As filed with the Securities and Exchange
Commission on August 25, 1999
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
WEB STREET, INC.
(Exact name of registrant as specified in its
charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
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6211
(Primary Standard Industrial
Classification Code No.)
510 Lake Cook Road, Deerfield, Illinois 60015,
(847) 444-4700
(Address, Including Zip Code, and Telephone
Number, Including Area Code, of Registrants Principal
Executive Offices)
Stuart A. Cohn, Esq.
Executive Vice President and General Counsel
Web Street, Inc.
510 Lake Cook Road, Deerfield, Illinois 60015,
(847) 444-4700
(Name, Address, Including Zip Code, and
Telephone Number, Including Area Code, of Agent for Service)
Copies to:
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36-4212401
(I.R.S. Employer
Identification No.)
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Mark D. Wood,
Esq.
Adam R. Klein, Esq.
Katten Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661
(312) 902-5200
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Robert Rosenman, Esq.
Cravath, Swaine & Moore
825 Eighth Avenue
New York, New York 10019
(212) 474-1000
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Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this Registration
Statement.
If
any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, check the following box: ¨
If
this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same
offering: ¨
If
this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier
effective registration statement for the same offering: ¨
If
this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier
effective registration statement for the same offering: ¨
If
delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: ¨
CALCULATION OF REGISTRATION FEE
Title of Each
Class of
Securities to be Registered
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Proposed
Maximum
Aggregate
Offering Price(1)
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Amount of
Registration Fee
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Common Stock, $.01
par value (2)
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$50,000,000
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$13,900
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(1)
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Estimated
solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933, as amended.
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(2)
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Includes
the associated rights to purchase series D junior participating
preferred stock, $.01 par value, of Web Street, Inc. The rights
will be initially attached to, and trade with, the common stock.
The value attributable to such rights will be reflected in the
price of the common stock.
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The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until
the Registrant shall file a further amendment which specifically
states that this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of
1933 or until the Registration Statement shall become effective on
such date as the Securities and Exchange Commission, acting pursuant
to Section 8(a), may determine.
Subject
to Completion, Dated August 25, 1999
Shares
[LOGO TK]
Common Stock
This is an initial public offering of shares of common stock
of Web Street, Inc. and the selling stockholders identified in this
prospectus. We will receive all the proceeds of the offering, except
the proceeds from the sale of the shares by the selling
stockholders, less the underwriting discount. There is currently no
public market for our shares. We expect that the initial public
offering price will be between $
and $
per share.
We have applied for listing of our common stock on the Nasdaq
National Market under the symbol WEBS.
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Per Share
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Total
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Offering Price
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$
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$
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Underwriting
Discount
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$
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$
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Proceeds, before
expenses, to Web Street
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$
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$
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Proceeds to the
selling stockholders
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$
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$
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We have granted the underwriters a 30-day option to purchase
up to an additional shares of
common stock to cover any over-allotments. If the underwriters
exercise this right in full, the Offering Price will total $
, the
Underwriting Discount will total $
and the
Proceeds, before expenses, to Web Street will total $
.
Neither the Securities and Exchange Commission nor
any state securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
The underwriters of this offering expect to deliver the shares
to purchasers on
, 1999.
Fahnestock & Co. Inc.
Web Street Securities, Inc.
The date of this prospectus is
, 1999
The information in this prospectus is not complete
and may be changed. We and the selling stockholders may not sell
these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is
not an offer to sell these securities, and it is not soliciting
offers to buy these securities, in any state where the offer or sale
is not permitted.
[INSIDE FRONT COVER]
[Bar graphs showing quarterly growth in number of
customer acounts and average daily trades in 1998 and 1999]
[Pictures of pages from our web site showing our
logo, our trading pit and the ratings of our online brokerage
services by Barrons, SmartMoney and
Time Digital.]
[Picture of page from our co-branded web site with
ConSors]
Web Street Securities and our logo are registered
service marks of Web Street. This prospectus also contains other
service marks, trademarks and tradenames of Web Street and other
companies.
Notes to Readers of this Prospectus
You should keep in mind the following points as you read this
prospectus:
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Except
where we indicate differently, the information in this prospectus
reflects the conversion of each outstanding share of our preferred
stock into four shares of our common stock, which will occur upon
the consummation of this offering.
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Except
where we indicate differently, the information in this prospectus
reflects a three-for-two split of our outstanding common and
preferred stock which we completed in July 1999 and a
-for- split of our
common stock which we completed in
1999.
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Except
where we indicate differently, the information in this prospectus
assumes that the underwriters will not exercise their option to
purchase additional shares of common stock to cover any
over-allotments and that no other person will exercise any other
outstanding option or warrant.
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This
prospectus contains statistical data regarding the past and
projected growth of the U.S. equity markets, investment activity,
the internet, online commerce and the U.S. and international
online brokerage industries. We have taken these data from
information published by sources specializing in research of these
subject matters. However, these data are by their nature
imprecise. Therefore, we caution you not to unduly rely on these
data.
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TABLE OF CONTENTS
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We have placed an electronic version of this prospectus on a
special web site located at http://www.
. Web Street Securities, Inc., our broker-dealer
subsidiary, is maintaining this web site and acting as e-manager of
this offering.
This summary highlights some of the information in this
prospectus. It may not contain all the information that is important
to you. To understand this offering fully, you should read this
entire prospectus carefully, including the risk factors and our
financial statements.
Web Street
Our Business
We provide online brokerage services to individual investors,
primarily in the U.S. and Europe. Through our web site, located at
www.webstreet.com, our customers can quickly execute equity
and option trades at a low cost and conveniently access real-time
trading information, financial market data and account information.
These features make trading easier and more efficient for our
customers and enable them to take greater control of their
investment decisions and financial transactions.
We have built and continue to invest in a proprietary online
trading system that is cost efficient, secure and highly scalable.
In our virtual trading pit, our customers can do all the following
with just a few clicks of a mouse and without changing screens:
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track
stock quotes that automatically update in real time as the market
moves;
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view
up-to-date news and financial market headlines;
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buy and
sell securities, including stocks and options;
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receive
quick confirmation of executed trades; and
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check
securities positions and account balances that are updated in real
time to reflect just-completed trades.
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In addition, our customers have access to
personalized investment tools. These tools include portfolio
tracking; historical and intra-day stock charting; market-maker
information; financial market and company news; and investment
research. We provide these services 24 hours a day, seven days a
week through the internet. We also offer toll-free telephone access
for customers who want to enter orders through a licensed broker or
our automated touch-tone telephone trading service. Further, we
provide high-quality customer service 24 hours a day, seven days a
week through a toll-free telephone number, 1-800-WEBTRADE, and
online help desk.
Through
our Unified Global Brokerage Accounts, we currently enable investors
in Germany and Iceland to trade in U.S. securities markets from our
web site. In December 1998, we entered into a three-year mutually
exclusive agreement with ConSors Discount-Broker, a subsidiary of
the German financial institution SchmidtBank and a leading European
online discount brokerage firm with approximately 137,000 customers
as of June 30, 1999. Under this agreement, ConSors is required to
direct to us all its customers in Germany, Switzerland, Austria,
Italy and Luxembourg who want to trade stocks or options in U.S
markets. We currently provide our services to ConSors customers in
Germany and expect to begin serving ConSors customers in the four
other countries covered by the agreement in late 1999 or early 2000.
In January 1999, we entered into a similar agreement with Landsbref,
Ltd., the securities house of The Bank of Iceland, under which
Landsbref is required to direct to us, and we currently provide our
services to, all its customers in Iceland who want to trade stocks
or options in U.S. markets. We are exploring alliances and joint
venture opportunities with financial institutions in a number of
other key international markets to accelerate worldwide acceptance
of our Unified Global Brokerage Accounts. Through these accounts, we
plan to enable online investors worldwide to trade in major global
financial markets.
Since the launch of our web site in July 1997, we have grown rapidly:
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our
customer accounts increased 277% to 66,400 at June 30, 1999 from
17,600 at June 30, 1998;
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our
average trades per day increased 383% to 4,022 for the quarter
ended June 1999 from 833 for the comparable period in 1998; and
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our total
revenues increased 403% to $10.7 million for the six months ended
June 1999 from $2.1 million for the comparable period in 1998.
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During this period of rapid growth, the following leading
financial and technology publications have positively recognized our
online brokerage services:
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Barron
s gave us its highest rating, four stars, in 1999 and
1998, emphasizing that we have a dynamic site where research and
trading are easily accessible;
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SmartMoney rated us one of the top three overall online
brokerage firms in 1999 and 1998, due to our low commissions,
24-hour service, rapid technical support, free real-time quotes
and instantaneously updated online account information; and
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Time
Digital rated us the third best online discount brokerage
service in 1999, noting that our trading pit allows investors to
monitor stock, fund and option activity, check balances and
positions and execute trades all from a single screen.
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Our Market Opportunity
The U.S. market for equity securities has grown dramatically
in recent years, with equity market capitalization doubling in the
past five years to over $15 trillion. During this time, there has
been a large increase in the average daily trading volume in the
U.S. securities market. At the same time, the internet has emerged
as a communications and commerce tool that is changing the brokerage
industry. According to leading research firms:
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the
number of U.S. online brokerage accounts is projected to grow from
6.7 million at the end of 1998 to over 24 million by 2002;
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online
trades of retail customers are projected to grow from 25% of all
retail stock trades in the U.S. in the first quarter of 1999 to
50% by 2002;
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the value
of assets held by customers in accounts with online brokerage
firms is projected to grow from $324 billion in the U.S. at the
end of 1998 to over $3 trillion in 2003; and
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the
number of European online brokerage accounts is projected to grow
from 400,000 in 1998 to 8.3 million by 2002.
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Our Growth Strategy
Our objective is to be a leading provider of online financial
services. The key elements of our strategy to accomplish this
objective include the following:
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expand
brand awareness and customer base;
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increase
global market presence;
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facilitate trading in world markets through our Unified Global
Brokerage Accounts;
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enhance
services to encourage increased customer account balances;
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maintain
and enhance technology leadership;
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offer a
broad array of financial services; and
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pursue
acquisitions, joint ventures and partnerships.
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General Corporate Information
We conduct all of our brokerage activities through a
wholly-owned subsidiary, Web Street Securities, Inc., an Illinois
corporation and registered broker-dealer. Web Street Securities
incorporated in Illinois on September 3, 1996. We incorporated in
Delaware on December 31, 1997 under the name Web Street Financial
Group, Inc., which we changed to WebStreet.com, Inc. on February 9,
1999 and to Web Street, Inc. on August 11, 1999.
Where to Contact Us
Our principal executive offices are located at 510 Lake Cook
Road, Deerfield, Illinois 60015 and our telephone number is (847)
444-4700. Our web site is located at http://www.webstreet.com.
None of the information on our web site is part of this
prospectus. However, we have placed an electronic version of this
prospectus on a special web site located at http://www.
. Web Street Securities, our
broker-dealer subsidiary, is maintaining this web site and acting as
e-manager of offering.
This Offering
Common stock
offered by Web Street
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shares
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Common stock
offered by the selling stockholders
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shares
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Common stock to be
outstanding after this offering
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shares
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Use of proceeds
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To market our services, to expand
and
improve our systems, to build a separate
data center and for working capital and
general corporate purposes, possibly
including acquisitions.
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Proposed Nasdaq
National Market symbol
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WEBS
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The number of shares of our common stock to be outstanding
after this offering excludes the following:
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shares of common stock issuable upon the
exercise of warrants currently outstanding at a weighted average
exercise price of $
per share;
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shares of common stock issuable upon the
exercise of stock options currently outstanding at a weighted
average exercise price of $
per share;
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shares of common stock reserved for grants that
we may make in the future under our incentive compensation plan;
and
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shares of common stock reserved for issuance
under our employee stock purchase plan.
