
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................................... $ 129,680,107 $ 75,458,361
============= =============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 60
OPTIMARK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
REVENUE:
Revenue from affiliate ................. $ 1,620,454 -- --
Revenue, other ......................... 1,391,790 -- --
------------- ------------- -------------
Total revenue ....................... $ 3,012,244 -- --
EXPENSES:
Research and development ............... 31,635,548 $ 23,124,775 $ 11,701,821
Communications and data center ......... 28,227,012 13,585,922 --
U.S. Equities business development ..... 12,230,190 11,081,296 4,171,720
General and administrative ............. 11,220,729 9,196,446 4,890,097
Depreciation and amortization .......... 9,334,424 1,584,339 242,274
Restructuring expense (Note 8) ......... 7,693,026 -- --
Warrant compensation expense (Note 14) . 40,616,822 546,606 --
------------- ------------- -------------
Total expenses ...................... 140,957,751 59,119,384 21,005,912
------------- ------------- -------------
OTHER (INCOME) EXPENSES:
Interest income ........................ (3,315,664) (2,234,087) (562,366)
Interest expense ....................... 1,079,554 321,798 --
Equity in income of investee (Note 1) .. 69,112 -- --
Gain on recovery of bad debt (Note 3) .. (700,000) -- --
------------- ------------- -------------
................................... (2,866,998) (1,912,289) (562,366)
------------- ------------- -------------
NET LOSS .................................. (135,078,509) (57,207,095) (20,443,546)
OTHER COMPREHENSIVE LOSS:
Foreign currency translation adjustments (36,911) -- --
------------- ------------- -------------
COMPREHENSIVE LOSS ........................ $(135,115,420) $ (57,207,095) $ (20,443,546)
============= ============= =============
EARNINGS PER SHARE:
Basic and diluted (As restated-
See Note 19) ........................... $ (3.84) $ (1.84) $ (0.75)
============= ============= =============
Weighted average number of common shares
outstanding - basic and diluted (As
restated - See Note 19) ................ 35,193,208 31,067,059 27,199,653
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 61
OPTIMARK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
SHARES AMOUNTS SHARES AMOUNTS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 ....................................... 654,844 $ 6,548 -- --
Issuance of common stock (Note 14) .......................... -- -- -- --
Purchase of treasury stock (Note 14) ........................ -- -- -- --
Issuance of Series A preferred stock, net of expenses
(Note 14) ................................................... 2,892,224 28,923 -- --
Issuance of warrants (Note 14) .............................. -- -- -- --
Warrants exercised, net of expenses (Note 14) ............... -- -- -- --
Net loss .................................................... -- -- -- --
---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1997 ..................................... 3,547,068 35,471 -- --
Issuance of common stock (Note 14) .......................... -- -- -- --
Repurchase of Series A preferred treasury stock (Note 14) ... -- -- -- --
Sale of common treasury stock (Note 14) ..................... -- -- -- --
Issuance of Series B preferred stock, and warrants,
net of expenses (Note 14) ................................. -- -- 11,000,000 $ 110,000
Issuance of warrants (Note 14) .............................. -- -- -- --
Warrants exercised (Note 14) ................................ -- -- -- --
Warrants forfeited (Note 14) ................................ -- -- -- --
Options exercised (Note 15) ................................. -- -- -- --
Conversion of common stock to nonvoting common
stock (Note 14) ............................................. -- -- -- --
Value assigned to warrants issued as compensation
(Note 14) ................................................... -- -- -- --
Note receivable from officer, plus interest (Notes 14 and 15) -- -- -- --
Net loss .................................................... -- -- -- --
---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1998 ..................................... 3,547,068 35,471 11,000,000 110,000
Conversion of Series A Preferred Stock into common
stock (Note 14) ............................................. (75,000) (750) -- --
Issuance of Series C Preferred Stock, net of expenses
(Note 14) ................................................. -- -- -- --
Issuance of Series D Preferred Stock (Note 14) .............. -- -- -- --
Issuance of common stock (Note 14) .......................... -- -- -- --
Issuance of warrants (Note 14) .............................. -- -- -- --
Warrants exercised (Note 14) ................................ -- -- -- --
Warrants forfeited (Note 14) ................................ -- -- -- --
Warrants expired (Note 14) .................................. -- -- -- --
Options exercised (Note 14) ................................. -- -- -- --
Restructuring option charge (Note 8) ........................ -- -- -- --
Interest on note receivable from officer (Note 14) .......... -- -- -- --
Note receivable repayment from officer (Note 14) ............ -- -- -- --
Net loss .................................................... -- -- -- --
Other comprehensive loss .................................... -- -- -- --
---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1999 ..................................... 3,472,068 $ 34,721 11,000,000 $ 110,000
========== ========== ========== ==========
</TABLE>
F-5
<PAGE> 62
<TABLE>
<CAPTION>
SERIES C SERIES D
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
SHARES AMOUNTS SHARES AMOUNTS
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 ....................................... -- -- -- --
Issuance of common stock (Note 14) .......................... -- -- -- --
Purchase of treasury stock (Note 14) ........................ -- -- -- --
Issuance of Series A preferred stock, net of expenses
(Note 14) ................................................... -- -- -- --
Issuance of warrants (Note 14) .............................. -- -- -- --
Warrants exercised, net of expenses (Note 14) ............... -- -- -- --
Net loss .................................................... -- -- -- --
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 ..................................... -- -- -- --
Issuance of common stock (Note 14) .......................... -- -- -- --
Repurchase of Series A preferred treasury stock (Note 14) ... -- -- -- --
Sale of common treasury stock (Note 14) ..................... -- -- -- --
Issuance of Series B preferred stock, and warrants,
net of expenses (Note 14) ................................. -- -- -- --
Issuance of warrants (Note 14) .............................. -- -- -- --
Warrants exercised (Note 14) ................................ -- -- -- --
Warrants forfeited (Note 14) ................................ -- -- -- --
Options exercised (Note 15) ................................. -- -- -- --
Conversion of common stock to nonvoting common
stock (Note 14) ............................................. -- -- -- --
--------- --------- --------- ---------
Value assigned to warrants issued as compensation
(Note 14) ................................................... -- -- -- --
Note receivable from officer, plus interest (Notes 14 and 15) -- -- -- --
Net loss .................................................... -- -- -- --
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1998 ..................................... -- -- -- --
Conversion of Series A Preferred Stock into common
stock (Note 14) ............................................. -- -- -- --
Issuance of Series C Preferred Stock, net of expenses
(Note 14) ................................................... 8,250,000 $ 82,500 -- --
Issuance of Series D Preferred Stock (Note 14) .............. -- -- 250,000 $ 2,500
Issuance of common stock (Note 14) .......................... -- -- -- --
Issuance of warrants (Note 14) .............................. -- -- -- --
Warrants exercised (Note 14) ................................ -- -- -- --
Warrants forfeited (Note 14) ................................ -- -- -- --
Warrants expired (Note 14) .................................. -- -- -- --
Options exercised (Note 14) ................................. -- -- -- --
Restructuring option charge (Note 8) ........................ -- -- -- --
Interest on note receivable from officer (Note 14) .......... -- -- -- --
Note receivable repayment from officer (Note 14) ............ -- -- -- --
Net loss .................................................... -- -- -- --
Other comprehensive loss .................................... -- -- -- --
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1999 ..................................... 8,250,000 $ 82,500 250,000 $ 2,500
========= ========= ========= =========
</TABLE>
F-5
<PAGE> 63
<TABLE>
<CAPTION>
COMMON STOCK
VOTING NONVOTING
----------------------------- ----------------------------
SHARES AMOUNTS SHARES AMOUNTS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 ..................................... 26,753,732 $ 267,536 -- --
Issuance of common stock (Note 14) ........................ 818,552 8,186 -- --
Purchase of treasury stock (Note 14) ...................... -- -- -- --
Issuance of Series A preferred stock, net of expenses
(Note 14) ................................................. -- -- -- --
Issuance of warrants (Note 14) ............................ -- -- -- --
Warrants exercised, net of expenses (Note 14) ............. 207,284 2,073 -- --
Net loss .................................................. -- -- -- --
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 ................................... 27,779,568 277,795 -- --
Issuance of common stock (Note 14) ........................ 167,000 1,670 -- --
Repurchase of Series A preferred treasury stock (Note 14) . -- -- -- --
Sale of common treasury stock (Note 14) ................... -- -- -- --
Issuance of Series B preferred stock, and warrants,
net of expenses (Note 14) ............................... -- -- -- --
Issuance of warrants (Note 14) ............................ -- -- -- --
Warrants exercised (Note 14) .............................. 3,358,844 33,589 -- --
Warrants forfeited (Note 14) .............................. -- -- -- --
Options exercised (Note 15) ............................... 253,510 2,535 -- --
Conversion of common stock to nonvoting common
stock (Note 14) ......................................... (740,000) (7,400) 740,000 $ 7,400
Value assigned to warrants issued as compensation
(Note 14) ............................................... -- -- -- --
Note receivable from officer, plus interest
(Notes 14 and 15) ..................................... -- -- -- --
Net loss ................................................ -- -- -- --
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 ................................... 30,818,922 308,189 740,000 7,400
Conversion of Series A Preferred Stock into common
stock (Note 14) ........................................... 300,000 3,000 -- --
Issuance of Series C Preferred Stock, net of expenses
(Note 14) ................................................. -- -- -- --
Issuance of Series D Preferred Stock (Note 14) ............ -- -- -- --
Issuance of common stock (Note 14) ........................ 2,004,167 20,042 -- --
Issuance of warrants (Note 14) ............................ -- -- -- --
Warrants exercised (Note 14) .............................. 2,198,764 21,988 -- --
Warrants forfeited (Note 14) .............................. -- -- -- --
Warrants expired (Note 14) ................................ -- -- -- --
Options exercised (Note 14) ............................... 434,204 4,342 -- --
Restructuring option charge (Note 8) ...................... -- -- -- --
Interest on note receivable from officer (Note 14) ........ -- -- -- --
Note receivable repayment from officer (Note 14) .......... -- -- -- --
Net loss .................................................. -- -- -- --
Other comprehensive loss .................................. -- -- -- --
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 ................................... 35,756,057 $ 357,561 740,000 $ 7,400
=========== =========== =========== ===========
</TABLE>
F-5
<PAGE> 64
<TABLE>
<CAPTION>
TOTAL
--------------------------
SHARES AMOUNTS
---------- ----------
<S> <C> <C>
BALANCE, JANUARY 1, 1997 ....................................... 26,753,732 $ 267,536
Issuance of common stock (Note 14)........................... 818,552 8,186
Purchase of treasury stock (Note 14) ........................ -- --
Issuance of Series A preferred stock, net of expenses
(Note 14) ................................................... -- --
Issuance of warrants (Note 14) .............................. -- --
Warrants exercised, net of expenses (Note 14) ............... 207,284 2,073
Net loss .................................................... -- --
---------- ----------
BALANCE, DECEMBER 31, 1997 ..................................... 27,779,568 277,795
Issuance of common stock (Note 14) .......................... 167,000 1,670
Repurchase of Series A preferred treasury stock (Note 14) ... -- --
Sale of common treasury stock (Note 14) ..................... -- --
Issuance of Series B preferred stock, and warrants,
net of expenses (Note 14) ................................. -- --
Issuance of warrants (Note 14) .............................. -- --
Warrants exercised (Note 14) ................................ 3,358,844 33,589
Warrants forfeited (Note 14) ................................ -- --
Options exercised (Note 15) ................................. 253,510 2,535
Conversion of common stock to nonvoting common
stock (Note 14) ............................................. -- --
Value assigned to warrants issued as compensation
(Note 14) ................................................... -- --
Note receivable from officer, plus interest (Notes 14 and 15) -- --
Net loss .................................................... -- --
---------- ----------
BALANCE, DECEMBER 31, 1998 ..................................... 31,558,922 315,589
Conversion of Series A Preferred Stock into common
stock (Note 14) ............................................. 300,000 3,000
Issuance of Series C Preferred Stock, net of expenses
(Note 14) ................................................... -- --
Issuance of Series D Preferred Stock (Note 14) .............. -- --
Issuance of common stock (Note 14) .......................... 2,004,167 20,042
Issuance of warrants (Note 14) .............................. -- --
Warrants exercised (Note 14) ................................ 2,198,764 21,988
Warrants forfeited (Note 14) ................................ -- --
Warrants expired (Note 14) .................................. -- --
Options exercised (Note 14) ................................. 434,204 4,342
Restructuring option charge (Note 8) ........................ -- --
Interest on note receivable from officer (Note 14) .......... -- --