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Summary Consolidated Financial and Other Data
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Period
from
September 3,
1996, our
inception, to
December 31,
1996
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Year Ended
December 31,
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Six Months
Ended June 30,
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1997
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1998
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1998
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1999
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(unaudited)
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(in thousands,
except share and per share data and Other Data)
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Statement of
Operations Data:
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Revenues
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$
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$329
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$
7,891
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$2,122
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$10,673
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Cost of services
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498
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5,116
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1,463
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6,254
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Operating expenses
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116
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3,098
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14,593
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6,350
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5,646
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Net loss
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$(116
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)
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$(3,267
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)
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$(11,818
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)
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$(5,691
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)
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$(1,227
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)
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Basic and diluted net loss per
common
share(1)
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$(0.01
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$(0.25
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$(0.71
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)
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$(0.35
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)
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$(0.06
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)
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Shares used in computing basic
and
diluted net loss per
common
share(1)
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12,308,862
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12,872,442
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16,740,600
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16,391,708
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20,404,466
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Other Data:
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Total trades
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N/A
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11,500
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291,500
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72,600
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440,600
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Average trades per day
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N/A
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100
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1,200
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600
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3,600
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Total customer accounts(2)
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N/A
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1,000
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42,200
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17,600
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66,400
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Total customer assets(2)
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N/A
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$16,082,900
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$231,558,200
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$104,996,800
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$471,174,700
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Total employees(2)
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6
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14
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65
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61
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112
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(1)
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Does not
reflect the -for-
split of our common stock which we completed in
1999.
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(2)
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As of the
end of each of the periods presented.
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In the following table, the Pro Forma column reflects our
issuance and sale of
shares of common stock and receipt of $2,082,000 in net cash
proceeds in a private placement we completed in August 1999. The Pro
Forma As Adjusted column also reflects our sale of
shares of common stock in this
offering at an assumed initial public offering price of $
per share, after
deducting the estimated underwriting discount and offering expenses.
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June 30, 1999
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Actual
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Pro Forma
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Pro Forma
As Adjusted
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(unaudited)
(in thousands)
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Balance Sheet
Data:
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Cash and cash equivalents
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$3,399
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$ 5,481
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$
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Total assets
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8,558
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10,640
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Total liabilities
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3,478
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3,478
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Total stockholders equity
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5,080
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7,162
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You should carefully consider the risks and uncertainties
described below, and all the other information included in this
prospectus, before you decide whether to purchase shares of our
common stock. Any of the following risks could materially adversely
affect our business, financial condition or operating results and
could result in a partial or complete loss of your investment.
Risks Related to Our Business
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We
have a limited operating history, have incurred losses since our
founding and may not achieve future profitability.
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We began offering online brokerage services in July 1997. As a
result, we have a limited operating history upon which you can
evaluate us and our prospects. Our limited operating history makes
predicting our future operating results difficult. We have incurred
an operating and net loss in each fiscal year since our founding and
may continue to incur losses if our operating expenses increase more
quickly than our revenues. Our ability to achieve profitability in
the future will depend upon our ability to expand our brand
awareness and customer base, increase our global market presence and
enhance and maintain our proprietary technology. To achieve these
goals, we will need to increase spending on marketing, technology,
product development and other operating costs. To the extent that
revenues do not increase as a result of this increased spending, we
may not be able to achieve profitability in the future. If we do
achieve profitability, we may not be able to sustain it.
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We
have had negative cash flows from operations and may not be able
to secure additional financing if we need it in the future.
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To date, we have had negative cash flows from operations and
have depended on sales of our securities to meet our cash
requirements. In addition to the net proceeds of this offering, we
may need to raise additional funds to:
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support
our planned rapid growth;
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develop
new or enhanced services and technologies;
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increase
our marketing efforts;
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acquire
complementary businesses or technologies;
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respond
to anticipated capital requirements; and
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respond
to competitive pressures or unanticipated requirements.
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We may not be able to obtain additional financing on
acceptable terms when we need it. If we require, but are unable to
obtain, additional financing in the future, we may be unable to
implement our business and growth strategies, respond to changing
business or economic conditions, withstand adverse operating
results, consummate desired acquisitions or compete effectively.
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We
may not be able to develop and increase public recognition of our
Web Street brand successfully.
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We believe that establishing and maintaining favorable
consumer perception of our Web Street brand is critical to
attracting and expanding our internet customer base and alliances
with financial institutions in key international markets. The
importance of developing our brand will increase due to the growing
number of internet and financial services available to consumers. To
build our brand, we must succeed in our marketing efforts, provide
high-quality services and products, increase the number of visitors
to our web site and continue to receive high ratings from leading
financial and technology publications. If we do not accomplish each
of these goals, our reputation could be harmed, and we may not be
able to attract and retain internet customers and international
partners.
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We
depend on U.S. Clearing Corporation to clear all our customers
trades.
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Unlike some of our primary competitors, we do not provide our
customers with clearing services. These services include the
consummation, settlement and delivery functions in securities
transactions and the maintenance of customer accounts. Currently,
U.S. Clearing Corporation, a subsidiary of Fleet Financial Group,
Inc., clears all our customers trades and maintains all our
customers accounts. We have no control over the operations of
U.S. Clearing. If U.S. Clearing improperly handles the funds and
securities of our customers, we may be subject to claims by
customers who are financially harmed. Further, if our customers
trades are not cleared accurately and in a timely manner, our
reputation may be harmed and demand for our services may decrease.
If U.S. Clearing discontinues its contractual relationship with us
before our agreement expires or fails to perform adequately under
our agreement, our business, financial condition and operating
results could be materially adversely affected. In addition, we may
be liable for the failure of our customers to make timely settlement
on any transaction executed through U.S. Clearing.
See BusinessOperationsClearing
.
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Our
business may be adversely affected by the expiration of our
clearing agreement in April 2000.
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Our clearing agreement with U.S. Clearing expires on April 30,
2000. By that time, we will need to:
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enter
into a new agreement with U.S. Clearing or another clearing firm;
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enter
into a joint venture with a clearing firm; or
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become
self-clearing, either through an acquisition or internal
development.
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Developing our own clearing operations or entering
into a joint venture or other agreement with a new clearing firm
could be time consuming and costly and could divert our attention
and resources. We may not be able to develop our own clearing
operations or enter into a joint venture with another clearing firm
by April 30, 2000 on terms favorable to us or at all. Therefore, we
may have to enter into a new clearing agreement with U.S. Clearing
or another firm at least on a temporary basis, even if that is not
the most attractive alternative. We may also encounter problems
moving our customers from U.S. Clearing to us or a new clearing
firm. Additionally, if we become self-clearing, we will be subject
to substantially greater regulation, including higher net capital
requirements. We will need to have access to sources of capital,
which may not be available. In addition, we will be subject to
significantly greater risk of losses and civil liabilities for
errors related to the handling of customer funds and securities or
in clearing customer transactions.
See BusinessOperationsClearing
and
Regulation and Supervision
.
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We
expect to receive decreased payments related to order flow, which
may adversely affect our ability to offer commission-free trades
on particular over-the-counter orders and our per trade revenues
and profit margins.
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We receive cash payments from U.S. Clearing that are related
to, but not dependent on, the payments U.S. Clearing receives from
various Nasdaq market-makers and third market firms in exchange for
routing trade orders to them for execution, commonly referred to as
order flow. Our current clearing agreement requires U.S. Clearing to
make these payments to us at a contractually-determined rate,
regardless of the order flow rebates it actually receives. We
received payments relating to order flow from U.S. Clearing of
$3,215,000 in the year ended December 31, 1998, representing 41% of
our total revenues for 1998, and of $3,907,000 for the six months
ended June 30, 1999, representing 37% of our total revenues for that
1999 period. When our current clearing agreement ends on April 30,
2000, we expect to begin receiving payments that are directly based
upon order flow. We expect that those payments will be made to us at
regular market rates, which we believe will be significantly below
the current rate of payment to us by U.S. Clearing. Our current
above-market order flow payments have allowed us to offer our
customers commission-free trades on over-the-counter orders of 1,000
or more shares that are priced at over $2.00 per share. After April
2000, when our order flow payments decrease, it may no longer be
economical for us to continue to offer these free trades, and, thus,
we may lose the competitive advantage we gain by doing so. In
addition, payment to us for order flow may further decrease after
our current clearing agreement expires because of:
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the SEC
s enactment of order handling rules which have reduced
market-makers spreads and correspondingly their profits;
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the
emergence of electronic communication networks, which enable
securities trading without the use of market makers; and
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the
proposed quotation of stock prices in decimals, which could
further reduce spreads.
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We
may not be able to manage our growth effectively.
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Our growth has placed, and is expected to continue to place, a
significant strain on our managerial, operational and financial
resources and systems. To manage our growth successfully we must
continue to expand and improve our operational, information
management and financial systems and controls on a timely basis. Our
current senior management has limited experience managing a rapidly
growing enterprise and may not be able to manage effectively our
growth. We may not budget adequately for the costs associated with
our continued growth, which could adversely affect our ability to
offer and expand our online financial services.
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We
may not be able to hire and retain additional qualified personnel
to support our growth.
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To continue our growth, we must hire, train and retain a
significant number of skilled personnel, including persons with
experience in the internet, computer and brokerage industries.
Because of the recent substantial growth in these industries, we
have encountered intense competition for these personnel. Our
success also depends on our ability to attract and retain additional
qualified senior and middle managers and customer service
representatives. We may not be able to find or keep additional
suitable senior and middle managers, licensed brokers, customer
service representatives or technical personnel in the future.
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Our
operations may be disrupted by technological problems.
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Our systems could be overwhelmed by heavy trading or could
fail. We receive and process the overwhelming majority of our
trade orders through the internet. Heavy trading volumes could cause
significant backlogs and delays in order execution or could cause
our systems to fail. We may not be able to expand and upgrade our
technology, transaction processing systems and network hardware and
software to accommodate increased trading by our customers on a
timely basis. Also, our systems, and those of the third parties on
which we depend, may not operate properly in the event of:
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a
hardware or software error, failure or crash;
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a power
or telecommunications failure;
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a fire,
flood or other natural disaster.
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Our systems may be more likely to suffer problems while we
implement upgrades to our network hardware and software. For
example, other online brokerage firms have recently experienced
systems interruptions due to undetected errors in upgraded software
introduced to their networks. Additionally, our computer systems and
those of the third parties on which we depend may be vulnerable to
damage or interruption due to sabotage, computer viruses or other
criminal activities or security breaches.
Our data center operations are presently located at a single
facility in Deerfield, Illinois. Therefore, any systems slowdowns or
failures that disrupt our operations at this facility would impair
our ability to execute our customers trade orders. In
addition, we depend upon computer systems operated by third parties
to consummate and settle customer trades and to maintain customer
accounts. If the systems of these third parties slow down
significantly or fail even for a short time, our customers would
suffer delays in trading. Any delays could be of particular concern
for customers when there is significant stock price volatility.
These delays could
damage our reputation, cause customers to close their accounts with us
and cause customers to incur substantial losses. We could be subject
to claims or litigation with respect to these losses. For example,
some of our competitors have recently been served with customer
lawsuits after outages prevented customers from trading. Our
property and business interruption insurance may not adequately
compensate us for all losses we may incur.
We may lose customers if we encounter problems with
internet connections. We depend on content providers to provide
us with data feeds on a timely basis. Our web site could experience
interruptions in service due to a failure or delay in the
transmission or receipt of this information. These interruptions
could prevent our customers from accessing updated market
information that they need to make quick investment decisions. In
addition, our customers depend on internet service providers, online
service providers and other web site operators for access to our web
site. Some of them have experienced significant outages in the past
and could experience outages, delays and other difficulties due to
system failures unrelated to our systems. These types of events
could cause customers to perceive our web site as not functioning
properly and therefore cause them to use traditional brokerage firms
or other online brokerage firms to trade securities.