Note receivable repayment from officer (Note 14) ............ -- --
Net loss .................................................... -- --
Other comprehensive loss .................................... -- --
---------- ----------
BALANCE, DECEMBER 31, 1999 ..................................... 36,496,057 $ 364,961
========== ==========
</TABLE>
F-5
<PAGE> 65
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK ------------------------------
WARRANTS PAID-IN ACCUMULATED
SHARES AMOUNTS CAPITAL DEFICIT
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 ..................................... 3,464,000 $ 384,000 $ 19,811,359 $ (16,555,173)
Issuance of common stock (Note 14) ........................ -- -- 1,491,814 --
Purchase of treasury stock (Note 14) ...................... -- -- -- --
Issuance of Series A preferred stock, net of expenses
(Note 14) ................................................. -- -- 21,169,075 --
Issuance of warrants (Note 14) ............................ 5,611,692 -- -- --
Warrants exercised, net of expenses (Note 14) ................ (207,284) -- 377,775 --
Net loss .................................................. -- -- -- (20,443,546)
------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1997 ................................... 8,868,408 384,000 42,850,023 (36,998,719)
Issuance of common stock (Note 14) ........................ -- -- 1,668,330 --
Repurchase of Series A preferred treasury stock (Note 14) . -- -- -- --
Sale of common treasury stock (Note 14) ................... -- -- 1,547,520 --
Issuance of Series B preferred stock, and warrants,
net of expenses (Note 14) ............................... 500,000 914,861 108,006,651 --
Issuance of warrants (Note 14) ............................ 11,250,000 -- -- --
Warrants exercised (Note 14) .............................. (3,358,844) -- 7,443,310 --
Warrants forfeited (Note 14) .............................. (40,800) -- -- --
Options exercised (Note 15) ............................... -- -- 705,958 --
Conversion of common stock to nonvoting common
stock (Note 14) ........................................... -- -- -- --
Value assigned to warrants issued as compensation
(Note 14) ................................................. 315,328 546,606 -- --
Note receivable from officer, plus interest (Notes 14 and 15) -- -- -- --
Net loss .................................................. -- -- -- (57,207,095)
------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1998 ................................... 17,534,092 1,845,467 162,221,792 (94,205,814)
Conversion of Series A Preferred Stock into common
stock (Note 14) ........................................... -- -- (2,250) --
Issuance of Series C Preferred Stock, net of expenses
(Note 14) ................................................. -- -- 96,906,621 --
Issuance of Series D Preferred Stock (Note 14) ............ -- -- 2,997,500 --
Issuance of common stock (Note 14) ........................ -- -- 28,029,963 --
Issuance of warrants (Note 14) ............................ 32,729,158 40,631,364 -- --
Warrants exercised (Note 14) .............................. (2,198,764) (4,002) 5,966,498 --
Warrants forfeited (Note 14) .............................. (8,000) -- -- --
Warrants expired (Note 14) ................................ (1,666,667) (6,786,306) 6,786,306 --
Options exercised (Note 14) ............................... -- -- 847,519 --
Restructuring option charge (Note 8) ...................... -- -- 5,810,840 --
Interest on note receivable from officer (Note 14) ........ -- -- -- --
Note receivable repayment from officer (Note 14) .......... -- -- -- --
Net loss .................................................. -- -- -- (135,078,509)
Other comprehensive loss .................................. -- -- -- --
------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1999 ................................... 46,389,819 $ 35,686,523 $ 309,564,789 $(229,284,323)
============= ============= ============= =============
</TABLE>
F-5
<PAGE> 66
<TABLE>
<CAPTION>
TREASURY STOCK
----------------------------
NOTES SERIES A SERIES A
RECEIVABLE-- PREFERRED PREFERRED COMMON
OFFICER SHARES AMOUNT SHARES
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 .................................... -- -- -- --
Issuance of common stock (Note 14) ....................... -- -- -- --
Purchase of treasury stock (Note 14) ..................... -- -- -- (208,000)
Issuance of Series A preferred stock, net of expenses
(Note 14) ................................................ -- -- -- --
Issuance of warrants (Note 14) ........................... -- -- -- --
Warrants exercised, net of expenses (Note 14) ............... -- -- -- --
Net loss ................................................. -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 .................................. -- -- -- (208,000)
Issuance of common stock (Note 14) ....................... -- -- -- --
Repurchase of Series A preferred treasury stock
(Note 14) .............................................. -- (250,000) $(10,000,000) --
Sale of common treasury stock (Note 14) .................. -- -- -- 208,000
Issuance of Series B preferred stock, and warrants,
net of expenses (Note 14) .............................. -- -- -- --
Issuance of warrants (Note 14) ........................... -- -- -- --
Warrants exercised (Note 14) ............................. -- -- -- --
Warrants forfeited (Note 14) ............................. -- -- -- --
Options exercised (Note 15) .............................. -- -- -- --
Conversion of common stock to nonvoting common
stock (Note 14) .......................................... -- -- -- --
Value assigned to warrants issued as compensation
(Note 14) ................................................ -- -- -- --
Note receivable from officer, plus interest (Notes 14 and 15) (1,003,678) -- -- --
Net loss ................................................. -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 .................................. (1,003,678) (250,000) (10,000,000) --
Conversion of Series A Preferred Stock into common
stock (Note 14) .......................................... -- -- -- --
Issuance of Series C Preferred Stock, net of expenses
(Note 14) ................................................ -- -- -- --
Issuance of Series D Preferred Stock (Note 14) ........... -- -- -- --
Issuance of common stock (Note 14) ....................... -- -- -- --
Issuance of warrants (Note 14) ........................... -- -- -- --
Warrants exercised (Note 14) ............................. -- -- -- --
Warrants forfeited (Note 14) ............................. -- -- -- --
Warrants expired (Note 14) ............................... -- -- -- --
Options exercised (Note 14) .............................. -- -- -- --
Restructuring option charge (Note 8) ..................... -- -- -- --
Interest on note receivable from officer (Note 14) ....... (36,064) -- -- --
Note receivable repayment from officer (Note 14) ......... 1,039,742 -- -- --
Net loss ................................................. -- -- -- --
Other comprehensive loss ................................. -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1999 .................................. -- (250,000) (10,000,000) --
------------ ------------ ------------ ------------
</TABLE>
F-6
<PAGE> 67
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON COMPREHENSIVE STOCKHOLDERS'
AMOUNT LOSS EQUITY
------------- ------------- -------------
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1997 .................................... -- -- $ 3,914,270
Issuance of common stock (Note 14) ....................... -- -- 1,500,000
Purchase of treasury stock (Note 14) ..................... $ (532,480) -- (532,480)
Issuance of Series A preferred stock, net of expenses
(Note 14) ................................................ -- -- 21,197,998
Issuance of warrants (Note 14) ........................... -- -- --
Warrants exercised, net of expenses (Note 14) ............... -- -- 379,848
Net loss ................................................. -- -- (20,443,546)
------------- ------------- -------------
BALANCE, DECEMBER 31, 1997 .................................. (532,480) -- 6,016,090
Issuance of common stock (Note 14) ....................... -- -- 1,670,000
Repurchase of Series A preferred treasury stock (Note 14) -- -- (10,000,000)
Sale of common treasury stock (Note 14) .................. 532,480 -- 2,080,000
Issuance of Series B preferred stock, and warrants,
net of expenses (Note 14) .............................. -- -- 109,031,512
Issuance of warrants (Note 14) ........................... -- -- --
Warrants exercised (Note 14) ............................. -- -- 7,476,899
Warrants forfeited (Note 14) ............................. -- -- --
Options exercised (Note 15) .............................. -- -- 708,493
Conversion of common stock to nonvoting common
stock (Note 14) .......................................... -- -- --
Value assigned to warrants issued as compensation
(Note 14) ................................................ -- -- 546,606
Note receivable from officer, plus interest (Notes 14 and 15) -- -- (1,003,678)
Net loss ................................................. -- -- (57,207,095)
------------- ------------- -------------
BALANCE, DECEMBER 31, 1998 .................................. -- -- 59,318,827
Conversion of Series A Preferred Stock into common
stock (Note 14) .......................................... -- -- --
Issuance of Series C Preferred Stock, net of expenses
(Note 14) ................................................ -- -- 96,989,121
Issuance of Series D Preferred Stock (Note 14) ........... -- -- 3,000,000
Issuance of common stock (Note 14) ....................... -- -- 28,050,005
Issuance of warrants (Note 14) ........................... -- -- 40,631,364
Warrants exercised (Note 14) ............................. -- -- 5,984,484
Warrants forfeited (Note 14) ............................. -- -- --
Warrants expired (Note 14) ............................... -- -- --
Options exercised (Note 14) .............................. -- -- 851,861
Restructuring option charge (Note 8) ..................... -- -- 5,810,840
Interest on note receivable from officer (Note 14) ....... -- -- (36,064)
Note receivable repayment from officer (Note 14) ......... -- -- 1,039,742
Net loss ................................................. -- -- (135,078,509)
Other comprehensive loss ................................. -- $ (36,911) (36,911)
------------- ------------- -------------
BALANCE, DECEMBER 31, 1999 .................................. $ -- $ (36,911) $ 106,524,760
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 68
OPTIMARK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................ $(135,078,509) $(57,207,095) $(20,443,546)
Adjustments to reconcile net loss to net cash used in
operating activities:
Interest on note receivable ....................... (36,064) (3,678) --
Write-off of intangibles .......................... -- -- 96,436
Value assigned to warrants issued as compensation . 40,616,822 546,606 --
Value assigned to options in connection with
restructuring ................................... 5,810,840 -- --
Depreciation and amortization ..................... 9,334,424 1,584,339 242,274
Gain on recovery of receivable .................... (700,000) -- --
Loss from investment in joint venture ............. 69,112 -- --
Loss on disposal of assets ........................ 980 -- --
Changes in operating assets and liabilities:
Receivables ..................................... (672,882) -- --
Other assets .................................... (4,799,180) (1,385,749) (1,169,231)
Accounts payable and accrued liabilities ........ 2,402,135 6,597,004 3,526,121
Other liabilities ............................... 487,856 57,433 59,147
------------- ------------ ------------
Net cash used in operating activities ......... (82,564,466) (49,811,140) (17,688,799)
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................. (11,148,195) (5,697,274) (1,539,972)
Purchases of software licenses ...................... (1,619,039) -- --
Payments on capitalized software costs .............. (12,298,155) -- --
Investment in joint venture ......................... -- (69,112) --
Proceeds from disposal of assets .................... 4,826 -- --
------------- ------------ ------------
Net cash used in investing activities ......... (25,060,563) (5,766,386) (1,539,972)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock ........ 50,005 670,000 1,500,000
Net proceeds from issuance of preferred stock ..... 99,989,121 108,116,651 21,197,998
Net proceeds from issuance of warrants ............ -- 914,861 --
Net proceeds from recovery of receivable .......... 700,000 -- --
Proceeds from exercise of warrants for common stock 5,984,484 7,476,899 379,848
Proceeds from exercise of options for common stock 851,861 708,493 --
Proceeds from sale and leaseback .................. -- 2,575,560 --
Proceeds from term loan ........................... 999,653 -- --
Proceeds from officer loan ........................ 1,039,742 -- --
Payments on capital leases ........................ (3,191,697) (542,428) --
Purchase of treasury stock, common ................ -- -- (532,480)
Purchase of treasury stock, Series A .............. -- (10,000,000) --
Proceeds from sale of treasury stock, common ...... -- 2,080,000 --
------------- ------------- ------------
Net cash provided by financing activities ....... 106,423,169 112,000,036 22,545,366
------------- ------------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ....................................... (1,201,860) 56,422,510 3,316,595
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR ................................. 63,839,270 7,416,760 4,100,165
------------- ------------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR ............... $ 62,637,410 $ 63,839,270 $ 7,416,760
============= ============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash payments for interest ........................ $ 1,079,554 $ 201,555 $ --
============= ============= ============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Common stock issued for note ...................... $ -- $ 1,000,000 $ --
============= ============= ============
Increase in capital leases ........................ $ 6,359,303 $ 2,800,921 $ --
============= ============= ============
Acquisition of license ............................ $ 28,000,000 $ -- $ --
============= ============= ============
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 69
OPTIMARK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. BASIS OF PRESENTATION AND REORGANIZATION
OptiMark Technologies, Inc. (formerly MJT Holdings, Inc.) (the
"Company" or "OptiMark") was formed in July 1996 in order to effect the
reorganization of MJT Holdings, Inc. ("Holdings"). On August 1, 1996,
Holdings was merged with and into the Company (the "Merger"). The
Merger was a transaction among companies under common control and,
accordingly, has been accounted for in a manner similar to a pooling of
interests.
2. GENERAL INFORMATION AND SUMMARY OF ACCOUNTING POLICIES
General - The Company has been engaged in two business segments, the
U.S. Equities Business and the Electronic Markets Business. The U.S.
Equities Business is comprised of the development, operation and
marketing of the OptiMark(TM) Equity Trading System (the "System"), an
innovative securities trading service based on the Company's patented
market restructuring technology (the "OptiMark Technology"). The
OptiMark Technology, as adapted for the System, allows the anonymous
and nondisclosed representation of an investor's willingness to buy or
sell securities over a continuous range of prices and sizes, and
provides a means of optimizing the sequential allocation of trades
between buyers and sellers at different prices and sizes based on a
measure of mutual satisfaction. The Company presents the System to
potential users as a facility of securities exchanges, and the exchange
remits to OptiMark a fee per share for trades completed through the
System. As of December 31, 1998, the System entered the final testing
stage, and the Company had not realized any revenues from its use. In
January and October 1999, the Company began to realize revenue for the
trades executed through both the Pacific Exchange, Inc. (the "PCX") and
the Nasdaq Stock Market, Inc. (the "Nasdaq") Systems, respectively.
The Electronic Markets Business is comprised of the development and
operation of trading platforms and environments for existing and
emerging electronic market places through a combination of consulting,
servicing, licensing and equity agreements, focused on both the
securities and non-securities market places. The Company commenced
these activities after termination of the license agreement with High
Performance Markets, Ltd. ("HPM") (Note 6). The OptiMark Technology, as
adapted for these marketplaces, allows a broad array of auction and
exchange activities, including the trading of goods and services whose
value is determined by more than size and price; trading among many
buyers and many sellers; and broker facilitated trading. In July 1999,
the Company began to realize revenues from the consulting and
development services to a joint venture in Japan for the trading of
equity securities ("Japan Joint Venture").
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The
Company has suffered recurring net losses from operations each year
since inception. The Company's current cash and cash equivalents, plus
the expected cash flows for 2000, are not expected to be sufficient to
meet its 2000 operating and financial commitments. These factors, among
others, may indicate that the Company will be unable to continue as a
going concern for a reasonable period of time. The Company anticipates
that it will be able to meet its cash requirements through September
2000.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts, or the
amounts and classification of liabilities that might be necessary,
should the Company be unable to continue as a going concern. The
Companies continuation as a going concern is dependent upon its ability
to generate sufficient cash flow to meet its obligations on a timely
basis, to obtain additional financing, or refinancing as may be
required, and ultimately to attain successful operations. The Company
re-evaluated its organization and cost structure in the light of its
business trajectory, resulting in significant cost reductions during
1999. The Company is continuing to re-evaluate its cost structure and
implement cost savings where possible. Management also has been
executing its strategy to increase usage of the System in use at the
PCX and Nasdaq, but has not been successful to date. The Company will
seek additional financing but there is no guarantee such financing will
be obtained.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. Companies in which OptiMark has equity investments of 50%
or less and has the ability to exercise significant influence are
accounted for using the equity method. Intercompany accounts and
transactions have been eliminated in consolidation.
F-8
<PAGE> 70
Cash and Cash Equivalents - The Company considers highly liquid
investments with an original maturity of three months or less, to be
cash equivalents.
Foreign Currency Translation - Assets and liabilities of the Company's
foreign operations are translated into U.S. dollars at fiscal year-end
exchange rates, and revenues and expenses are translated at weighted
average exchange rates for the year. Gains and losses arising from
translation are recorded as a cumulative translation adjustment within
accumulated other comprehensive loss, a component of stockholders'
equity.
Property and Equipment - Property and equipment are recorded at cost.
For financial reporting purposes, depreciation is provided for using
the straight-line method over the estimated useful lives of the related
assets, which range from three to seven years. Leasehold improvements
are amortized over the lesser of the life of the asset or the life of
the lease.
Intangible Assets - Intangible assets are primarily comprised of
non-securities industry rights and product and software licenses.
Amortization is provided for using the straight-line method over a
period of 3 to 15 years (Note 6).
Income Taxes - The Company files a consolidated Federal income tax
return, which includes all eligible United States subsidiary companies.
Foreign subsidiaries are taxed according to regulations existing in the
countries in which they do business. Deferred income taxes are provided
for temporary differences between income tax bases and financial
reporting bases of the Company's assets and liabilities utilizing
currently enacted tax laws and rates.
Revenue Recognition - Transaction revenue is recorded on a trade date
basis and recognized when securities are traded through the System
based on a fee per share contractual agreement with both the PCX and
the Nasdaq. Consulting revenue is recorded as services are performed.
The Company records transaction and consulting revenue net of its
revenue sharing agreements with both the PCX and Chicago Board Options
Exchange, Inc. ("CBOE") (Note 13).
Long-Lived Assets - The Company accounts for the impairment of
long-lived assets and for long-lived assets to be disposed of by
evaluating the carrying value of its long-lived assets in relation to
the operating performance and future undiscounted cash flows of the
underlying businesses when indications of impairment are present.
Long-lived assets to be disposed of, if any, are evaluated in relation
to the net realizable value. The Company determined that, as of
December 31, 1999 and 1998, there had been no impairment in the
carrying value of the long-lived assets.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Recent Accounting Pronouncements - During 1998, the Financial
Accounting Standards Board issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The Company is currently
evaluating the impact, if any, of this standard, which will be
applicable to the Company's December 31, 2001 consolidated financial
statements.
During 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued SOP No. 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. This statement is applicable to and has been adopted in
the Company's 1999 consolidated financial statements and requires the
Company to capitalize certain payroll and payroll related costs and
other costs that are directly related to the development of certain
systems of the Company. At December 31, 1999, net capitalized software
costs were approximately $10,816,000. The Company is amortizing these
costs over three years. The current year amortization expense totaled
approximately $1,482,000.
Segment Reporting - The Company operates in two industry segments, the
U.S. Equity Business and the Electronic Markets Business. At December
31, 1998, the Company's U.S. Equity Business had not generated any
revenues as the Company was engaged in the development and testing of
the System. At December 31, 1998, the Electronic Markets Business had
not generated any revenues as no consulting services had been performed
for licensees, nor were any
F-9
<PAGE> 71
royalties earned from licensees. In 1999, the System was launched,
consulting services were performed and revenue began to be realized.
3. RELATED PARTY TRANSACTIONS
At December 31, 1998, the Company had two notes receivable from
affiliates aggregating $2,550,000 which were fully reserved and bear
interest at 5.45% per annum. As these notes were deemed to be
uncollectible, no interest income had been accrued on these notes. In
1999, the Company received in aggregate, payments of approximately
$827,000 on these notes. This amount represented full repayment of one
note, partial repayment on the other note and interest income of
approximately $127,000. Due to the uncertainty of the remaining balance
being collected, the Company has continued to record a valuation
allowance against the note and has not recorded any additional
interest. The Company recorded the return of principal on both notes as
a gain on the recovery of bad debt.
Included in stockholders' equity at December 31, 1998 is a loan to an
officer of the Company of approximately $1,004,000, including interest.
This note was repaid during 1999 (Note 14).
In September 1998, the Company entered into the Japan Joint Venture to
develop and implement the System for the trading of equity securities
in Japan. As of December 31, 1998, OptiMark had made its capital
contribution of approximately $69,000 for a 15% interest (which is
reflected as "Investment in Joint Venture" in the consolidated balance
sheets). It is management's belief that the Company has the ability to
exercise significant influence over the Japan Joint Venture through
veto power and membership on the board and therefore accounts for its
investment in the Japan Joint Venture using the equity method. At
December 31, 1999, the Company, in accordance with the equity method of
accounting, realized losses up to its capital contribution. In
connection with the Japan Joint Venture, the Company entered into a
development agreement in principle, whereby the Company provides
services on a time and material basis and is reimbursed at fully
allocated cost (Note 10).
Included in Receivables at December 31, 1999 is approximately $522,000
due from the Japan Joint Venture in connection with consulting services
performed by the Company.
Included in other assets at December 31, 1999 is a loan to an officer
of approximately $212,000 (Note 4).
F-10
<PAGE> 72
4. OTHER CURRENT ASSETS AND OTHER ASSETS
Other current assets and other assets consist of the following as of
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
OTHER
CURRENT ASSETS OTHER ASSETS
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Prepaid expenses........... $ 3,127,165 $ 1,004,554 $ - $ -
Security deposits.......... 32,723 497,013 2,283,748 702,564
Restricted cash............ 1,470,095 496,966 - -
Interest receivable........ 262,552 - - -
Other...................... 248,027 16,016 100,000 -
Loan to officer............ - - 212,000 209,435
----------- ----------- ----------- ------------
$ 5,140,562 $ 2,014,549 $ 2,595,748 $ 911,999
=========== =========== =========== ============
</TABLE>
+
Prepaid expenses as of December 31, 1999 and 1998, consists primarily
of warranty, support and service agreements for purchased hardware and
software. Security deposits consist primarily of deposits with respect
to rental property and operating leases. Included in restricted cash at
December 31, 1999 and 1998 are letters of credit of approximately
$338,000 and $377,000, respectively, a guarantee of two employee loans
of approximately $120,000 in both years and approximately $1,012,000
held in an escrow account at December 31, 1999. Interest receivable
relates to interest earned, but not yet received, on the Company's
commercial paper. The loan to the officer incurs interest at 6% and
expires on March 31, 2003 or within 30 days of termination of
employment.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Computer equipment............................... $ 18,562,737 $ 6,957,193
Furniture and fixtures........................... 1,483,588 1,034,003
Software......................................... 4,573,767 1,407,025
Leasehold improvements........................... 3,251,821 1,058,910
------------ ------------
Total............................................ 27,871,913 10,457,131
Less accumulated depreciation and
amortization................................... 7,904,549 1,833,700
------------ ------------
Net property and equipment....................... $ 19,967,364 $ 8,623,431
============ ============
</TABLE>
Depreciation expense was approximately $6,083,000, $1,584,000 and
$242,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
F-11
<PAGE> 73
6. INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31, 1999:
<TABLE>
<S> <C>
Nonsecurities industry rights........................ $ 28,000,000
Software licenses.................................... 1,619,039
-------------
Total................................................ 29,619,039
Less accumulated amortization........................ 1,769,287
-------------
Intangible assets, net............................... $ 27,849,752
=============
</TABLE>
In May 1996, the Company sold to HPM, a newly formed limited
partnership controlled by the then stockholders of the Company, a
royalty-free, perpetual, worldwide license to make, have made, use,
sell and distribute products, systems and services, outside of the
securities industry field, under the issued OptiMark patent and one
other patent application (the "HPM License"), in exchange for a
nonrecourse subordinated promissory note in the amount of $650,000
(which was fully reserved for in 1996). In March 1999, the Company
entered into a license termination agreement with HPM to terminate the
HPM License. In consideration for the termination of the license, the
Company issued to HPM 2,000,000 shares of common stock of the Company
at $14 per share (fair market value at date of issuance) (Note 14). In
connection with the issuance of common stock, the Company recorded an
intangible asset in the amount of $28,000,000. During 1999 HPM paid the
Company an aggregate of $767,700 representing full repayment on the
note (which represents a portion of amounts previously written off
(Note 3)) and interest income of $117,700.