Our business would be harmed if our computer systems or
those of third parties on which we depend fail due to year 2000
problems. Because many computer systems were not designed to
handle dates beyond the year 1999, computer hardware and software
may need to be modified before the year 2000 in order to remain
functional. Due to our dependence on computer technology to conduct
our business, the year 2000 issue could adversely affect our
business, financial condition and operating results in the following
ways:
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We, along
with the rest of the securities industry, depend heavily on the
systems of the securities exchanges and Nasdaq. If these
organizations do not remedy their own year 2000 problems in a
timely fashion, trading of securities could be halted or delayed.
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Any
failure due to year 2000 problems of the computer systems operated
by U.S. Clearing or Automatic Data Processing, Inc., which
processes data and maintains electronic files regarding our
customers accounts for U.S. Clearing, could interfere with
our customers ability to trade and result in trade
processing errors.
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Any
failure due to year 2000 problems of the systems of utility
companies, online or internet service providers, our content
providers or other parties upon which we depend could interfere
with our customers ability to trade online.
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Uncertainty about the year 2000 problem generally may cause
investors and lenders to reduce the level of their market and
lending activities temporarily as they assess the effectiveness of
our, their and others year 2000 compliance efforts. As a
result, we may experience a downturn in customer and general
market activity for a period of time before and after January 1,
2000.
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Our
current services may become obsolete and unmarketable if we are
not able to respond adequately to rapidly changing technology and
customer demands.
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Our industry is characterized by rapid changes in technology
and customer demands. As a result, our current services may quickly
become obsolete and unmarketable. Our future success will depend on
our ability to adapt to technological advances, anticipate customer
demands, develop new services and enhance our current services on a
timely and cost-effective basis. Further, our services must remain
competitive with those of other companies with substantially greater
resources. We may experience technical or other difficulties that
could delay or prevent the development, introduction or marketing of
new services or enhanced versions of existing services. Also, we may
not be able to adapt new or enhanced services to emerging industry
standards, and our new services may not be favorably received.
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We
may encounter difficulties if we enter new business areas.
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To date, our business activities have been limited almost
entirely to providing online brokerage services and related market
information. However, our growth may depend in part on our strategy
of providing
other online financial services, including banking, consumer credit,
home mortgage brokerage services, insurance and merchandise payment,
as well as the distribution of securities in public offerings led by
established investment banking firms. We may need to enter into
acquisitions, joint ventures or other alliances to offer these
additional financial services. We may not be able to identify
suitable acquisition or partnership opportunities or enter into and
maintain these arrangements on favorable economic terms. Further, we
have no experience in providing these additional online financial
services. If we enter new areas outside of our current online
brokerage business, we may be subject to additional regulatory and
other requirements. We may not be successful in pursuing new
business opportunities, and we may not be able to compete
successfully in any new business areas.
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Our
growth could be impaired if we are not able to develop and
maintain the relationships we need to implement our international
strategy.
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Our growth will depend, in large part, on the success of our
international strategy. We have limited experience in providing our
online brokerage services internationally, and we depend on
financial institutions in international markets to help us build our
international operations. We depend upon each of our international
partners to provide marketing expertise and a base of existing
customers. If we are unable to maintain these relationships or
develop additional relationships in other countries, our ability to
penetrate, and compete successfully in, foreign markets would be
materially adversely affected. Further, our current agreements
provide that our international partners have the exclusive right to
represent us in their territories. If any of our international
partners fails to adequately market and support our services in a
particular territory, we may have no way of growing our business in
that territory. To implement fully our international strategy, we
will need to expand our current relationships with international
partners. These partners may not agree to expand these relationships.
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Our
growth could be impaired if we do not successfully handle risks
associated with international business.
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There are risks inherent in doing business in international
markets, particularly in the heavily regulated brokerage industry,
including:
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less-developed technological infrastructures, resulting in lower
customer acceptance of, or access to, electronic channels;
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less-developed automation in exchanges, depositories and clearing
houses and systems;
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fluctuations in currency exchange rates;
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unexpected changes in regulatory requirements, tariffs and other
trade barriers;
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potentially adverse tax consequences; and
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inadequate protection for intellectual property rights.
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We must also comply with the regulatory controls of
each specific country in which we conduct business. Any failure to
develop effective compliance and reporting systems could result in
regulatory penalties in the applicable jurisdiction. Additionally,
we could be subject to increased administration burdens, regulatory
requirements and expenses when we expand our Unified Global
Brokerage Accounts to allow trading by U.S. customers in
international securities markets and by international customers in
international markets outside their home jurisdictions. One or more
of these factors may make it difficult for us to implement fully our
Unified Global Brokerage Account strategy, may materially adversely
affect our current or future international operations and may cause
the volume of transactions by international customers to be less
than we anticipate.
See Regulation and SupervisionSecurities
Industry.
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Our
business may be adversely affected if we fail to maintain our
relationships with third-party content providers.
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We rely on third-party content providers, including BASELINE
Financial Services, Inc., S&P Comstock, Reuters Reality Online
and Reuters News Service, to provide us with all of the financial
information, market news, charts, stock quotes, research reports and
other fundamental data that we offer to our customers. We may
be unable to maintain these existing relationships. If we lose any of
these relationships, we will need to find other content providers
that can provide similar information on commercially reasonable
terms and to integrate their information into our web site. During
this potentially time-consuming process, our customers could be
unable to access critical market information on our web site. If we
are unable to provide our customers with fundamental market and
financial data for any extended amount of time, our reputation could
be harmed and we could lose customers.
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Our
business could be harmed by internet security breaches or
misappropriation of customers personal information.
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Our computer systems may be vulnerable to physical or
electronic computer break-ins, viruses and similar disruptive
problems. A person who is able to circumvent our security measures
could misappropriate proprietary information or cause interruptions
in our operations. If a person was able to penetrate our network
security or misappropriate our customers personal financial or
trading account information, we could be liable for unauthorized
trades, impersonation or similar fraud claims. We could also be
subject to claims for other misuses of personal information, such as
for unauthorized marketing purposes. Any security breach or
misappropriation of customer information could damage our reputation
and materially adversely affect our business, financial condition
and operating results. General concerns over the security of
internet transactions and the privacy of users could also inhibit
the use of the internet as a means of conducting commercial
transactions, such as securities trades.
See BusinessTechnology and Systems.
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We
could lose our competitive advantages if we are not able to
protect our proprietary technology and intellectual property
rights against infringement.
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Our success and ability to compete depend to a significant
degree on our proprietary software and other technology reflected in
our web site. We do not have patents for this technology. If any of
our competitors copies or otherwise gains access to our proprietary
technology or develops similar software independently, we would not
be able to compete as effectively. We also consider our service
marks, particularly our family of Web Street marks and
related design marks, invaluable to our ability to continue to
develop and maintain the goodwill and recognition associated with
our brand. The measures we take to protect our proprietary
technology and other intellectual property rights, which presently
are based upon a combination of confidentiality agreements and
copyright, trade secret and trademark laws, may not be adequate to
prevent their unauthorized use. Further, the laws of foreign
countries may provide inadequate protection of our intellectual
property rights. We may need to bring legal claims to enforce or
protect our intellectual property rights. Any litigation, whether
successful or unsuccessful, could result in substantial costs and
diversions of resources. In addition, notwithstanding the rights we
have secured in our intellectual property, other persons may bring
claims against us that we have infringed on their intellectual
property rights, including claims based upon the content we license
from third parties or claims that our intellectual property right
interests are not valid. For example, companies have recently
brought claims that allege infringement of patent rights relating to
methods of doing business over the internet. Any claims against us,
with or without merit, could be time consuming and costly to defend
or litigate, divert our attention and resources, result in the loss
of goodwill associated with our service marks or require us to make
changes to our web site or other of our technologies.
See BusinessIntellectual Property and
Other Proprietary Rights.
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We
may encounter problems if we do not successfully address risks
associated with acquisitions.
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Our growth may depend in part upon our ability to acquire
successfully other companies or technologies. We may encounter
problems associated with acquisitions. We have never completed an
acquisition and may be vulnerable to the following risks:
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difficulties in integrating acquired operations, technologies,
services and personnel with our existing operations and personnel;
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difficulties in meeting operating expectations for acquired
businesses, services and technologies;
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failure
to obtain required regulatory approvals;
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disruption of ongoing business;
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inexperience in new business areas;
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diversion
of managements attention from other business concerns;
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adverse
impact on earnings of amortization or write-offs of acquired
goodwill and other intangible assets;
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issuances
of equity securities, which may be dilutive to existing
stockholders, to pay for acquisitions; and
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potential
loss of key employees and/or customers of acquired companies.
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We
may suffer losses if we fail to manage effectively our customer
credit risks.
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We indemnify our clearing agent for losses it suffers on cash
and margin transactions with our customers secured by securities in
their accounts. Therefore, we are subject to general risks of loss
relating to extending credit. We take the risk that a market decline
could cause the value of the securities of a customer held by our
clearing agent as collateral to fall below the amount of the customer
s indebtedness before the securities can be sold or the
customer can repay the loan or provide additional collateral. We run
a risk of loss if there are decreases in market values of securities
and the borrowers fail to honor their commitments. Our policies and
procedures to identify, monitor and manage our customer credit risks
may not be fully effective.
See Business Our ServicesMargin
Accounts.
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If
we fail to comply with net capital requirements, our business
activities could be limited or prohibited.
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We are subject to stringent rules of the SEC, the NASD and
various other regulatory agencies regarding the maintenance of
specific levels of net capital by securities brokers, including the
SECs Uniform Net Capital Rule. Net capital is the net worth of
a broker or dealer, less deductions that result from (1) excluding
assets that are not readily convertible into cash, (2)
conservatively valuing other assets and (3) various charges for
operational matters. If we fail to maintain the required net
capital, the SEC could prohibit us from doing business, the NASD
could suspend our registration and other regulatory bodies could
suspend or expel us or impose limitations on our business
activities. As a result, we could ultimately be required to cease or
discontinue expansion of business activities or to liquidate our
business. In addition, a change in the net capital rules, the
imposition of new rules or any unusually large charge against net
capital could limit those of our operations that require the
intensive use of capital. If we incur significant operating losses
or any unusually large charge against net capital, our ability to
expand or even maintain our present level of business could be
materially adversely affected. If we engage in clearing or
underwriting activities, we will be subject to higher net capital
requirements.
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We
may be subject to legal claims in connection with the content we
distribute.
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We face potential indirect liability for claims of defamation,
negligence, copyright, patent or trademark infringement, violation
of the securities laws and other claims based upon the third-party
content that we distribute online. For example, by distributing
negative investment research information, we may find ourselves
subject to defamation claims regardless of the merits of these
claims. Computer failures may also result in our widely publishing
and distributing incorrect data. In these and other instances, we
may be required to engage in protracted and expensive litigation,
which would divert our managements attention and require us to
expend significant financial resources. Our general liability
insurance may not necessarily cover any of these claims or may not
be adequate to protect us against all liability that may be imposed.
Any claims or resulting litigation could have a material adverse
affect on our business, financial condition and results of
operations.
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Employee or customer misconduct could harm us and is difficult to
detect and deter.
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There have been a number of highly publicized cases involving
fraud or other misconduct by employees in the financial services
industry in recent years, and we run the risk that employee
misconduct could occur. Our employees could bind us to transactions
that exceed authorized limits or present unacceptable risks or hide
from us unauthorized or unsuccessful activities. This misconduct
could cause unknown and unmanaged risks or losses. Our employees
could also make improper use of confidential information, which
could result in
regulatory sanctions and harm to our reputation. In addition, we are
exposed to potential losses resulting from fraud and other
misconduct by our customers, including:
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fraudulent internet trading, which could involve fraudulent access
to legitimate customer accounts or the use of a false identity to
open an account; or
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the use
of forged or counterfeit checks for payment.
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The precautions we take to prevent and detect
employee and customer misconduct may not effectively deter these
activities. If we do not prevent or detect these activities, we may
incur losses that we are not able to recover.
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The
loss of members of our senior management or systems development
teams could adversely affect our business.
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We believe that our ability to implement successfully our
business strategy and to operate profitably depends on the continued
employment of:
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our
senior management team led by Joseph J. Fox, our co-chairman of
the board and chief executive officer, and Avi Fox, our
co-chairman of the board and president; and
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our
systems development team led by William J. Mania, our chief
technology officer.
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If we lose the services of one or more members of our
management or systems development teams, our business, financial
condition and results of operations may be materially adversely
affected.
Risks Related to Our Industry
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We
depend on continued growth in the use of the internet.
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Our market is new and rapidly evolving. Our business will be
adversely affected if internet usage does not continue to grow. Use
of the internet may be inhibited by a number of factors, including:
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inadequate network infrastructure;
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inconsistent quality of services; and
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lack of
cost-effective, high-speed service.
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If internet usage continues to grow, the internet
infrastructure may be unable to support the demands placed on it by
this growth. The internets performance and reliability may
decline. In addition, web sites have experienced interruptions as a
result of outages and other delays occurring throughout the internet
infrastructure. If these outages or delays frequently occur in the
future, internet usage, as well as usage of our web site and online
brokerage services, could grow more slowly or decline.
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We depend on
continued growth in the use of online brokerage services.
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Our online brokerage services involve a new approach to
securities trading. Individuals who have relied upon traditional
means of commerce in the past may not accept, or may be slow in
accepting, this new and very different method of conducting
business. For example, investors who trade with more traditional
brokerage firms, or even discount brokers, may be reluctant to trade
securities over the internet. Also, concerns and adverse publicity
about security and privacy on the internet or systems failures by us
or other online brokerage firms could hinder the growth of online
brokerage trading.
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Intense competition in the online brokerage industry could impair
our ability to grow and achieve profitability.
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We may not be able to compete effectively with current or
future competitors. The market for online brokerage services over
the internet is new, rapidly evolving and intensely competitive. We
expect this
competition to further intensify in the future. In the U.S., we face
direct competition from other independent online brokerage firms, as
well as traditional discount brokerage firms providing online and/or
touch-tone telephone services. We are also encountering competition
from established full commission brokerage firms, mutual fund
sponsors and other financial organizations, some of which are
actively expanding their online capabilities. In addition, we may
face increased competition from commercial banks and other financial
institutions, insurance companies and providers of online financial
and information services, as these companies expand their product
lines. We also face increasing competition in international markets,
both from international competitors and U.S.-based brokerage firms
that have established or acquired international operations or
entered into partnerships with international brokerage firms. Many
of our existing and potential competitors may:
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have
longer operating histories and significantly greater financial,
technical and marketing resources than we do;
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offer a
wider range of services and financial products than we do; and
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have
greater name recognition, larger customer bases and greater
management depth and experience than we do.
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This may place us at a disadvantage in responding to
our competitors pricing strategies, technological advances,
marketing campaigns, global expansion, alliances and other
initiatives. Some of our competitors conduct more extensive
promotional activities and offer lower prices to customers than we
do, which could allow them to gain greater market share or prevent
us from increasing our market share. In the future, we may need to
decrease our prices if our competitors lower their prices. Our
competitors may be able to respond more quickly to new or changing
opportunities, technologies and customer requirements. This is
particularly true because of the substantial resources being devoted
by our principal competitors to marketing and technology development
efforts. Further, to the extent our competitors are able to attract
and retain customers based on the convenience of one-stop shopping
or because of international operations or arrangements, our business
and ability to grow could be materially adversely affected. To be
successful, we must establish and strengthen our brand awareness and
effectively differentiate our online services from those of our
competitors. We may therefore have to substantially increase
marketing or technology expenditures in order to compete
effectively.
See BusinessCompetition.
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The
securities industry is highly volatile.
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Since our formation, almost all our revenues have been from
online brokerage services. We expect this business to continue to
account for a substantial majority of our revenues in the near
future. Therefore, we are directly affected by the same factors
which affect the rest of the securities industry. These factors
include economic and political conditions, broad trends in business
and finance and changes in securities trading volumes and price
levels. Each of these factors is beyond our control.
The U.S. and international securities markets have fluctuated
significantly in the past 12 months. A downturn in the U.S.
securities markets would, and a downturn in international securities
markets could, adversely affect our operating results. Recently, the
market for technology and internet-related stocks has been
especially volatile. We believe an unusually large or extended
downturn in this market could have a significant adverse effect on
us because many of our customers invest in these types of stocks. In
previous stock market declines, many firms in the securities
industry suffered financial losses, and the level of individual
investor trading activity temporarily decreased. In the future, any
decrease in trading activity may not be temporary. In addition, in a
market downturn we could suffer substantial losses on margin loans
made to our customers, and the customers may not trade to the same
extent they traded before the downturn or at all. Declines in
trading volume adversely affect our results of operations because
our commission and order flow revenues are directly related to the
number of trades we process. For these reasons, severe market
fluctuations could have a material adverse effect on our business,
financial condition and results of operations. Some of our
competitors with greater financial resources and more diversified
business lines might withstand a downturn in the securities industry
better than we would.
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We operate
in a highly regulated industry and compliance failures could
adversely affect our business.
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Our business could be harmed if we fail to comply with U.S.
securities and online brokerage industry regulations. As a
participant in the U.S. securities industry, we are subject to
extensive federal and state regulation and the regulation of various
self-regulatory organizations. The rules, laws and regulations are
strictly enforced by:
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state and
federal criminal authorities;
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other
self-regulatory organizations, including the various securities
exchanges; and
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state
securities commissions or agencies.
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These laws, rules and regulations focus on the
protection of customers and the securities markets, rather than
protection of creditors and stockholders of broker-dealers. Because
the online brokerage industry is a new and rapidly evolving
industry, its regulatory environment may be particularly subject to
changes. Further, the SEC and NASD are focusing significant
attention on online trading due to the opportunity for abuse of
federal securities laws and broker-dealer laws and the ease with
which individual investors can quickly lose large sums of money.
Recently, various regulatory and enforcement agencies have been
reviewing service and other issues, including systems capacity,
customer access, best execution practices and advertising claims, as
they relate to the online brokerage industry, including us. These
reviews may result in enforcement actions or new regulations. If we
fail to comply with the securities laws, rules or regulations, we
could be suspended, censured or fined, receive a cease and desist
order or have limitations imposed on our business activities. Also,
we or any of our officers or licensed brokers could be subject to
suspension or revocation of registration by the SEC and suspension
or expulsion by the NASD or other regulatory bodies. If we, or any
of our officers or licensed brokers, suffer any of these
consequences, our business, financial condition and operating
results could be materially adversely affected. In a worst-case
situation, we could ultimately be required to liquidate our
business. In addition, all our marketing activities are regulated by
the NASD, and designated officers must review all marketing
materials prior to release, use or publication. The NASD can impose
penalties for violations of its advertising regulations. Our
operations and profitability could also be directly affected by
additional legislation, changes in rules promulgated by the SEC, the
NASD, the Board of Governors of the Federal Reserve System, state
regulators, the various securities exchanges and other
self-regulatory organizations, or changes in the interpretation or
enforcement of existing laws and rules.
See Regulation and SupervisionSecurities
Industry.
Our business could be harmed if new laws and government
regulations relating to the internet are adopted. Laws and
regulations may be adopted in the future that address issues such as
privacy, pricing, tax treatment, consumer protection standards and
the characteristics and quality of online products and services. For
example, the Telecommunications Act of 1996 sought to prohibit
transmitting certain types of information and content over the
internet. Several telecommunications companies have petitioned the
Federal Communications Commission to regulate internet service
providers in a manner similar to long distance telephone carriers
and to impose access fees on these companies. The Federal
Communications Commission recently decided that a web users
telephone calls to gain access to the internet are interstate
communications and, thus, subject to regulation by the federal
government. Increased regulation of the internet could increase the
cost of transmitting or using data over the internet. A number of
proposals have been made at the federal, state and local levels and
by foreign governments that could impose taxes on online commerce.
The three-year moratorium preventing state and local governments
from taxing internet access and electronic commerce is scheduled to
expire on October 21, 2001. If the moratorium ends, state and local
governments could impose these types of taxes, which could impair
the growth of online commerce and materially adversely affect our
business.
Several states have proposed legislation that would limit the
uses of personal information gathered using the internet. The
European Union has enacted its own privacy regulations, which may
result in limits on the collection and use of personal information
gathered over the internet. In addition, changes to existing laws or
the passage of new laws intended to address these issues could,
among other things:
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create
uncertainty in the marketplace that could reduce demand for our
services;
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limit our
ability to collect and use data from our users; or
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increase
the cost of doing business as a result of litigation costs or
increased service delivery costs.
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Moreover, it may take years to determine the extent
to which existing laws relating to issues such as property
ownership, libel and personal privacy are applicable to the
internet. Any new laws or regulations relating to the internet or
new interpretations of existing laws or regulations or violations of
these laws or regulations could materially adversely affect our
business, financial condition or operating results.
See Regulation and SupervisionOnline
Commerce.
Risks Related to This Offering
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Joseph Fox
and Avi Fox own a large percentage of our common stock and can
control matters requiring stockholder approval.
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After this offering, Joseph Fox, our co-chairman of the board
and chief executive officer, and his brother, Avi Fox, our
co-chairman of the board and president, will together own
approximately
% of our outstanding common stock, or approximately
% if the
underwriters exercise in full their option to purchase additional
shares of common stock to cover any over-allotments. Joseph Fox and
Avi Fox have entered into a shareholders agreement which provides
that if one of them dies, the other will have the power to vote the
deceaseds shares. In addition, some of our stockholders have
agreed to vote their shares in favor of electing to our board of
directors those nominees determined by Messrs. Fox. As a result,
Messrs. Fox will together have the ability to exercise a controlling
influence over our business and corporate actions requiring
stockholder approval, including the election of our directors, a
sale of substantially all our assets, a merger with another entity
or an amendment to our certificate of incorporation. This
concentration of ownership could delay, defer or prevent a change of
control and could adversely affect the price that investors might be
willing to pay in the future for shares of our common stock.
See ManagementArrangements for Election to
Board of Directors.
|
If the
market price of our common stock fluctuates widely, you may not be
able to sell your shares at or above the initial public offering
price.
|
The initial public offering price will be negotiated between
us and the underwriters and may not be indicative of the market
price for our common stock that will prevail after this offering.
Therefore, you may not be able to sell your shares at or above the
initial public offering price. We believe the following factors
could cause the market price of our common stock to fluctuate widely
and could possibly cause our common stock to trade at a price below
the initial public offering price:
|
|
actual or
anticipated variations in our quarterly operating results;
|
|
|
announcements of new services, products, acquisitions or strategic
relationships by us or our competitors;
|
|
|
announcements of system slowdowns or failures by us or our
competitors;
|
|
|
new
regulations or interpretations of regulations applicable to our
online brokerage activities;
|
|
|
trends or
conditions in the internet industry;
|
|
|
changes
in accounting treatments or principles;
|
|
|
changes
in earnings estimates by securities analysts and in analyst
recommendations;
|
|
|
changes
in market valuations of other internet companies; and
|
|
|
general
political, economic and market conditions.
|
The market price for our common stock may also be affected by
our ability to meet or exceed expectations of analysts or investors.