During 1999, the Company also purchased certain software licenses from
a subcontractor for outsourced software development services for the
PCX and Nasdaq applications aggregating $1,300,000. Such licenses are
being amortized over three years and are included in the $1,619,039
above.
7. ACCRUED COMPENSATION
Accrued compensation includes $250,000 and $750,000 of employee bonuses
for 1999 and 1998, respectively, and accrued vacation of approximately
$1,363,000 and $859,000 for 1999 and 1998, respectively. These bonuses
are granted at the discretion of the Board of Directors.
8. ACCRUED RESTRUCTURING
The Company recorded approximately $7,693,000 of restructuring charges
in the fourth quarter of 1999 associated with a workforce reduction of
72 employees (mainly in the technology areas of the Company). Included
in this amount is approximately $5,811,000, representing the charge
associated with the revaluation of employee options and the remaining
balance of approximately $1,882,000 includes notice period salaries of
approximately $876,000, severance of approximately $706,000 and
vacation pay and other related employee costs of approximately
$300,000. As of December 31, 1999, approximately $522,000 of such
amount has been paid and the Company anticipates that the remaining
accrued restructuring costs will be paid in 2000.
In November 1999, the Company entered into an agreement with an officer
of the Company in connection with that officer's termination as an
officer and director of the Company. The agreement calls for cash
payments of $450,000 between November 1999 and June 2000, the vesting
of 50% of any nonvested options as of November 1999 and the extension
of the date on which all vested options can be exercised until November
2002. These costs, approximating $2,355,000, are included in the
amounts above.
F-12
<PAGE> 74
9. LEASE COMMITMENTS
Operating Leases - The Company has operating lease obligations for
office space, office equipment and computer equipment which expire at
various dates through 2014. Included in such operating leases are
certain informal mirror leases with a third party who is providing
services to the Company. The future minimum rental payments under
operating leases at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
<S> <C>
2000............................................... $ 13,621,873
2001............................................... 10,570,332
2002............................................... 4,695,372
2003............................................... 1,526,294
2004............................................... 1,412,890
Thereafter......................................... 11,495,641
---------------
Total.............................................. $ 43,322,402
===============
</TABLE>
Total rent expense for real estate amounted to approximately
$1,844,000; $735,000 and $206,000 (net of sublease income of
approximately $7,600; $46,800 and $13,200) for the years ended December
31, 1999, 1998 and 1997, respectively.
Total rent expense for equipment amounted to approximately $9,267,000;
$2,881,000 and $442,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
In December 1998, the Company entered into a master lease agreement
with a third party, which provided for equipment leases up to
$15,000,000. In January 1999, the Company entered into two master lease
agreements with two other third parties, which provided for equipment
leases up to $7,000,000 and $20,000,000 of aggregate equipment value,
respectively. During 1999 and 1998, the Company leased an aggregate of
approximately $22,615,000 and $0, respectively, of equipment under
these master lease agreements. The unused available credit under these
master lease agreements expired during 1999.
Capital Leases - In June 1998, the Company entered into a master lease
agreement with a third party which provided for equipment purchases up
to $5,000,000. In January 1999, the agreement was amended to increase
the line of credit by $7,000,000 to a total of $12,000,000.
In connection with obtaining the lease line of credit, the Company
granted a warrant to purchase up to 42,500 shares of its common stock
at an exercise price of $10 per share (fair market value at date of
grant) (Note 14). During 1999 and 1998, the Company leased an aggregate
of approximately $7,187,000 and $4,683,000, respectively, under the
lease line of credit. Included in the 1999 amount is a three-year term
loan for approximately $999,700. Included in the 1998 amount was a
sale-leaseback transaction for approximately $2,576,000, whereby the
Company sold and leased back new and existing computer hardware located
within the United States. The sale resulted in a gain of approximately
$235,000 for the Company, which was deferred and is being amortized
over the three-year lease term. The Company entered into
additional lease agreements for telephone and office equipment during
1999 and 1998 with terms of 36 months. Property and equipment purchased
under these leases for the years ended December 31, 1999 and 1998 were
approximately $173,000 and $694,000, respectively.
The net book value of equipment held under capital leases was
approximately $7,910,000 and $4,605,000 at December 31, 1999 and 1998
respectively.
F-13
<PAGE> 75
Future lease payments under capital leases as of December 31, 1999 are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
2000.......................................................... $ 5,083,967
2001.......................................................... 4,376,078
2002.......................................................... 817,288
---------------
Total......................................................... 10,277,333
Less amounts representing interest............................ 1,276,013
---------------
Present value of future lease payments........................ 9,001,320
Less current portion.......................................... 4,186,624
---------------
Noncurrent portion............................................ $ 4,814,696
===============
</TABLE>
10. SEGMENTS
As of December 31, 1998, the Company operated in one industry segment,
the Equity Business. As of December 31, 1999, the Company operated in
two industry segments, the U.S. Equity Business and the Electronic
Markets Business (Note 2). As of December 31, 1999, the Japan Joint
Venture was the only joint venture the Electronic Markets Business was
engaged in. Revenue from the Japan Joint Venture for 1999 was
$1,620,454 (see table below). The accounting policies of each segment
are the same as those described in the summary of significant
accounting policies (Note 2). The operations by industry segment for
the year ended December 31, 1999 are as follows:
<TABLE>
<CAPTION>
ELECTRONIC
US EQUITY MARKETS
BUSINESS BUSINESS CONSOLIDATED
-------- -------- ------------
<S> <C> <C> <C>
Revenue......................................... $ 1,391,790 $ 1,620,454 $ 3,012,244
Operating expense excluding depreciation
and amortization ............................. (129,448,628) (2,174,699) (131,623,327)
Depreciation and amortization .................. (8,220,620) (1,113,804) (9,334,424)
Total expenses ................................. (137,669,248) (3,288,503) (140,957,751)
Net non-operating income (expense)............. 2,936,110 (69,112) (2,866,998)
Net loss........................................ (133,341,348) (1,737,161) (135,078,509)
Total assets.................................... 102,527,244 27,152,863 129,680,107
</TABLE>
F-14
<PAGE> 76
11. INCOME TAXES
The tax effected components of deferred income tax assets and
liabilities at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................................... $ 69,946,000 $ 30,657,000
Capitalized research and development costs................................. 386,000 4,151,000
Reserve for note receivable to related parties............................. 721,500 1,267,000
Vacation accruals and other reserves....................................... 1,535,421 346,000
Warrants expense........................................................... 15,391,990 -
Other...................................................................... 532,000 -
------------- -------------
Total deferred tax asset.............................................. 88,512,911 36,421,000
------------- -------------
Deferred tax liabilities:
Tax depreciation in excess of book depreciation............................ 265,000 208,000
Deferred gain on sale of assets............................................ 750,000 762,000
------------- -------------
Total deferred tax liability.......................................... 1,015,000 970,000
------------- -------------
Net deferred tax assets....................................................... 87,497,911 35,451,000
Less valuation allowance...................................................... (87,497,911) (35,451,000)
------------- -------------
$ - $ -
============= =============
</TABLE>
Realization of the future tax benefits related to the deferred tax
assets is dependent on many factors, including the Company's ability to
generate taxable income within the net operating loss carryforward
period. Management has considered these factors in reaching its
conclusion as to the valuation allowance for financial reporting
purposes.
The Company has net operating loss carryforwards of approximately
$173,911,000 and research and development credit carryforwards of
$2,121,000 at December 31, 1999. Both the net operating loss
carryforwards and research and development credit carryforwards will
begin to expire in 2004 through 2018.
Based on the issuance of additional shares of stock, the Company
incurred a change in ownership for tax purposes, which may limit future
use of the net operating loss and research and development credit
carryforwards.
12. 401(K) EMPLOYEE BENEFIT PLAN
OptiMark has a 401(k) defined contribution plan (the "Plan"), which
covers all full-time employees over the age of 21 as of their initial
date of employment. The Plan has no matching requirement. Any future
matching will be at the discretion of the Board of Directors. The
amounts charged to expense related to the administration of the Plan
was approximately $9,200; $9,100 and $9,800 for the years ended
December 31, 1999, 1998 and 1997, respectively.
13. COMMITMENTS AND CONTINGENCIES
In August 1996, OptiMark entered into a revenue sharing agreement (the
"PCX Revenue Agreement") with PCX. The PCX Revenue Agreement requires
the Company to pay 1.5% of its consolidated gross revenues, as defined,
to PCX, up to a maximum of $3,855,580. The timing and the amount of the
payments is based on PCX's attainment of certain milestones with
respect to the deployment of the System at PCX as specified in the PCX
Revenue Agreement, which expires on December 31, 2005. Based on gross
revenues, as defined, for the year ended December 31, 1999, the PCX was
entitled to approximately $46,600 under this agreement, of which
approximately $16,000 had been paid. The PCX was not entitled to any
amounts or payments in 1998 or earlier.
F-15
<PAGE> 77
In December 1996, OptiMark entered into a revenue sharing agreement
(the "CBOE Revenue Agreement") with the CBOE. The CBOE Revenue
Agreement requires the Company to pay 1.5% of its consolidated gross
revenues, as defined, to CBOE, up to a maximum amount of $2,250,000.
The timing and the amount of the payments are based on CBOE's
attainment of certain milestones with respect to the deployment of the
System at the national securities exchange operated by CBOE, as
specified in the CBOE Revenue Agreement, which expires on December 31,
2005. At December 31, 1999, no System exists for the CBOE and thus no
payments are required to be made prior to commencement of this system.
Based on gross revenues, as defined, for the year ended December 31,
1999, the Company has accrued approximately $46,600 under this
agreement. The CBOE was not entitled to any amounts or payments in 1998
or earlier.
OptiMark also entered into separate warrant agreements with PCX and
CBOE (Note 14).
In November 1998, the Company entered into an employment agreement (the
"Agreement") with an officer of the Company which provides for annual
compensation of $425,000, a $1,000,000 sign on bonus and a $1,000,000
bonus paid in November 1999, the first anniversary of his employment.
The Agreement also provides that the officer will be paid a one-time
$1,000,000 bonus if the Company achieves pre-tax income in a fiscal
year of at least $10,000,000. See Note 15 regarding options granted in
accordance with the Agreement.
In August 1999, the Company entered into an employment agreement with
an officer of the Company which provides for annual compensation of
$225,000 and a guaranteed bonus of $350,000, half of which was paid at
the time of hire and half of which is payable on the first anniversary
of employment.