Any failure to meet these expectations, even if minor, could
materially adversely affect the market price of our common stock. In
addition, the market prices of equity securities of technology and
internet companies often fluctuate significantly for reasons
unrelated to the operating performance of these companies. The
trading prices of many technology and internet companies have
reached historical highs within the last 52 weeks and have reflected
relative valuations substantially above historical levels. During
the same period, these companies stocks have also been highly
volatile and have recorded lows well below such historical highs.
Our common stock may not trade at the same levels as other internet
stocks, and internet stocks in general may not sustain their current
market prices. In the past, following periods of volatility in the
market price of a companys securities, securities class action
litigation has often been instituted against that company. If any
securities litigation is initiated against us, we could incur
substantial costs and our managements attention and resources
could be diverted from our business.
|
Our
stockholder rights plan and provisions in our charter, our by-laws
and Delaware law could delay or deter tender offers or takeover
attempts.
|
Our stockholder rights plan, commonly known as a poison pill,
and certain provisions of our certificate of incorporation, our
by-laws and Delaware law could make it more difficult for a third
party to acquire control of us, even if the change in control would
be beneficial to you. The existence of these provisions could
adversely affect the market price for our common stock or deprive
you of an opportunity to sell your shares at a premium over
prevailing prices.
See Description of Capital Stock.
|
Our stock
price may decline if a large number of shares are sold after this
offering.
|
After completion of this offering, there will be approximately
shares of our common
stock outstanding, of which % will be held
by Joseph Fox and Avi Fox. Messrs. Fox may sell their shares in the
public markets from time to time, subject to limitations imposed by
federal securities laws and lock-up agreements with the
underwriters. The market price of our common stock could decline as
a result of sales of a large number of shares of our common stock by
Messrs. Fox or other stockholders in the market after this offering,
or the perception that these sales could occur. These factors also
could make it more difficult for us to raise funds through future
offerings of our equity securities.
See Shares Eligible for Future Sale.
|
Because an
active trading market for our common stock may not develop after
this offering, it may be difficult for you to sell your shares.
|
There was no public market for our common stock before this
offering. We do not know the extent to which investor interest in us
will lead to the development of a trading market or how liquid that
market might be. If an active and liquid trading market does not
develop, you may have difficulty selling your shares.
Cautionary Note Regarding Forward-Looking
Statements
This prospectus includes forward-looking statements that
reflect our current expectations and projections about our future
results, performance, prospects and opportunities. We have tried to
identify these forward-looking statements by using words including
may, will, expect,
anticipate, believe, intend,
estimate and continue and similar expressions.
These forward-looking statements are based on information currently
available to us and are subject to a number of risks, uncertainties
and other factors that could cause our actual results, performance,
prospects or opportunities in 1999 and beyond to differ materially
from those expressed in, or implied by, these forward-looking
statements. These risks, uncertainties and other factors include:
|
|
our need
to maintain and increase our customer accounts;
|
|
|
our need
to establish additional international and content relationships;
|
|
|
the
intense competition among web sites providing online financial
services;
|
|
|
existing
and future regulations affecting our business or the internet
generally; and
|
|
|
other
factors set forth under Risk Factors in this
prospectus.
|
You should not place undue reliance on any forward-looking
statements. Except as otherwise required by federal securities laws,
we undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information,
future events, changed circumstances or any other reason after the
date of this prospectus.
We estimate that our net proceeds from the sale of the shares
of common stock we are offering will be approximately $
million. If the
underwriters exercise their over-allotment option in full, our net
proceeds will be $
million. Our net proceeds are what we expect to receive
after deducting the estimated underwriting discount and offering
expenses. We intend to use these net proceeds as follows:
|
|
Increased marketing and promotional efforts. We plan to use
approximately $
million of the net proceeds to market our online
brokerage services and other financial services and products over
the next 12 months;
|
|
|
Expansion and improvement of technology. We plan to use
approximately $
million of the net proceeds to expand and upgrade our
computer hardware and software systems;
|
|
|
Developing a second data center. We intend to use
approximately $
million of the net proceeds to fund a
portion of the cost to develop a second data center in Arizona so
that we can (1) continue to serve our customers in the event of a
catastrophic systems failure at one of our facilities, (2)
increase our overall system capacity and (3) operate more
efficiently by splitting the demands on our systems between two
facilities; and
|
|
|
Working capital and general corporate purposes. We intend to
use the remaining $
million of the net proceeds for working capital and
general corporate purposes, possibly including funding of
acquisitions of other businesses and meeting increased net capital
requirements if we become self-clearing. Though from time to time
we evaluate potential acquisitions, we have no current agreement,
commitment or understanding with respect to any acquisition. We
also have not yet decided whether we will become self-clearing
when our current clearing agreement expires at the end of April
2000.
|
The previous paragraph describes our best estimate of our use
of our net proceeds from this offering, based on our current plans
and estimates of anticipated expenditures. However, at this time, we
cannot precisely determine the exact cost, timing and amount of
funds required for our specific uses. Our actual expenditures may
vary from these estimates. We may find it necessary or advisable to
reallocate the net proceeds within the uses outlined above or to use
portions of the net proceeds for other purposes. Pending their use,
we plan to invest the net proceeds in short-term, investment-grade,
interest-bearing securities.
We will not receive any proceeds from the sale of shares by
the selling stockholders.
We have never paid any cash dividend on our common stock. We
plan to retain all future earnings to support our operations and to
finance the development and growth of our business. Therefore, we do
not expect to pay cash dividends on our common stock in the
foreseeable future. Any future determination as to the payment of
dividends will be at our board of directors discretion and
will depend on our results of operations, financial condition,
capital requirements and other factors that our board of directors
considers relevant.
The table below shows our capitalization as of June 30, 1999.
The pro forma data reflect our issuance and sale of
shares of common stock and our
receipt of $2,082,000 in net cash proceeds in a private placement we
completed in August 1999. The pro forma as adjusted data also
reflect:
|
|
the
conversion of all currently outstanding shares of our series A
preferred stock into an aggregate of
shares of our common stock upon
completion of this offering; and
|
|
|
our
issuance and sale of
shares of common stock at an assumed initial public
offering price of $
per share, after deducting the estimated underwriting
discount and offering expenses.
|
|
|
June 30, 1999
|
|
|
Actual
|
|
Pro Forma
|
|
Pro Forma
As Adjusted
|
|
|
(unaudited)
(in thousands)
|
|
|
Long-term debt
|
|
$
|
|
|
|
|
|
$
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Series A preferred
stock, $.01 par value, 500,000 shares
authorized and 112,500 shares issued and
outstanding,
actual and pro forma; no shares authorized
or issued and
outstanding, pro forma as adjusted
|
|
1
|
|
|
1
|
|
|
|
Preferred stock, $.01
par value, 6,000,000 shares authorized
and no shares issued and outstanding,
actual and pro
forma;
shares authorized and no shares issued and
outstanding, pro forma as adjusted
|
|
|
|
|
|
|
|
|
Common stock, $.01 par
value, 100,000,000 shares
authorized and
shares issued and outstanding,
actual; 100,000,000 shares authorized and
shares
issued and outstanding, pro forma;
shares
authorized and
shares issued and
outstanding, pro forma as adjusted
|
|
207
|
|
|
|
|
|
|
Additional paid-in
capital
|
|
21,947
|
|
|
|
|
|
|
Accumulated deficit
|
|
(17,075
|
)
|
|
(17,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity and capitalization
|
|
$5,080
|
|
|
$7,162
|
|
|
$
|
|
|
|
|
|
|
|
|
|
The number of issued and outstanding shares of our common
stock excludes as of June 30, 1999:
|
|
shares of common stock
issuable upon the exercise of warrants at a weighted average
exercise price of $
per share;
|
|
|
shares of common stock
issuable upon the exercise of stock options currently outstanding
at a weighted average exercise price of $
per share;
|
|
|
shares of common stock
reserved for grants that we may make in the future under our
incentive compensation plan; and
|
|
|
shares of common stock
reserved for issuance under our employee stock purchase plan.
|
Our net tangible book value at June 30, 1999, after giving
effect to the conversion of all currently outstanding shares of
preferred stock into an aggregate of
shares of common stock, was approximately $
, or $
per share of common
stock. Our net tangible book value is our total assets minus the sum
of our liabilities and intangible assets. Our net tangible book
value per share is our net tangible book value divided by the total
number of shares of common stock outstanding.
At June 30, 1999, our pro forma net tangible book value, after
giving effect to:
|
|
an
increase in our total assets to reflect $2,082,000 of net proceeds
from our private placement of
shares of common stock in August 1999; and
|
|
|
the
addition of the shares
of common stock we sold in that private placement,
|
was $ , or $
per share of common stock.
At June 30, 1999, our pro forma as adjusted net tangible book
value, after giving effect to:
|
|
an
increase in our total assets to reflect our net proceeds from this
offering as described under
Use of Proceeds;
and
|
|
|
the
addition of the shares
of common stock we are offering by this prospectus,
|
would have been approximately $
, or $ per share of common stock.
The table below shows the pro forma increase in net tangible
book value of $
per share and the dilution to new investors. This dilution
will equal the difference between (1) the price at which we sell
each share of our common stock in this offering and (2) the net
tangible book value per share.
Assumed initial
public offering price per share
|
|
$
|
Net tangible book value per share at June 30, 1999
prior to this offering
|
|
|
Increase per share attributable to pro forma
adjustments
|
|
|
|
|
|
Pro forma net tangible book value per share at June
30, 1999
|
|
|
Increase per share attributable to new stockholders
|
|
|
Pro forma as
adjusted net tangible book value per share at June 30, 1999 after
this
offering
|
|
|
|
|
|
Dilution per share
to new investors
|
|
$
|
|
|
|
The following table shows the difference between existing
stockholders and new investors in this offering with respect to the
number of shares of common stock purchased from us, the total
consideration paid to us and the average price paid per share,
without giving effect to the sale of shares by the selling
stockholders:
|
|
Shares Purchased
|
|
Total
Consideration
|
|
Average
Price
Per Share
|
|
|
Number
|
|
Percent
|
|
Amount
|
|
Percent
|
Existing
stockholders
|
|
|
|
|
%
|
|
$
|
|
|
%
|
|
$
|
New investors
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
100.0
|
%
|
|
$
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These calculations do not give effect to (1)
shares of common stock issuable
upon the exercise of outstanding options at a weighted average
exercise price of $
per share and (2)
shares of common stock issuable upon
the exercise of outstanding warrants at a weighted average exercise
price of $
per share. To the extent any of these options and warrants
are exercised, there will be further dilution to new investors. See
Capitalization,
ManagementStock Options and Incentive
Compensation,
Description of Capital Stock
and
note 10
of the notes to our consolidated financial statements.