The Company receives network services from a supplier of international
and domestic long-distance enhanced network telecommunications services
(the "Network Provider"). The contractual agreement with the Network
Provider has a minimum annual fee of approximately $4,800,000 for such
services. Additionally, under certain circumstances, the Company will
be required to make cancellation payments in the event that the Company
terminates any or all of these services. The agreement contains
provisions allowing the Company to purchase infrastructure equipment
used by the Network Provider in providing service to the Company.
In September 1998, OptiMark entered into an agreement with the Nasdaq
to offer, as a facility of the Nasdaq, a securities trading application
based on the OptiMark Technology to be known as the "Nasdaq
Application." The agreement with Nasdaq may be terminated by either of
the parties in certain circumstances, which include denial of
regulatory approval, persistent low trading volumes or if a change of
control, as defined, has occurred with respect to either party. The
agreement provides for each party to provide, at its own expense,
certain requisite hardware, software and other equipment, necessary to
develop and implement the Nasdaq Application. As of December 31, 1999,
the Company received regulatory approval and has commenced operations
of the Nasdaq system.
OptiMark also entered into a separate warrant agreement with the Nasdaq
(Note 14).
14. EQUITY
Stock Split - On May 22, 1997, the Company declared a 4-for-1 stock
split of its common stock. All share data has been shown retroactively
in the financial statements and in the accompanying footnotes for all
years presented, to reflect the stock split.
Authorized Stock - During 1998, the Board of Directors and the
stockholders of the Company increased the authorized shares of common
stock and preferred stock of the Company by 70,000,000 and 30,000,000
shares, respectively. The Board of Directors have designated 3,547,068
shares of preferred stock as Series A Convertible Participating
Preferred Stock, 11,000,000 shares of preferred stock as Series B
Convertible Participating Preferred Stock, 8,250,000 shares of
preferred stock as Series C Convertible Preferred Stock and 250,000
shares of preferred stock as Series D Convertible Preferred Stock. As
of December 31, 1999 and 1998, the Company had 16,952,932 and
25,452,932 undesignated shares of preferred stock respectively,
authorized for issuance.
F-16
<PAGE> 78
Common Stock - During 1997, the Company issued 818,552 shares of common
stock to an investor at approximately $1.83 per share (fair market
value at date of issuance) raising $1,500,000. The investor was elected
to the Board of Directors. During 1998, the Company issued 350,000
shares of common stock to an officer at $10 per share (fair market
value at date of issuance) of which 183,000 shares were issued out of
treasury stock. The Company received cash of $2,500,000 and received a
4.33% interest-bearing note receivable for $1,000,000 which is
presented as a contra amount in the stockholders' equity section at
December 31, 1998. On November 1, 1999, the principal amount plus
interest of $39,742 on the note was repaid to the Company.
During 1999, the Company issued 2,000,000 shares of common stock to HPM
(Note 6) at $14 per share (fair market value at date of issuance) in
exchange for the termination of the non-securities industry licenses
previously granted to HPM and 4,167 shares of common stock to a
consultant at $12 (fair market value at date of issuance) in exchange
for approximately $50,000 in cash.
Common Stock (Non-Voting) - During 1998, the Company created a new
class of non-voting common stock. 1,500,000 shares were authorized and
740,000 shares were issued during 1998, to an investor who exchanged
740,000 shares of voting common stock for them. Such amounts are
included in common stock.
Series A Convertible Participating Preferred Stock - During 1996,
OptiMark entered into a stock purchase agreement (the "Purchase
Agreement") with three investors whereby the investors committed to
purchase an aggregate of 2,182,812 shares of OptiMark's Series A
Convertible Participating Preferred Stock (the "Series A Preferred
Stock") at a price of $7.33 per share (fair market value at date of the
agreement). The transaction closed in two stages. In 1996, OptiMark
sold 654,844 shares of Series A Preferred Stock for approximately
$4,800,000. At the second closing which took place in March 1997,
OptiMark sold 1,527,968 shares of Series A Preferred Stock for
approximately $11,200,000.
In May 1997, the Company and the holders of the Series A Preferred
Stock amended the Purchase Agreement to provide for the purchase by two
of the three abovementioned investors an aggregate of an additional
1,364,256 shares of Series A Preferred Stock at a price of $7.33 per
share (fair market value at date of the amendment) for $10,000,000.
Each share of Series A Preferred Stock is currently convertible into
four shares of common stock, subject to certain adjustments.
In March 1999, a Series A Preferred Stockholder converted 75,000 shares
of Series A Preferred Stock into 300,000 shares of the Company's common
stock.
Series B Convertible Preferred Stock - Between April and December 1998,
in a series of closings, the Company issued 11,000,000 shares of Series
B Convertible Preferred Stock (the "Series B Preferred Stock") at a
price of $10 per share (fair market value at date of issuance) to
investors. In connection therewith, the Company issued 25,000 shares of
Series B Preferred Stock (included in the 11,000,000 shares above) and
paid a $150,000 fee to an investor who served as a placement agent on
behalf of the Company. The Company also granted to the initial investor
in the Series B Preferred Stock a warrant to purchase 500,000 shares of
common stock at $10 per share (fair market value at date of grant) and
granted that investor a license to use, sell and distribute products,
systems and services using the OptiMark Technology within the insurance
industry field (see "Warrants" below). In advance of granting this
license, the Company purchased the rights to the OptiMark Technology in
the insurance industry field from HPM for $500,000 in cash. HPM had a
license to the rights to the OptiMark Technology in all non-securities
industry markets (Note 6). Legal and other costs of approximately
$68,000 were incurred in connection with these transactions.
Each share of Series B Preferred Stock is currently convertible into
one share of common stock, subject to certain adjustments.
Series C Convertible Preferred Stock - In July 1999, the Company issued
8,250,000 shares of Series C Convertible Preferred Stock (the "Series C
Preferred Stock") at a price of approximately $11.76 per share (fair
market value at date of issuance) to two investors. Legal and other
costs of approximately $11,000 were incurred in connection with this
transaction.
F-17
<PAGE> 79
Each share of Series C Preferred Stock is currently convertible into
one share of common stock, subject to certain adjustments.
Series D Convertible Preferred Stock - In July 1999, the Company issued
250,000 shares of Series D Convertible Preferred Stock (the "Series D
Preferred Stock") at a price of $12 per share (fair market value at
date of issuance) to an investor.
Each share of Series D Preferred Stock is currently convertible into
one share of common stock, subject to certain adjustments.
The Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock are entitled to a
liquidation preference equal to $7.33 per share, $10 per share,
approximately $11.76 per share and $12 per share, respectively,
(aggregating approximately $226 million) plus all declared and unpaid
dividends thereon to the date fixed for liquidation, dissolution or
winding up. Holders of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock are
entitled to receive dividends equal to any dividends received by the
holders of the Company's common stock, as if the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock had been converted into common stock.
Pursuant to agreements between the holders of the Series A Preferred
Stock, one of the holders of Series B Preferred Stock, certain officers
and directors of the Company, and the Company, these stockholders have
certain preemptive rights, rights of first refusal and tag-along
rights. Pursuant to four separate registration rights agreements, the
holders of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock have certain rights,
subject to certain restrictions and limitations, to have the Company
register their shares with the Securities Exchange Commission for
resale.
Warrants - During 1996, the Company granted a warrant to purchase
2,104,000 shares of its common stock in connection with the Company's
agreement with PCX to implement the System (Note 13). The warrant is
exercisable in tranches based upon the achievement of certain
milestones set forth in the warrant agreement. As of December 31, 1999
the warrant was exercisable for 841,600 shares. The exercise price of
the warrant is approximately $1.83 per share (fair market value at date
of grant), subject to certain adjustments. The effect of the warrant
was an expense of approximately $384,000 (the value using the
Black-Scholes Model) in 1996.
During 1996, the Company also granted a warrant to purchase 1,000,000
shares of common stock in connection with an anticipated agreement with
CBOE to implement the System (Note 13). The warrant is exercisable in
tranches based upon the achievement of certain milestones set forth in
the warrant agreement. As of December 31, 1999, no shares were
exercisable under this warrant. The exercise price of the warrant was
$2.25 per share, subject to certain adjustments. Subsequent to the
issuance of this warrant, as a result of certain adjustments, the
number of shares under this warrant increased by 227,828 and the
exercise price was reduced to approximately $1.83 per share. In
connection with these adjustments, the Company recorded an expense of
approximately $438,000 in 1998.
During 1997, the Company granted warrants to purchase 5,611,692 shares
of common stock in conjunction with the Series A Preferred Stock
financing mentioned above. The exercise prices, (subject to certain
adjustments), ranged from approximately $1.83 (fair market value at
date of grant) to $2.75 per share based on the Company meeting certain
objectives. Based on the Black-Scholes Model, there was no value
associated with these warrants. During 1997, 207,284 of these warrants
were exercised at approximately $1.83 per share and during 1998 an
additional 3,242,644 were exercised at $2.25 per share. As a result of
certain adjustments, the exercise prices of certain of these warrants
were reduced from $2.25 to approximately $2.22 and from $2.75 to
approximately $2.72. During 1999, the remaining warrant to purchase
2,161,764 shares of common stock at approximately $2.72 per share was
exercised.
At December 31, 1997, the Company had outstanding warrants to purchase
360,000 shares of common stock, of which 340,000 were granted at $1.50
per share (fair market value at date of grant) to employees of Holdings
who did not become employees of the Company in connection with the
restructuring (Note 1) and 20,000 granted at approximately
F-18
<PAGE> 80
$1.83 per share (fair market value at the date of grant) to a
consultant of the Company. The services provided or goods received
under the granting of such warrants by the Company were not
significant. During 1996, warrants to purchase 200,000 shares of common
stock had been exercised at $1.50 per share. During 1999 and 1998,
warrants to purchase an additional 32,000 and 96,200 shares,
respectively, had been exercised at $1.50 per share and 20,000 at
approximately $1.83 per share, were exercised in 1998.
During 1998, the Company issued warrants to purchase up to 11,837,500
shares of its common stock. In September 1998, in connection with the
Company's agreement with the Nasdaq to implement the Nasdaq Application
(Note 13), the Company entered into a warrant agreement with the Nasdaq
whereby the Nasdaq has the ability to earn warrants to purchase up to
11,250,000 shares of the Company's common stock (the "Nasdaq
Warrants"). The Nasdaq Warrants are exercisable in tranches based upon
the achievement of certain milestones, as defined by the Nasdaq Warrant
agreement. In connection with the launch of the Nasdaq Application in
October 1999, an aggregate of 4,500,000 warrants were earned. Of the
4,500,000 warrants, 2,250,000 are exercisable at $5 per share and the
remaining 2,250,000 are exercisable at $7 per share. The exercise price
of the remaining 6,750,000 Nasdaq Warrants is $7 per share. The Nasdaq
Warrants expire the earlier of: (i) October 2004, or (ii) the last day
the Nasdaq Application is available to Nasdaq users. In connection with
the above 4,500,000 warrants, the Company recorded an expense of
$33,800,000 in 1999 (the value using the Black Scholes Model). In
accordance with the Emerging Issues Task Force 96-18, Accounting for
Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services ("EITF
96-18"), as the measurement date is at some time in the future, no
value can be determined on the remaining 6,750,000 Nasdaq warrants
until the Nasdaq has achieved certain conditions.
As discussed above, a warrant to acquire 500,000 shares of common stock
was issued in connection with the Series B Preferred Stock financing
and expires in June 2003. The effect of the above warrant in 1998 was a
debit to additional paid in capital of approximately $915,000 (the
value using the Black-Scholes Model).
In 1998, a warrant to acquire 42,500 shares of common stock was issued
in connection with a master equipment lease agreement with a third
party (Note 9) and expires in June 2003. The remaining warrants to
acquire 45,000 shares of common stock were granted to two consultants
of the Company and have an exercise price of $10 (fair market value at
date of grant). Of these warrants, 40,000 expire in August 2003 and the
remaining 5,000 were exercised in August 1999. The effect of the above
warrants in 1998 was an expense of approximately $109,000 (the value
using the Black-Scholes Model).
During 1999, the Company issued to five holders of Series B Preferred
Stock, warrants to acquire 1,666,667 shares of its common stock at $10
per share. In connection with such issuance, the Company recorded an
expense of approximately $6,786,300 (the value using the Black-Scholes
Model) in 1999. All of these warrants expired unexercised in June 1999.
Additionally, warrants to acquire 25,000 shares of common stock were
granted to two consultants of the Company. Of these warrants, 5,000
were issued at $10 and expire in January 2002 or by termination by the
Company. The effect of this warrant in 1999 was an expense of
approximately $6,300 (the value using the Black-Scholes Model). The
remaining 20,000, granted to a former board member, were issued at $14
and expire in February 2009. The charge associated with this warrant
(utilizing the Black-Scholes Model) was approximately $38,800, to be
amortized over the life of the contract. The amount expensed in 1999
was approximately $24,200.
Additionally, in October 1999, the Company entered into a strategic
alliance with Knight/Trimark Group, Inc. ("Knight") under which Knight
can earn warrants to acquire common stock of up to a maximum of 25% of
the Company, but not in excess of 31,037,491 common shares. The
warrants are earned in tranches based on the number of shares traded by
Knight in the OptiMark System, with progressively larger amounts of
trades required to earn each tranche. The warrants, if earned, have
exercise prices ranging from $2 to $9 per share, contingent upon the
time frame in which the warrants are earned as well as the percentage
of Knight trades of total trades in the OptiMark System. At
progressively earlier satisfaction of the trades required, the exercise
prices are progressively lower. Also, at progressively smaller
percentages of Knight trades of total trades in the OptiMark system,
the exercise prices are progressively lower. In accordance with the
Emerging Issues Task Force 96-18, Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services ("EITF
F-19
<PAGE> 81
96-18"), as the measurement date is at some time in the future, no
value can be determined on the 31,037,491 warrants until Knight has
achieved certain conditions.
Treasury Stock - During 1997, the Company purchased 208,000 shares of
common stock at $2.56 per share from an individual investor and held
these shares as treasury shares. In 1998, these shares were sold to two
consultants and an officer of the Company at $10 per share (fair market
value at date of sale).
Additionally, during 1998, the Company purchased 250,000 shares of
Series A Preferred Stock at $40 per share from an investor and held
these shares as treasury shares at December 31, 1998 and 1999. In
January 2000, the Company's Board of Directors retired these Series A
Preferred shares and the shares were returned to the unauthorized
preferred shares.
15. STOCK OPTION PLAN
Prior to November 1999, the Company maintained a stock option plan (the
"1996 Plan"), which provided for the issuance of stock options to
employees. Under the 1996 Plan, options that were intended to be
incentive stock options were granted at prices not less than fair
market value per share on the date of grant, as determined by the Board
of Directors. The options granted were exercisable in accordance with
the vesting schedule not to exceed ten years. No further stock options
may be granted under the 1996 Plan.
In November 1999, the Company adopted the 1999 Stock Plan (the "1999
Plan"), which made 14,669,224 shares available for issuance. This
amount included 8,669,224 shares under the 1996 Plan and an additional
6,000,000 shares under the 1999 Plan. All options outstanding under the
1996 Plan, as of the date of adoption of the 1999 Plan, continue in
effect under their original terms. The 1999 Plan provides for the
issuance of non-statutory and incentive stock options (as defined in
the Internal Revenue Code of 1986, as amended), restricted stock and
stock equivalent rights to employees, directors and consultants.
Options granted under the 1999 Plan that are intended to be incentive
stock options are granted at prices not less than fair market value per
share on the date of grant. Non-Statutory stock options granted under
the 1999 Plan are granted at prices not less than 85% of fair market
value per share on the date of grant. No portion of the option may be
exercised beyond 10 years from the grant date.
On voluntary termination an employee has thirty days in which to
exercise his or her vested options.
During 1998, the Company provided for the granting of 1,200,000 options
to an officer of the Company with an exercise price of $10 (fair market
value at the date of grant), and an exercise period of 10 years from
the date of grant under the Plan. Of the 1,200,000 options, 200,000
vested immediately and the remaining 1,000,000 options vest ratably
over a five-year period on the anniversary of the date of hire.
F-20
<PAGE> 82
At December 31, 1999, 1998 and 1997, the components of the Plan
consisted of the following:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
------ -----
<S> <C> <C>
Options outstanding at January 1, 1997..................................... 2,060,000 $ 1.68
Options granted during 1997................................................ 1,901,500 1.97
------------
Options outstanding at December 31, 1997................................... 3,961,500 $ 1.82
Options granted during 1998................................................ 3,131,750 6.80
Options exercised during 1998.............................................. (253,510) 2.79
Options canceled during 1998............................................... (122,100) 2.95
------------
Options outstanding at December 31, 1998................................... 6,717,640 $ 4.08
Options granted during 1999................................................ 2,074,450 12.60
Options exercised during 1999.............................................. (434,204) 1.96
Options canceled during 1999............................................... (1,411,826) 6.27
------------
Options outstanding at December 31, 1999................................... 6,946,060 $ 6.32
------------
Weighted-average fair value of options granted during the year 1999........ $ 1.97
Weighted-average fair value of options granted during the year 1998........ $ 0.99
Weighted-average fair value of options granted during the year 1997........ $ 0.43
Number of options exercisable at December 31, 1997......................... 748,797 $ 1.69
Number of options exercisable at December 31, 1998......................... 1,548,655 $ 2.81
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE SHARES CONTRACTUAL EXERCISE SHARES EXERCISE
PRICES OUTSTANDING LIFE PRICE OUTSTANDING PRICE
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$ 1.50 - $ 1.83................. 2,490,700 5.29 $ 1.73 1,673,286 $ 1.71
$ 2.56 - $ 4.00................. 1,274,500 6.84 3.32 427,700 3.32
$ 7.50 - $10.00................. 1,627,400 8.63 9.70 499,350 9.70
$ 12.00 - $14.00................ 1,553,460 9.60 12.58 10,860 13.63
$ 1.50 - $14.00................. 6,946,060 7.32 $ 6.32 2,611,196 $ 3.55
</TABLE>
SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but
does not require companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and Related Interpretations.
Accordingly, compensation cost for stock options is measured as the
excess, if any, of the fair value of the Company's stock at the date of
grant over the amount an employee must pay to acquire the stock. Had
compensation cost for the Plan been determined at the fair value on the
grant dates under the method of SFAS No. 123, the Company's net loss
for the years ended December
F-21
<PAGE> 83
31, 1999, 1998 and 1997, would have increased to approximately
$135,747,000, $57,830,000 and $20,661,000, respectively.
Options held by an optionee will generally become exercisable as to 20%
of the shares covered by such options on the first anniversary of the
date of hire for initial grants and 20% of the shares on the first
anniversary date of the grant date for subsequent issues and with an
additional 20% of the shares covered by such options on each of the
four succeeding anniversaries of the date of the hire or grant date if
the optionee continues to be employed by the Company, on each such
date.
The fair value of each option grant in 1999, 1998 and 1997 was
estimated on the date of grant using the Black-Scholes option-pricing
model, with the following assumptions: weighted-average risk-free
interest rates of 5.51%, 5.08% and 6.32% in 1999, 1998 and 1997,
respectively; no dividend yield, expected life of between two and five
years in 1999 and 1998 and between three and five years in 1997, and
volatility of 0%. All options were granted at fair market value.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
In the opinion of management, the carrying value of cash and cash
equivalents, receivables, notes, other assets, current liabilities and
capital leases payable are a reasonable estimate of their fair value.
17. EARNINGS (LOSS) PER SHARE ("EPS")
Basic EPS for 1999, 1998 and 1997 was calculated using 35,193,208,
31,067,059 and 27,199,653 weighted-average shares outstanding for the
years ended December 31, 1999, 1998 and 1997, respectively. Due to the
net losses incurred during 1999, 1998 and 1997 all options and
convertible preferred stock were anti-dilutive and were thus excluded
from the basic and diluted earnings per share calculation.
18. SUBSEQUENT EVENTS
On April 19, 2000, the Company entered into an agreement to form a
50/50 joint venture with a third party to provide the OptiMark matching
engine technology for the trading of non-exchange (private) equity
securities of certain overseas companies in defined international
markets. OptiMark will license certain technology to the joint venture
for a royalty. The third party will contribute cash to the joint
venture covering front- and back-end development, operations and
maintenance.
On April 19, 2000, the Company also entered into an agreement with a
third party to provide the OptiMark matching engine technology in a
wide variety of vertical markets in financial and derivative products.
OptiMark will license certain technology to the third party for a
royalty and will also receive 20% of the equity of the third party on a
fully-diluted basis, as well as an option on 10% of the common equity
of the third party.
On April 19, 2000, the Company also entered into an agreement with a
third-party to provide the OptiMark matching engine technology for
trading of certain capacity-related services in a web-market trading
environment and vertical site. OptiMark will receive 20% carried
interest in the third party company and be remunerated for any trading
engine customization.
19. LOSS PER SHARE RESTATEMENT
Subsequent to the issuance of the Company's consolidated financial
statements for the year ended December 31, 1999, the Company's
management determined that the consolidated financial statements
contained an error in the determination of the number of shares
included in the calculation of basic and diluted loss per share.
Previously, the weighted average number of shares outstanding included
the outstanding shares of preferred stock (Series A, Series B, Series
C and Series D). However, the preferred stock has certain liquidation
preferences which causes it to be materially different from the common
stock and therefore should have been excluded from the calculation of
the weighted average shares used in calculating the Company's basic and
diluted loss per share.