Selected Consolidated Financial and Other Data
In this section, we present our selected consolidated
financial and other data. You should read carefully the financial
statements included in this prospectus, including the notes to the
financial statements. The selected data in this section are not
intended to replace the financial statements. We derived the
statement of operations data for the period from September 3, 1996,
our inception, to December 31, 1996 and the years ended December 31,
1997 and 1998, and the balance sheet data as of December 31, 1997
and 1998, from our audited consolidated financial statements in this
prospectus. Those statements were audited by Arthur Andersen LLP,
independent public accountants. We derived the statement of
operations data for the six months ended June 30, 1998 and 1999 and
the balance sheet data as of June 30, 1998 and 1999 from our
unaudited consolidated financial statements included in this
prospectus. Our management believes that the unaudited consolidated
financial statements contain all adjustments needed to present
fairly the information included in those statements, and that the
adjustments made consist only of normal recurring adjustments. Our
results of operations for the six months ended June 30, 1999 are not
necessarily indicative of the results we may achieve for the full
year.
|
|
Period
from
September 3, 1996,
our inception, to
December 31, 1996
|
|
Year Ended
December 31,
|
|
Six Months Ended June 30,
|
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(in thousands,
except share and per share data and Other Data)
|
Statement of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction revenue
|
|
$
|
|
|
$
291
|
|
|
$
7,350
|
|
|
$2,005
|
|
|
$9,880
|
|
Subscription service
revenue
|
|
|
|
|
38
|
|
|
378
|
|
|
54
|
|
|
478
|
|
Interest income
|
|
|
|
|
|
|
|
163
|
|
|
63
|
|
|
315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
|
|
329
|
|
|
7,891
|
|
|
2,122
|
|
|
10,673
|
|
Cost of services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clearance and execution
|
|
|
|
|
144
|
|
|
2,795
|
|
|
708
|
|
|
4,377
|
|
Employee compensation
and benefits
|
|
|
|
|
227
|
|
|
1,375
|
|
|
431
|
|
|
1,258
|
|
Communication and data
processing
|
|
|
|
|
127
|
|
|
946
|
|
|
324
|
|
|
619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of services
|
|
|
|
|
498
|
|
|
5,116
|
|
|
1,463
|
|
|
6,254
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and
advertising
|
|
|
|
|
1,389
|
|
|
8,152
|
|
|
3,653
|
|
|
2,244
|
|
Technology development
|
|
|
|
|
430
|
|
|
1,559
|
|
|
587
|
|
|
913
|
|
General and
administrative
|
|
116
|
|
|
1,279
|
|
|
4,882
|
|
|
2,110
|
|
|
2,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
116
|
|
|
3,098
|
|
|
14,593
|
|
|
6,350
|
|
|
5,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$(116
|
)
|
|
$(3,267
|
)
|
|
$(11,818
|
)
|
|
$(5,691
|
)
|
|
$(1,227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share(1)
|
|
$(0.01
|
)
|
|
$(0.25
|
)
|
|
$(0.71
|
)
|
|
$(0.35
|
)
|
|
$(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per
common
share(1)
|
|
12,308,862
|
|
|
12,872,442
|
|
|
16,740,600
|
|
|
16,391,708
|
|
|
20,404,466
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trades
|
|
N/A
|
|
|
11,500
|
|
|
291,500
|
|
|
72,600
|
|
|
440,600
|
|
Average trades per day
|
|
N/A
|
|
|
100
|
|
|
1,200
|
|
|
600
|
|
|
3,600
|
|
Total customer accounts(2)
|
|
N/A
|
|
|
1,000
|
|
|
42,200
|
|
|
17,600
|
|
|
66,400
|
|
Total customer assets(2)
|
|
N/A
|
|
|
$16,082,900
|
|
|
$231,558,200
|
|
|
$ 104,996,800
|
|
|
$471,174,700
|
|
Total employees(2)
|
|
6
|
|
|
14
|
|
|
65
|
|
|
61
|
|
|
112
|
|
|
(1)Does not reflect the
- for-
split of our common stock which we completed in
1999.
|
|
(2)As of the end of each of the
periods presented.
|
|
|
|
|
December 31,
|
|
June 30,
|
|
|
1996
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
|
|
(unaudited)
|
|
|
(in
thousands)
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
3
|
|
|
$
1,272
|
|
|
$
1,580
|
|
|
$538
|
|
|
$3,399
|
|
Total assets
|
|
3
|
|
|
1,514
|
|
|
4,496
|
|
|
1,913
|
|
|
8,558
|
|
Total liabilities
|
|
|
|
|
412
|
|
|
3,345
|
|
|
597
|
|
|
3,478
|
|
Redeemable common stock
|
|
|
|
|
278
|
|
|
624
|
|
|
624
|
|
|
|
|
Total stockholders equity
|
|
3
|
|
|
824
|
|
|
527
|
|
|
692
|
|
|
5,080
|
|
Managements Discussion and Analysis
of
Financial Condition and Results of Operations
You should read the following discussion along
with our financial statements and the related notes included in
this prospectus. The following discussion contains
forward-looking statements that are subject to risks,
uncertainties and assumptions, including those discussed under
Risk Factors. Our actual results, performance and
achievements in 1999 and beyond may differ materially from those
expressed in, or implied by, these forward-looking statements.
See Cautionary Note Regarding Forward-Looking
Statements.
We were founded in September 1996 but did not begin
generating revenues until the third quarter of 1997, our first
quarter online. During that quarter, we processed approximately
40 trades per day. In January 1998, we completed our initial
system testing phase and launched our initial marketing
campaign. In the fourth quarter of 1998, we processed
approximately 2,100 trades per day. In the first quarter of
1999, our average daily trading volume increased 46% from the
fourth quarter of 1998 to approximately 3,100 trades per day. In
the second quarter of 1999, our average daily trading volume
increased an additional 31% from the first quarter of 1999 to
over 4,000 trades per day.
We earn brokerage commissions for acting as agent in
securities transactions, including trading in Nasdaq and U.S.
exchange-listed equities, equity and index options and, to a
lesser degree, mutual fund transactions. These brokerage
commissions represented 52% of our total revenues for the year
ended December 31, 1998 and 56% of our total revenues for the
six months ended June 30, 1999. Since we initiated services, we
have maintained commissions charged on equity transactions at
$14.95 per internet trade, $17.95 per trade executed by
telephone through our automated touch-tone service and $24.95
per trade executed by telephone through a registered
representative. On equity and index option trades, we also
charge $14.95, $17.95 and $24.95 per trade, plus $1.75 per
contract. We currently offer commission-free trades on
over-the-counter orders of 1,000 or more shares priced at more
than $2.00 per share.
Through our clearing agreement with U.S. Clearing
Corporation, we use other broker-dealers to execute our customers
orders. To date, we have derived a significant portion of
our revenues from U.S Clearing in the form of payments related
to, but not dependent on the payments U.C. Clearing receives for
this order flow. We receive contractual payments directly from
U.S. Clearing of $0.025 per share for over-the-counter trades
priced at more than $2.00 per share; we receive these payments
regardless of the order flow rebates U.S. Clearing actually
receives. The order flow-related payments we received under this
agreement represented 41% of our total revenues for the year
ended December 31, 1998, and 37% of our total revenues for the
six months ended June 30, 1999. When our current clearing
agreement ends on April 30, 2000, we expect to begin receiving
payments that are directly based upon order flow. We expect that
those payments will be made to us at regular market rates, which
we believe will be significantly below the current rate of
payment to us by U.S. Clearing. Our current above-market order
flow payments have allowed us to offer our customers
commission-free trades on over-the-counter orders of 1,000 or
more shares priced at more than $2.00 per share. After April
2000, when our order flow payments decrease, it may no longer be
economical for us to continue to offer these free trades and,
thus, we may lose the competitive advantage we gain by doing so.
In addition, payment to us for order flow may further decrease
after our current clearing agreement expires because of (1) the
SECs enactment of order handling rules which reduced
market-makers spreads and correspondingly their profits,
(2) the emergence of electronic communication networks, which
enable securities trading without the use of market makers, and
(3) the proposed quotation of stock prices in decimals, which
could further reduce spreads and profits. Further, the SEC, the
NASD or other regulatory agencies, courts, or other governmental
units may prohibit payments for order flow in the future. We
believe that the adverse effect on per trade revenue and profit
margins from decreased order flow-related payments will be
offset in part by (1) the increased average commission per trade
which we expect to result from our anticipated discontinuation
of free over-the-counter trades discussed above and (2) the
decreased average cost per trade and increased interest income
which we expect to result from any new clearing agreement.
We have begun establishing our Unified Global
Brokerage Accounts. Through these accounts, we currently enable
investors in Germany and Iceland to trade in U.S. securities
markets from our web site. Because all trades executed by us are
settled in U.S. dollars, our customers and our international
partners bear the risk of fluctuations in foreign currency
exchange rates. We intend that once fully operational, these
accounts will allow our customers to trade in major global
financial markets. We intend to continue to enter into
arrangements with international online brokerage service
providers in major capital markets around the world, similar to
our mutually exclusive agreement with ConSors. Investors in
European countries who trade U.S. securities through our ConSors
relationship pay the same transaction fees as investors who
trade directly through us in the United States. We pay ConSors a
portion of the gross profits earned by us on trades executed by
customers in these European countries, in exchange for ConSors
(1) facilitating access to its existing customer base, (2)
conducting local marketing and advertising to attract new
customers and (3) providing local customer service support.
Landsbref, our other current international partner, provides
similar customer acquisition and ongoing customer support
functions for Icelandic brokerage customers who trade U.S.
securities through us. Commissions charged by Landsbref include
a mark-up above our normal commission rates, and we remit the
amount charged above our normal rate back to Landsbref as its
fee. We do not pay any other fee to Landsbref. We may structure
future arrangements with other international partners using
these or other revenue models.
The following descriptions of the components of
revenue and expense apply to all periods presented below:
|
Transaction
revenue consists of brokerage commissions on customer
transactions in equity securities, options and mutual funds
and payments for order flow, recorded on the dates trades are
made.
|
|
Subscription service revenue consists principally of fees
billed monthly to customers who choose to subscribe to one of
our automatically updating real-time quote services.
|
|
Interest
income represents interest paid to us by U.S. Clearing on
our customers margin debt and money market account
balances, as well as interest earned on our own available cash
balances. We participate in the interest spread on our
customers debit and money market credit balances through
our clearing agreement with U.S. Clearing.
|
|
Cost of
services includes transaction-based clearance and
execution costs for customer trades paid to U.S. Clearing
under the terms of our clearing agreement; margin-sharing
payments to international partners; compensation and benefit
costs for employees directly involved in brokerage and
subscription service operations; exchange and other market
data fees; and the costs of communication lines and related
equipment.
|
|
Marketing
and advertising expenses consist of advertising agency
fees; third-party charges for running internet, television,
print and radio ads; the costs of brochures, contests and
promotions; and the costs of our public relations program.
|
|
Technology
development expenses include technology-related payroll,
consulting, supplies and equipment costs associated with the
development and enhancement of our web site and related
product and service offerings.
|
|
General and
administrative expenses consist primarily of compensation
and benefits for corporate management and administrative
personnel, occupancy costs, insurance, professional fees,
postage and the provision for losses related to securities
transactions.
|
In the discussion below, we compare our results of
operations for the six month periods ended June 30, 1999 and
1998 and for the years ended December 31, 1998 and 1997. We do
not compare our results for the year ended December 31, 1997 to
the period from our inception on September 3, 1996 to December
31, 1996.
A comparison of results between these two periods would not be
meaningful because our 1996 period was much less than a year and
because we did not begin significant operating activity until
1997. In addition, we present supplemental financial information
for our fiscal quarters from the third quarter of 1997, the
first quarter in which we made our web site publicly available,
through the second quarter of 1999.