The basic and diluted loss per common share, as previously reported and
as restated are as follows:
<TABLE>
<S> <C> <C> <C>
Years Ended December 31
1999 1998 1997
As previously reported ($2.12) ($1.13) ($0.54)
As restated ($3.84) ($1.84) ($0.75)
The weighted average number of shares outstanding, as previously
reported and as restated are as follows:
Years Ended December 31
1999 1998 1997
As previously reported 63,790,247 50,417,641 37,848,932
As restated 35,193,208 31,067,059 27,199,653
</TABLE>
* * * * * *
F-22
<PAGE> 84
OPTIMARK HOLDINGS, INC. (FORMERLY OPTIMARK TECHNOLOGIES, INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 39,576,288 $ 62,637,410
Short term investments 1,373,750 --
Receivable from affiliate 3,436,048 521,880
Receivables 103,775 151,002
Other current assets 4,437,962 5,140,562
------------- -------------
Total current assets 48,927,823 68,450,854
PROPERTY AND EQUIPMENT - Net 17,889,443 19,967,364
CAPITALIZED SOFTWARE COSTS - Net 9,791,544 10,816,389
INTANGIBLE ASSETS - Net 27,198,201 27,849,752
OTHER ASSETS 2,715,838 2,595,748
------------- -------------
TOTAL $ 106,522,849 $ 129,680,107
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Accounts payable and accrued liabilities $ 8,696,010 $ 10,453,825
Accrued compensation 2,280,270 1,613,613
Current portion of capital leases payable 4,319,255 4,186,624
Short term borrowings from broker 1,142,145 --
Accrued restructuring 263,424 1,360,761
Other current liabilities 322,550 601,937
------------- -------------
Total current liabilities 17,023,654 18,216,760
CAPITAL LEASES PAYABLE, LESS CURRENT
PORTION 3,683,847 4,814,696
OTHER LIABILITIES 122,895 123,891
------------- -------------
Total liabilities 20,830,396 23,155,347
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, authorized and
unissued 17,277,932 and 16,952,932 at
March 31, 2000 and December 31, 1999,
respectively
Series A preferred stock, convertible and
participating, $0.01 par value;
3,222,068 and 3,547,068 shares authorized;
3,222,068 and 3,472,068 shares issued and
outstanding at March 31, 2000 and December
31, 1999, respectively 32,221 34,721
Series B preferred stock, convertible,
$0.01 par value; 11,000,000 shares authorized,
issued and outstanding at March 31, 2000
and December 31, 1999 110,000 110,000
Series C preferred stock, convertible,
$0.01 par value; 8,250,000 shares authorized,
issued and outstanding at March 31, 2000
and December 31, 1999 82,500 82,500
Series D preferred stock, convertible,
$0.01 par value; 250,000 shares authorized,
issued and outstanding at March 31, 2000 and
December 31, 1999. 2,500 2,500
Common stock, $0.01 par value; 150,000,000 shares
authorized; 36,604,657 and 36,496,057 shares
issued and outstanding at March 31, 2000
and December 31, 1999, respectively 366,047 364,961
Warrants, common stock 35,686,523 35,686,523
Additional paid-in capital 301,577,454 309,564,789
Accumulated deficit (252,118,999) (229,284,323)
Accumulated other comprehensive loss (45,793) (36,911)
Treasury stock, Series A preferred; 250,000 shares,
at cost -- (10,000,000)
------------- -------------
Total stockholders' equity 85,692,453 106,524,760
------------- -------------
TOTAL $ 106,522,849 $ 129,680,107
============= =============
</TABLE>
See notes to unaudited financial statements
F-23
<PAGE> 85
OPTIMARK HOLDINGS, INC. (FORMERLY OPTIMARK TECHNOLOGIES, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
(unaudited) (unaudited)
<S> <C> <C>
REVENUE:
Revenue from affiliate $ 2,905,189 $ --
Revenue, other 173,583 340,418
------------ ------------
Total revenue 3,078,772 340,418
EXPENSES:
Research and development 8,778,409 5,408,595
Communications and data center 7,445,858 5,283,982
US Equities business development 2,276,540 2,985,475
General and administrative 2,100,322 2,521,969
Depreciation and amortization 3,764,494 964,885
Restructuring expense 2,024,385 --
Warrant compensation expense 7,271 2,424
------------ ------------
Total expenses 26,397,279 17,167,330
------------ ------------
OTHER (INCOME)/EXPENSES:
Interest income (756,928) (651,467)
Interest expense 273,097 191,971
------------ ------------
(483,831) (459,496)
------------ ------------
NET LOSS (22,834,676) (16,367,416)
------------ ------------
OTHER COMPREHENSIVE LOSS:
Foreign currency translation adjustments (45,793) (3,516)
------------ ------------
COMPREHENSIVE LOSS $(22,880,469) $(16,370,932)
============ ============
EARNINGS PER SHARE:
Basic and diluted (As restated -- See Note 11) $ (0.62) $ (0.51)
============ ============
Weighted average number of common
shares outstanding - basic and diluted
(As restated -- See Note 11) 36,585,057 32,091,978
</TABLE>
See notes to unaudited financial statements
F-24
<PAGE> 86
OPTIMARK HOLDINGS, INC. (FORMERLY OPTIMARK TECHNOLOGIES, INC.) AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Period ended March 31, 2000
(unaudited)
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Convertible Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock Preferred Stock
Shares Amount Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 2000 3,472,068 $34,721 11,000,000 $110,000 8,250,000 $82,500 250,000 $2,500
Options exercised -- -- -- -- -- -- -- --
Warrants forfeited -- -- -- -- -- -- -- --
Retirement of
treasury stock (250,000) (2,500) -- -- -- -- -- --
Restructuring option
charge -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
Other comprehensive
loss -- -- -- -- -- -- -- --
--------- ------- ---------- -------- --------- ------- ------- ------
BALANCE, MARCH 31, 2000 3,222,068 $32,221 11,000,000 $110,000 8,250,000 $82,500 250,000 $2,500
========= ======= ========== ======== ========= ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
Common Stock
Voting Non-Voting Total
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 2000 35,756,057 $357,561 740,000 $7,400 36,496,057 $364,961
Options exercised 108,600 1,086 -- -- 108,600 1,086
Warrants forfeited -- -- -- -- -- --
Retirement of
treasury stock -- -- -- -- -- --
Restructuring option
charge -- -- -- -- -- --
Net loss -- -- -- -- -- --
Other comprehensive
loss -- -- -- -- -- --
---------- -------- ------- ------ ---------- --------
BALANCE, MARCH 31, 2000 35,864,657 $358,647 740,000 $7,400 36,604,657 $366,047
========== ======== ======= ====== ========== ========
</TABLE>
OPTIMARK HOLDINGS, INC. (FORMERLY OPTIMARK TECHNOLOGIES, INC.) AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Period ended March 31, 2000
(unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
Warrants Paid-In Accumulated
Shares Amount Capital Deficit
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 2000 46,389,819 $35,686,523 $309,564,789 ($229,284,323)
Options exercised -- -- 175,649 --
Warrants forfeited (124,000) -- -- --
Retirement of treasury stock -- -- (9,997,500) --
Restructuring option charge -- -- 1,834,515 --
Net loss -- -- -- (22,834,676)
Other comprehensive loss -- -- -- --
---------- ----------- ------------ -------------
BALANCE, MARCH 31, 2000 46,265,819 $35,686,523 $301,577,454 ($252,118,999)
========== =========== ============ =============
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock Accumulated
Series A Other Total
Preferred Comprehensive Stockholders'
Shares Amount Loss Equity
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 2000 (250,000) ($10,000,000) ($36,911) $106,524,760
Options exercised -- -- -- 176,735
Warrants forfeited -- -- -- --
Retirement of treasury stock 250,000 10,000,000 -- --
Restructuring option charge -- -- -- 1,834,515
Net loss -- -- -- (22,834,676)
Other comprehensive loss -- -- (8,882) (8,882)
--------- ------------ -------- ------------
BALANCE, MARCH 31, 2000 0 $ 0 ($45,793) $85,692,453
========= ============ ======== ============
</TABLE>
See notes to unaudited financial statements
F-25
<PAGE> 87
OPTIMARK HOLDINGS, INC. (FORMERLY OPTIMARK TECHNOLOGIES, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
March 31,
2000 1999
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(22,834,676) $(16,367,416)
Adjustments to reconcile net loss to net cash used in
operating activities:
Interest on note receivable -- (10,676)
Value assigned to warrants issued as compensation 7,271 2,424
Value assigned to options in connection with
restructuring 1,834,515 --
Depreciation and amortization 3,764,494 964,885
Loss on disposal of assets 148,399 --
Changes in operating assets and liabilities:
Receivables (2,866,941) (388,194)
Other assets 575,239 (2,417,865)
Accounts payable and accrued liabilities (2,197,377) 2,851,890
Other liabilities (260,796) 86,078
------------ ------------
Net cash used in operating activities (21,829,872) (15,278,874)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (194,755) (2,262,852)
Payments on capitalized software costs -- (3,988,805)
Purchase of short term investments (1,373,750) --
Proceeds from brokerage borrowings 1,142,145 --
Proceeds from disposal of assets 16,593 --
------------ ------------
Net cash used in investing activities (409,767) (6,251,657)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options for common stock 176,735 664,337
Proceeds from term loan -- 999,653
Payments on capital leases (998,218) (500,559)
------------ ------------
Net cash (used in) provided by financing activities (821,483) 1,163,431
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (23,061,122) (20,367,100)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 62,637,410 63,839,270
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 39,576,288 $ 43,472,170
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash payments for interest $ 272,774 $ 191,971
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Increase in capital leases $ - $ 759,093
Acquisition of license $ - $ 28,000,000
</TABLE>
See notes to unaudited financial statements
F-26
<PAGE> 88
OPTIMARK HOLDINGS, INC (FORMERLY OPTIMARK TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
1. GENERAL INFORMATION
OptiMark was formed in 1996 as the successor to a company that had begun
developing the OptiMark equities trading system in 1994. The Company operates in
two business segments, the Electronic Markets Business and the U.S. Equity
Business.
Continuation As A Going Concern - The Company's financial statements disclose
that while the financial statements have been prepared assuming it will continue
to operate as a going concern, there is substantial doubt as to its ability to
do so. To date, the Company has generated insufficient revenue to meet its
operating expenses and have met its cash needs through equity financing and
equipment leasing.
At May 31, 2000, the Company had about $30 million of cash. At current rates of
expenditure, the Company believes this cash would suffice to allow it to
continue operations through the middle of October 2000. In order to be able to
continue operations beyond that point, the Company is pursuing the following
initiatives:
Reduce expenses. The major focus of the Company's plan is to reduce expenses,
chiefly in its US equities business. The Company is currently in discussion with
IXnet, its network services provider, to renegotiate the terms of its
arrangement to reduce monthly cash requirements. The Company believes it can
achieve substantial further savings in the near term through renegotiation of
data equipment contracts. In addition, through efforts currently underway to
consolidate, or possibly sell, the US equities business, the Company believes it
can substantially reduce operating expenses. With these measures the Company
expects to be able to reduce operating costs enough to allow it to continue
operations with existing cash into the first quarter of 2001.
Additional capital. The Company has commenced discussions with several parties,
including major existing stockholders, with a view to raising additional equity
capital, and believes that it could obtain significant funds in this manner.
However, the Company believes that the terms on which such financing would be
available will improve substantially as it makes progress in reducing expenses
and pursuing its current business strategy. Accordingly, at this point the
Company does not plan to seek firm financing commitments before late in the
third quarter of 2000.
Pursue business strategy. As discussed elsewhere in this registration statement,
the Company is actively pursuing applications of its technology through
strategic alliances in electronic business-to-business markets, and have
recently announced several such alliances. In addition, it expects that its
system will be operational as a facility of the Osaka Stock Exchange by the end
of the third quarter. While any short-term revenue impact of these initiatives
is likely to be modest, the Company believes they are nonetheless important in
the near term in convincing potential sources of additional financing to invest
on the most favorable terms.
The Company believes these steps will enable it to continue operations
beyond March 31, 2001.
The Company is still generating losses and expects to do so for the
foreseeable future. Presently the Company has cash to fund operations through
the middle of October 2000. Expense reductions and additional equity financing
will be required during 2000 to meet its operating and investing cash
requirements. There is no assurance that the Company will be successful in
achieving these expense reductions and in raising this money on acceptable terms
or at all. If it does not succeed, it will be unable to continue as a going
concern.
2. PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS
Presentation - The accompanying unaudited consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries and, in
the opinion of management, reflect all adjustments, consisting only of normal
recurring
F-27
<PAGE> 89
adjustments, necessary for a fair statement of the results for the interim
periods. Companies in which OptiMark has equity investments of 50% or less and
has the ability to exercise significant influence are accounted for using the
equity method. All significant intercompany transactions and balances have been
eliminated. Certain footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to SEC rules and regulations, although
the Company believes that the disclosures are adequate to make the information
presented not misleading. The nature of the Company's business is such that the
results of an interim period are not necessarily indicative of the results for
the full year. These unaudited consolidated financial statements should be read
in conjunction with the financial statements and notes thereto included in the
Company's audited financial statements as of December 31, 1999 included
elsewhere in this registration statement.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Recent Accounting Pronouncements - During March 2000, the Financial Accounting
Standards Board issued Interpretation 44, Accounting for Certain Transactions
Involving Stock Compensation. This interpretation will be applicable to the
Company's third quarter consolidated financial statements. Management of the
Company does not expect the adoption of such interpretation to have a material
effect on the Company's consolidated financial statements.