The following table shows for the periods presented
(1) the percentage of total revenues represented by items on our
consolidated statements of operations and (2) the percentage
change in each of the items from the prior period:
|
|
Percentage of Total Revenues
|
|
Period-to-Period Percentage Change
|
|
|
Year Ended
December 31,
|
|
Six
Months Ended
June 30,
|
|
1998
Compared
to 1997
|
|
Six Months Ended
June 30, 1999
Compared to
Six Months Ended
June 30, 1998
|
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction revenue
|
|
88
|
%
|
|
93
|
%
|
|
95
|
%
|
|
93
|
%
|
|
2,426
|
%
|
|
393
|
%
|
Subscription service revenue
|
|
12
|
|
|
5
|
|
|
2
|
|
|
4
|
|
|
878
|
|
|
784
|
|
Interest income
|
|
|
|
|
2
|
|
|
3
|
|
|
3
|
|
|
*
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
100
|
|
|
100
|
|
|
100
|
|
|
100
|
|
|
2,298
|
|
|
403
|
|
Cost of
Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clearance and execution
|
|
44
|
|
|
35
|
|
|
34
|
|
|
41
|
|
|
1,841
|
|
|
519
|
|
Employee compensation and
benefits
|
|
69
|
|
|
17
|
|
|
20
|
|
|
12
|
|
|
506
|
|
|
191
|
|
Communication and data
processing
|
|
39
|
|
|
12
|
|
|
15
|
|
|
6
|
|
|
644
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of
Services
|
|
151
|
|
|
65
|
|
|
69
|
|
|
59
|
|
|
927
|
|
|
327
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and advertising
|
|
422
|
|
|
103
|
|
|
172
|
|
|
21
|
|
|
487
|
|
|
(39
|
)
|
Technology development
|
|
131
|
|
|
20
|
|
|
28
|
|
|
9
|
|
|
263
|
|
|
55
|
|
General and administrative
|
|
389
|
|
|
62
|
|
|
99
|
|
|
23
|
|
|
282
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
942
|
|
|
185
|
|
|
299
|
|
|
53
|
|
|
371
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before
income tax benefit
|
|
(993
|
)
|
|
(150
|
)
|
|
(268
|
)
|
|
(12
|
)
|
|
262
|
|
|
(78
|
)
|
Income tax
benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
(993
|
)%
|
|
(150
|
)%
|
|
(268
|
)%
|
|
(12
|
)%
|
|
262
|
%
|
|
(78
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 1999 Compared to Six
Months Ended June 30, 1998
Revenues
Total revenues increased by $8,551,000, or 403%, to
$10,673,000 for the six months ended June 30, 1999 from
$2,122,000 for the six months ended June 30, 1998. Average
trades per day increased to approximately 3,600 for the six
months ended June 30, 1999 from approximately 600 for the six
months ended June 30, 1998. Transaction revenues increased by
$7,875,000, or 393%, to $9,880,000 for the six months ended June
30, 1999 from $2,005,000 for the six months ended June 30, 1998.
Transaction revenues decreased slightly as a percentage of total
revenues between these periods to 93% from 95% due to the
increase in subscription service revenue discussed below.
Brokerage commissions increased to 56% from 48% of total
revenues, while order flow rebates decreased to 37% from 46% of
total revenues, between these periods. We processed
approximately 3,600 average trades per day in the six months
ended June 30, 1999. This increased from 600 average
trades per day in the six months ended June 30, 1999. Total
accounts increased to 66,400 at June 30, 1998 from 17,600 at
June 30, 1998. For the six months ended June 30, 1999, equity
transactions represented 86% and option transactions represented
14% of our total transaction volume. This compares to 78% for
equity transactions and 22% for option transactions for the six
months ended June 30, 1998.
Transaction revenue from our international
relationships, principally our agreement with ConSors,
represented 6% of our total revenues in the first six months of
1999. Our relationship with ConSors became operational in the
end of the first quarter of 1999. We did not have any material
revenues attributable to international relationships in any
prior periods. We expect revenues from our international
relationships to increase as a percentage of our total revenues
in the future.
Subscription service revenue increased by $424,000,
or 784%, to $478,000 for the six months ended June 30, 1999 from
$54,000 for the six months ended June 30, 1998. Subscription
service revenue increased as a percentage of total revenues
between these periods to 4% from 2% as approximately 2,000 of
our customers subscribed to our automatically updating real-time
quote services at prices ranging from $19.95 to $79.95 per month.
Interest income increased by $251,000, or 395%, to
$315,000 for the six months ended June 30, 1999 from $63,000 for
the six months ended June 30, 1998. This increase was due to
increases in our own available cash balances, as well as
customer balances, as customer money market credits increased to
$88,300,000 at June 30, 1999 from $28,763,000 at June 30, 1998
and customer margin debits increased to $48,852,000 at June 30,
1999 from $11,345,000 at June 30, 1998. However, interest income
still represented only 3% of total revenues for the six months
ended June 30, 1999.
Total cost of services increased by $4,791,000, or
327%, to $6,254,000 for the six months ended June 30, 1999 from
$1,463,000 for the six months ended June 30, 1998. However,
total cost of services declined to 59% from 69% of total
revenues between these periods. Total clearance and execution
costs increased by $3,669,000, or 519% to $4,377,000 for the six
months ended June 30, 1999 from $708,000 for the six months
ended June 30, 1998, due primarily to the 500% increase in
average daily trade volumes processed between these periods.
Although total clearance and execution costs increased, as
trading volume increased to specified levels, clearance and
execution costs per trade paid to U.S. Clearing decreased. Under
our agreement with U.S. Clearing, these per trade costs will
continue to decrease as trading volume further increases to
higher specified levels. Employee compensation and benefits
increased by $827,000, or 191%, to $1,258,000 for the six months
ended June 30, 1999 from $431,000 for the six months ended June
30, 1998. Communication and data processing costs increased by
$295,000, or 91%, to $619,000 for the six months ended June 30,
1999 from $324,000 for the six months ended June 30, 1998. These
increases were due to the growth in number of employees and
increased customer activity. The number of employees involved in
brokerage, customer service and technical support activities
increased to 79 from 41 between these periods.
For the reasons discussed below, total operating
expenses decreased by $704,000, or 11%, to $5,646,000 for the
six months ended June 30, 1999 from $6,350,000 for the six
months ended June 30, 1998. We expect to spend significant
amounts in the future to continue developing and delivering to
our customers state-of-the-art online financial products and
services, to expand the number of financial services centers and
to increase brand recognition to expand our customer base. We
also plan to continue to implement financial, operational and
management controls and reporting systems and procedures to
support the continued expansion of our operations. As a
consequence, we intend to increase expenditures in all operating
areas to support our planned growth and the further development
of our infrastructure.
Marketing and advertising. Marketing and
advertising expenses decreased by $1,409,000, or 39%, to
$2,244,000 for the six months ended June 30, 1999 from
$3,653,000 for the six months ended June 30, 1998. We scaled
back advertising expenses significantly in the first quarter
ended March 31, 1999 in advance of the introduction of a new
advertising campaign, launched in June 1999, which emphasizes
the ease and efficiency with which our customers can invest
through us. We plan to spend approximately $9,000,000 on
advertising and marketing in 1999. We expect to continue to
significantly increase spending on marketing and advertising for
the foreseeable future, in an effort to attract new customer
accounts and accelerate our revenue growth rate.
Technology development. Technology
development expenses increased by $326,000, or 55%, to $913,000
for the six months ended June 30, 1999 from $587,000 for the six
months ended June 30, 1998. This increase was due to both an
increase in the number of technology development employees and
increased usage of outside consultants. This increase was
partially offset by approximately $201,000 in costs that were
capitalized for internal software development that would have
been previously expensed as discussed under
Recent Accounting Pronouncements. As a
percentage of total revenues, technology development costs
declined to 9% from 28%. We expect that these costs will
increase as a percentage of total revenues for the balance of
1999 and possibly beyond as we accelerate the pace of
development projects to enhance the functionality and capacity
of our web site and expand our computer systems. These expenses
may fluctuate as a percentage of revenue over time depending on
the projects we undertake from time-to-time.
General and administrative. General and
administrative expenses increased by $379,000, or 18%, to
$2,489,000 for the six months ended June 30, 1999 from
$2,110,000 for the six months ended June 30, 1998. Increased
salaries, benefits and other cash compensation expenses, as well
as higher occupancy costs, were partially offset by lower
non-cash charges for stock and options granted below market
value in the prior year. The amount of non-cash charges declined
to $171,000 for the six months ended June 30, 1999 from $987,000
for the six months ended June 30, 1998. We anticipate hiring
additional personnel and incurring increased administrative
costs related to being a public company and to support the
expected growth of our business.
Year Ended December 31, 1998 Compared to Year
Ended December 31, 1997
Total revenues increased by $7,562,000, or 2,298%,
to $7,891,000 for the year ended December 31, 1998 from $329,000
for the year ended December 31, 1997. This significant increase
was in large part because we did not launch our online financial
services until the third quarter of 1997. We initiated our
online brokerage service and recorded our first revenues in July
1997. We continued system testing and enhancement and
development of our initial marketing campaign during the second
half of 1997. We processed approximately 150 average trades per
day in December 1997. This increased to over 2,500 average
trades per day in December 1998. Total customer accounts
increased by 41,000, or 852%, to 42,200 at December 31, 1998
from 1,000 at December 31, 1997.
Transaction revenues increased by $7,059,000, or
2,426%, to $7,350,000 for the year ended December 31, 1998 from
$291,000 for the year ended December 31, 1997. Transaction
revenues represented 93% of total revenues for the year ended
December 31, 1998, compared to 88% for the year ended December
31, 1997. Brokerage commissions remained constant at 52% of
total revenues, while order flow rebates increased to 41% from
37% of total revenues, between these years. For the year ended
December 31, 1998, equity transactions represented 77%, and
option transactions represented 23%, of our total transaction
volumes. This compares to 72% for equity transactions and 28%
for option transactions for the year ended December 31, 1997.
Subscription service revenue increased by $339,000 to $378,000
for the year ended December 31, 1998 from $39,000 for the year
ended December 31, 1997, due to an increased number of
subscribers to our automatically updating real-time quote
services, but declined to 5% from 12% of total revenues between
these periods. Interest income totaling $163,000 was first
reported in the year ended December 31, 1998, representing 2% of
total revenues.
Total cost of services increased by $4,618,000, or
927%, to $5,116,000 for the year ended December 31, 1998 from
$498,000 for the year ended December 31, 1997. This increase was
due primarily to the increases discussed above in the number of
securities transactions we processed during 1998, our first full
year of online operations. Clearance and execution costs
increased by $2,651,000, or 1,841%, to $2,795,000 for the year
ended December 31, 1998 from $144,000 for the year ended
December 31, 1997. The transaction-based fees paid to U.S.
Clearing for trade execution, as well as to various market data
vendors, increased throughout 1998 as transaction volumes
increased. However, as a percentage of total revenues, clearance
and execution costs decreased to 35% in 1998 from 44% in 1997,
as certain fixed costs were spread over the increased trade
volumes.
Employee compensation and benefits increased by
$1,148,000, or 506%, to $1,375,000 for the year ended December
31, 1998 from $227,000 for the year ended December 31, 1997.
Communication and data processing costs increased by $819,000,
to $946,000 for the year ended December 31, 1998 from $127,000
for the year ended December 31, 1997. We continued to add
licensed brokers and other customer service personnel, as well
as communication lines and equipment, to accommodate the
increased number of accounts and associated traffic to our web
site and over the telephone. Total employees involved in
brokerage, customer service and technical support activities
increased to 42 at December 31, 1998 from 10 at December 31,
1997. As a percentage of total revenues, however, employee
compensation and benefit costs decreased to 17% from 69% between
these years. Similarly, communication and data processing costs
decreased as a percentage of total revenues to 12% from 39%
between these years.
Total operating expenses increased by $11,495,000,
or 371%, to $14,593,000 for the year ended December 31, 1998
from $3,098,000 for the year ended December 31, 1997. This
increase was due to the costs associated with the development
and growth of our web site, systems, brand and infrastructure,
as discussed in further detail below.
Marketing and advertising. Marketing and
advertising expenses increased by $6,763,000, or 487%, to
$8,152,000 for the year ended December 31, 1998 from $1,389,000
for the year ended December 31, 1997. Our initial marketing
campaign was developed in the fourth quarter of 1997 and
launched in the first quarter of 1998. We advertised throughout
1998 on various internet sites, as well as in print and on
television and radio.