3. ACCRUED RESTRUCTURING
The Company recorded approximately $2,024,000 of restructuring charges in the
first quarter of 2000 associated with a workforce reduction of seven employees.
Included in this amount is approximately $1,835,000 representing the charge
associated with the revaluation of options of these terminated employees, the
remaining balance of approximately $189,000 includes notice period salaries of
approximately $121,000, severance of approximately $41,000 and vacation pay and
other employee related costs of approximately $27,000. As of March 31, 2000
approximately $36,000 of such amount has been paid and approximately $1,250,000
of the approximately $1,361,000 of accrued restructuring costs at December 31,
1999 has been paid. The Company anticipates that the remaining accrued
restructuring costs will be paid in the second quarter of 2000.
4. SEGMENTS
As of March 31, 1999, the Company operated in one industry segment, the U.S.
Equity Business. As of March 31, 2000, the Company operated in two industry
segments, the U.S. Equity Business and the Electronic Markets Business. As of
March 31, 2000, costs incurred and revenues earned in connection with the
Pacific Exchange and Nasdaq facilities comprised the U.S. Equity Business and
costs incurred and revenue earned in connection with the Japan Joint Venture and
costs incurred in connection with new business development comprised the
Electronic Markets Business.
F-28
<PAGE> 90
<TABLE>
<CAPTION>
US EQUITY ELECTRONIC MARKETS
BUSINESS BUSINESS CONSOLIDATED
<S> <C> <C> <C>
Revenue $ 173,583 $ 2,905,189 $ 3,078,772
Operating expenses excluding
depreciation and amortization (19,314,196) (3,318,589) (22,632,785)
Depreciation and amortization (3,273,070) (491,424) (3,764,494)
Total expenses (22,587,266) (3,810,013) (26,397,279)
Net non-operating expenses 483,831 - 483,831
Net loss (21,929,852) (904,824) (22,834,676)
Total assets 76,929,085 29,593,764 106,522,849
</TABLE>
5. INCOME TAXES
The Company has not generated any taxable income to date and therefore has not
paid any federal income taxes since inception. Utilization of the Company's net
operating loss carryforwards, which begin to expire in 2004, may be subject to
certain limitations under Section 382 of the Internal Revenue Code of 1986, as
amended. Due to uncertainties regarding realizability of the deferred tax
assets, the Company has provided a valuation allowance on the deferred tax asset
in an amount necessary to reduce the net deferred tax asset to zero.
6. SHORT-TERM INVESTMENTS/BORROWINGS
The Company's short-term investments consisted of short-term equity investments.
The Company classifies all uninvested funds on deposit with investment managers
as short-term investments. The Company reflects the related cash flows as
investing cash flows in the Consolidated Statements of Cash Flows. As a result
of the classification of highly liquid investments within short-term investments
and short-term borrowings, a significant portion of the Company's gross
short-term investment purchases and maturities disclosed as investing cash flows
is related to highly liquid investments. The Company's short-term borrowings
relate to equity investments purchased on margin.
At March 31, 2000, the cost of the Company's short-term investments approximated
fair value.
7. COMPREHENSIVE LOSS
Comprehensive loss is comprised of net loss and foreign currency translation
adjustments. Comprehensive loss for the three months ending March 31, 2000 was
$22,880,469.
8. EQUITY
In January 2000, the Company retired 250,000 shares of Series A Participating
Preferred Stock that was held in treasury.
In March 2000, in connection with a workforce reduction of seven employees,
approximately $1,835,000 was recorded to Additional Paid-In Capital,
representing the charge associated with the revaluation of these employee stock
options.
9. STOCK OPTIONS
<TABLE>
<S> <C>
Options outstanding at January 1, 2000 6,946,060
Options granted during first quarter, 2000 2,941,100
Options exercised during first quarter, 2000 (108,600)
Options canceled during first quarter, 2000 (1,235,050)
----------
Options outstanding at March 31, 2000 8,543,510
==========
</TABLE>
10. EARNINGS (LOSS) PER SHARE ("EPS")
Basic EPS for March 31, 2000 and 1999 was calculated using 36,585,057 and
32,091,978 weighted-average shares outstanding for the three months ended March
31, 2000 and 1999, respectively. Due to the net losses incurred during the three
months ended March 31, 2000 and 1999 all options and convertible preferred stock
were anti-dilutive and were thus excluded from the basic and diluted earnings
per share calculation.
11. SUBSEQUENT EVENTS
On June 12, 2000 the Company established a holding company and placed its
Electronic Markets Business and U.S. Equity Business in two separate operating
subsidiaries.
12. LOSS PER SHARE RESTATEMENT
Subsequent to the issuance of the Company's unaudited consolidated financial
statements for the three months ended March 31, 2000 the Company's management
determined that the consolidated financial statements contained an error in the
determination of the number of shares included in the calculation of loss per
share. Previously, the weighted average number of shares outstanding included
the outstanding shares of preferred stock (Series A, Series B, Series C and
Series D). However, the preferred stock has certain liquidation preferences
which causes it to be materially different from the common stock and therefore
should have been excluded from the calculation of the weighted average shares
used in calculating the Company's basic and diluted loss per share.
The basic and diluted loss per common share, as previously reported and as
restated are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31
2000 1999
<S> <C> <C>
As previously reported ($0.33) ($0.29)
As restated ($0.62) ($0.51)
</TABLE>
The weighted average number of shares outstanding, as previously reported and
as restated are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31
2000 1999
<S> <C> <C>
As previously reported 68,545,051 56,581,566
As restated 36,585,057 32,091,978
</TABLE>
F-29
<PAGE> 91
INDEX TO EXHIBITS
These Exhibits are numbered in accordance with the Exhibit Table of
Item 601 of Regulation S-K.
The following documents are filed as part of this report:
INDEX TO EXHIBITS
These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-K:
(b) The following documents are filed as part of this report:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
2.1** Agreement and Plan of Merger dated June 12, 2000
3.1** Certificate of Incorporation of OptiMark Holdings
3.2** By-Laws of OptiMark Holdings
4.1* Specimen Common Stock Certificate
4.2* Specimen Preferred Stock Certificate
4.3* Series A Stock Purchase Agreement dated August 27, 1996 by
and among OptiMark and the parties named therein
4.4* Registration Rights Agreement dated August 27, 1996 by and
among OptiMark and the parties names therein
4.5* Amendment to Stock Purchase Agreement and Registration Rights
Agreement dated March 19, 1997 by and among OptiMark and the
parties named therein
4.6* Amendment to Stock Purchase Agreement, Stockholders Agreement
and Registration Rights Agreement dated May 29, 1997 by and
among OptiMark and the parties named therein
4.7* Amendment to Series A Registration Rights Agreement dated
January 1999 by and among OptiMark and the parties named
therein
4.8* Series B Stock Purchase Agreement dated December 22, 1998 by
and among OptiMark and the parties named therein
4.9* Registration Rights Agreement dated April 23, 1998 by and
among OptiMark and the parties named therein
4.10* Series C Stock Purchase Agreement dated June 11, 1999 by and
among OptiMark and the parties named therein
4.11* Registration Rights Agreement dated July 26, 1999 by and
among OptiMark and the parties named therein
4.12* Series D Stock Purchase Agreement dated July 30, 1999 by and
between OptiMark and BancBoston Capital Inc.
4.13* Registration Rights Agreement dated July 30, 1999 by and
between OptiMark and BancBoston Capital Inc.
4.14* Registration Rights Agreement dated September 19, 1998 by and
between OptiMark and The NASDAQ Stock Market, Inc.
4.15* Amended and Restated Stockholders Agreement dated April 23,
1998 by and among OptiMark and the parties named therein
10.1* Revenue Sharing Agreement dated August 27, 1996 by and
between OptiMark and The Pacific Exchange, Inc.
10.2* Revenue Sharing Agreement dated December 31, 1996 by and
between OptiMark and the Chicago Board Options Exchange, Inc.
10.3* PSE-OptiMark Agreement dated August 27, 1996 between OptiMark
and The Pacific Exchange, Inc.
</TABLE>
<PAGE> 92
<TABLE>
<S> <C>
10.4* NASDAQ/OptiMark Agreement dated September 1, 1998 by and
between OptiMark and The NASDAQ Stock Market, Inc.
10.5(a)* OptiMark 1999 Stock Plan (adopted November 29, 1999)
10.5(b)** Amendment No. 1 to the OptiMark 1999 Stock Plan
10.6* OptiMark Stock Option Plan (Amended & Restated January 27,
1999)
10.7* Form of Stock Option Agreement (1999 Stock Plan)
10.8* Form of Stock Option Agreement (Amended and Restated Stock
Option Plan)
10.9* Form of Non-Employee Director Option Agreement
10.10* Employment Agreement dated November 1, 1998 by and between
OptiMark and Phillip J. Riese
10.11* Employment, Trade Secret and Non-Competition Agreement dated
August 27, 1996 by and between OptiMark and William A. Lupien
10.12* Employment, Trade Secret and Non-Competition Agreement dated
August 27, 1996 by and between OptiMark and John T. Rickard
10.13* Letter Agreement dated November 15, 1999 by and between
OptiMark and William F. Adiletta
10.14* Restricted Stock Purchase Agreement dated December 1, 1998 by
and between OptiMark and Phillip J. Riese
10.15* Stock Purchase Agreement dated December 18, 1998 by and
between OptiMark and Phillip J. Riese
10.16* Stock Option Agreement dated November 1, 1998 by and between
OptiMark and Phillip J. Riese
10.17* Stock Option Agreement dated November 1, 1998 by and between
OptiMark and Phillip J. Riese
10.18+** Services Agreement dated January 1, 1999 by and between
OptiMark and ISM Information Systems Management Corporation
10.19+** OptiMark/IBM Ops Agreement dated February 2, 1999 by and
between OptiMark and the parties named therein
10.20+** Agreement for Information Technology Services dated May 6,
1999 by and between OptiMark and IBM Canada Limited
10.21* License Termination Agreement dated March 19, 1999 by and
between OptiMark and High Performance Markets, Ltd.
10.22* Common Stock Purchase Warrant dated August 27, 1996 in favor
of The Pacific Exchange, Inc.
10.23* Common Stock Purchase Warrant dated December 31, 1996 in
favor of The Chicago Board Options Exchange, Inc.
10.24* Common Stock Purchase Warrant dated April 23, 1998 in favor
of Virginia Surety Company, Inc.
10.25* Common Stock Purchase Warrant dated June 19, 1998 in favor of
Transamerica Business Credit Corporation
10.26* Common Stock Purchase Warrant dated August 24, 1998 by and
between OptiMark and Francis X. Egan
10.27* NASDAQ Warrant Agreement dated September 1, 1998 by and
between OptiMark and The NASDAQ Stock Market, Inc.
10.28* Common Stock Purchase Warrant dated January 27, 1999 by and
between OptiMark and BIOS Group LP
10.29* Warrant Agreement dated October 27, 1999 by and between
OptiMark and Knight/Trimark Group, Inc.
21.1** Subsidiaries of OptiMark Holdings
27.1** Financial Data Schedule
</TABLE>
* Previously filed as an exhibit to the Registrant's Registration
Statement on Form 10 (No. 000-30527) and incorporated by reference thereto.
** Previously filed as an exhibit to the Registrant's Registration
Statement on Form 10/A-1 (No. 000-30527) and incorporated by reference thereto.
<PAGE> 93
+ Confidential treatment is requested for certain confidential portions
of this exhibit pursuant to Rule 24b-2 under the Exchange Act. In accordance
with Rule 24b-2, these confidential portions have been omitted from this exhibit
and filed separately with the Commission.