Technology development. Technology
development expenses increased by $1,129,000, or 263%, to
$1,559,000 for the year ended December 31, 1998 from $430,000
for the year ended December 31, 1997. This increase was due to
an increase in the number of technology department employees and
expenses related to development of software by third parties to
continuously enhance our web site.
General and Administrative. General and
administrative expenses increased by $3,603,000, or 282%, to
$4,882,000 for the year ended December 31, 1998 from $1,279,000
for the year ended December 31, 1997. This increase was due to a
variety of factors, all related to the significant growth we
experienced. Among these factors, an increase in the number of
employees and improved compensation levels to attract and retain
qualified employees was the primary cause of the increase. Other
factors included increased consulting expenses and other
professional fees; relocation to larger facilities in Deerfield,
Illinois combined with a general increase in occupancy costs;
and increased costs for insurance, postage and provisions for
losses on securities transactions associated with the higher
customer and trade activity levels in 1998.
We also include in general and administrative
expenses the amortization of deferred compensation related to
stock and options that were granted below fair market value.
Amortization of deferred compensation was $1,224,000 for the
year ended December 31, 1998, compared to $63,000 for the year
ended December 31, 1997. We have not granted any below market
value shares or options since September 1, 1998, nor do we
expect to make any below market grants in the future. As a
result, these charges against income will decline significantly
in future periods.
Quarterly Results of Operations
The following table shows, for the periods
indicated, our quarterly results of operations. We have derived
our statement of operations data from our unaudited interim
financial statements, which have been prepared on substantially
the same basis as our audited financial statements and which we
believe include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the
financial information for the periods presented. You should read
this information along with our financial statements and notes
in this prospectus. Our operating results in any quarter are not
necessarily indicative of the results that may be expected for
any future period.
|
|
Three Months Ended
|
|
|
Sept. 30,
1997
|
|
Dec. 31,
1997
|
|
Mar. 31,
1998
|
|
June 30,
1998
|
|
Sept. 30
1998
|
|
Dec. 31,
1998
|
|
Mar. 31,
1999
|
|
June 30,
1999
|
|
|
(unaudited)
|
|
|
(in thousands, except share and per share data and Other
Data)
|
Statement
of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction revenue
|
|
$
44
|
|
|
$247
|
|
|
$
561
|
|
|
$
1,444
|
|
|
$
2,073
|
|
|
$
3,272
|
|
|
$
4,271
|
|
|
$5,609
|
|
Subscription service
revenue
|
|
|
|
|
38
|
|
|
13
|
|
|
41
|
|
|
124
|
|
|
200
|
|
|
218
|
|
|
260
|
|
Interest income
|
|
|
|
|
|
|
|
20
|
|
|
43
|
|
|
47
|
|
|
53
|
|
|
148
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
44
|
|
|
285
|
|
|
594
|
|
|
1,528
|
|
|
2,244
|
|
|
3,525
|
|
|
4,637
|
|
|
6,036
|
|
Cost of
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clearance and execution
|
|
22
|
|
|
122
|
|
|
233
|
|
|
475
|
|
|
704
|
|
|
1,383
|
|
|
1,718
|
|
|
2,659
|
|
Employee compensation
and
benefits
|
|
55
|
|
|
172
|
|
|
120
|
|
|
311
|
|
|
391
|
|
|
553
|
|
|
550
|
|
|
708
|
|
Communication and data
processing
|
|
60
|
|
|
67
|
|
|
73
|
|
|
251
|
|
|
161
|
|
|
461
|
|
|
288
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of
Services
|
|
137
|
|
|
361
|
|
|
426
|
|
|
1,037
|
|
|
1,256
|
|
|
2,397
|
|
|
2,556
|
|
|
3,698
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and advertising
|
|
|
|
|
1,389
|
|
|
1,727
|
|
|
1,926
|
|
|
872
|
|
|
3,627
|
|
|
633
|
|
|
1,611
|
|
Technology development
|
|
90
|
|
|
100
|
|
|
218
|
|
|
369
|
|
|
635
|
|
|
337
|
|
|
314
|
|
|
599
|
|
General and administrative
|
|
187
|
|
|
863
|
|
|
1,221
|
|
|
889
|
|
|
935
|
|
|
1,837
|
|
|
1,119
|
|
|
1,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating
Expenses
|
|
277
|
|
|
2,352
|
|
|
3,166
|
|
|
3,184
|
|
|
2,442
|
|
|
5,801
|
|
|
2,066
|
|
|
3,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before income
tax benefit
|
|
(370
|
)
|
|
(2,428
|
)
|
|
(2,998
|
)
|
|
(2,693
|
)
|
|
(1,454
|
)
|
|
(4,673
|
)
|
|
15
|
|
|
(1,242
|
)
|
Income tax
benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$(370
|
)
|
|
$(2,428
|
)
|
|
$(2,998
|
)
|
|
$(2,693
|
)
|
|
$(1,454
|
)
|
|
$(4,673
|
)
|
|
$
15
|
|
|
$(1,242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted net income
(loss) per common share(1)
|
|
$(0.03
|
)
|
|
$(0.19
|
)
|
|
$(0.19
|
)
|
|
$(0.16
|
)
|
|
$(0.08
|
)
|
|
$(0.28
|
)
|
|
$0.00
|
|
|
$(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in
computing
basic and diluted net
income (loss) per share(1)
|
|
12,610,434
|
|
|
12,872,442
|
|
|
16,176,090
|
|
|
16,391,708
|
|
|
16,569,701
|
|
|
16,740,600
|
|
|
20,092,013
|
(2)
|
|
20,404,466
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trades
|
|
2,300
|
|
|
9,200
|
|
|
20,100
|
|
|
52,500
|
|
|
82,700
|
|
|
136,200
|
|
|
187,200
|
|
|
253,400
|
|
Average trades
per day
|
|
40
|
|
|
144
|
|
|
330
|
|
|
833
|
|
|
1,293
|
|
|
2,095
|
|
|
3,069
|
|
|
4,022
|
|
Total customer
accounts(3)
|
|
400
|
|
|
1,000
|
|
|
5,700
|
|
|
17,600
|
|
|
32,200
|
|
|
42,200
|
|
|
54,300
|
|
|
66,400
|
|
Total customer
assets(3)
|
|
$4,578,600
|
|
|
$16,082,900
|
|
|
$43,163,400
|
|
|
$104,996,800
|
|
|
$156,307,300
|
|
|
$231,558,200
|
|
|
$348,308,300
|
|
|
$471,174,700
|
|
Total
employees(3)
|
|
14
|
|
|
14
|
|
|
34
|
|
|
61
|
|
|
76
|
|
|
65
|
|
|
80
|
|
|
112
|
|
(1)
|
Does not reflect the -for-
split of our common stock which we completed in
1999.
|
(2)
|
Represents shares used in computing basic net income per
share. 20,485,997 shares were used in computing diluted net
income of $0.00 per share.
|
(3)
|
As of the end of each of the periods presented.
|
Our quarterly operating results may fluctuate
significantly in the future due to a variety of factors, many of
which are outside our control. These factors include:
|
|
economic conditions specific to the internet, online commerce
or the brokerage industry, as well as general economic
conditions;
|
|
|
trends in securities markets;
|
|
|
changes in trading volume in securities markets;
|
|
|
the pace of development of the market for online commerce;
|
|
|
customer acceptance of our online financial services and
products;
|
|
|
introductions of new or enhanced online financial services and
products by us or our competitors;
|
|
|
our ability to upgrade and change our web site and systems;
|
|
|
technical difficulties or system downtime affecting the
internet or the operation of our web site;
|
|
|
changes in commissions charged by us or our competitors;
|
|
|
changes in the level of our marketing and other operating
expenses to support our growth;
|
|
|
changes in clearing, execution and exchange fees; and
|
|
|
domestic and international regulation of the brokerage
industry.
|
Due to these factors, period-to-period
comparisons of our revenues and operating results may not be
meaningful and should not be relied upon as indicators of future
performance. In addition, we may not be able to sustain the
rates of revenue growth that we have experienced in the past or
maintain or improve our operating results.
Income Taxes
We account for income taxes under Statement of
Financial Accounting Standards No. 109, Accounting for
Income Taxes. Since our inception, we have accumulated net
operating loss carryforwards totaling approximately $16 million.
We do not report any benefit for federal and state income tax
net operating loss carryforwards in our consolidated financial
statements, as the deferred tax asset generated has been offset
by a full valuation allowance as of June 30, 1999.
Liquidity and Capital Resources
As of June 30, 1999, we had cash and cash
equivalents of $3,399,000 and no bank debt. Since our inception,
we have financed our operations through the private placement of
common stock and, to a much lesser extent, the private placement
of preferred stock and equipment financing. We have reported
significant negative cash flows from operating activities for
each fiscal year to date and, to a lesser extent, for the six
months ended June 30, 1999. During the first six months of 1999,
we decreased our level of spending on marketing and advertising.
Cash flows from operating activities was a negative $285,000 for
the six months ended June 30, 1999, a negative $9,688,000 for
the year ended December 31, 1998 and a negative $2,764,000 for
the year ended December 31, 1997. Significant uses of cash in
operations for each of these periods included marketing
activities to establish our brand and to promote our products
and services, as well as expenditures to further develop the
capacity and functionality of our web site.
Cash used in investing activities, representing
capital expenditures, was $2,442,000 for the six months ended
June 30, 1999 and $1,039,000 for the year ended December 31,
1998, compared to $245,000 for the year ended December 31, 1997.
We continued to acquire fixed assets and software for cash and
under operating leases during the first half of 1999. As of June
30, 1999, we have commitments under noncancellable operating
leases for facilities and equipment totalling approximately
$3,063,000 that expire on various dates through April 1, 2003.
We have periodically completed private placements
of our stock as needed to fund the cash deficit from our
operating activities. We raised $300,000 in the first quarter of
1997 in a private placement of our series A preferred stock. We
completed various private placements of our common stock
totaling $3,979,000 in 1997 and $11,224,000 in 1998. During
January 1999, we raised $5,445,000, net of offering costs,
through private placements of 1,552,518 shares of our common
stock. In January 1999, we paid $400,000, and in April 1999 we
paid $250,000, to redeem all 3,000,000 shares of our then issued
and outstanding series C preferred stock. All of those shares
were issued in January 1997 to Darwin Financial Group, of which
Joseph Fox and Avi Fox are the principal stockholders, directors
and executive officers. During August 1999, we raised
$2,082,000, net of offering costs, through private placements of
shares of our common stock.
In the future, we expect to incur significantly
higher costs, particularly marketing and advertising, technology
development, payroll and occupancy costs, to grow our business.
We believe that the net proceeds from this offering, together
with our current cash and cash equivalents, will be sufficient
to meet our anticipated cash needs for working capital and
capital expenditures for at least the next 12 months. However,
during this period, we may seek additional capital in the
private and/or public equity markets if we grow more quickly
than expected. After that 12-month period, if cash generated
from operations is insufficient to satisfy our liquidity
requirements, we may need to raise additional funds through
public or private financing, strategic relationships or other
arrangements. If we receive additional funds through the
issuance of equity securities, our existing stockholders may
experience significant dilution and these equity securities may
have rights, preferences or privileges senior to those of our
common stock. Further, we may not be able to obtain additional
financing when needed or on terms favorable to us or our
stockholders. If we are unable to obtain additional financing
when needed, or to do so on acceptable terms, we may be unable
to develop or enhance our products or services, take advantage
of business opportunities or respond to competitive pressures.
The year 2000 issue involves the potential for
system and processing failures of date-related data resulting
from computer-controlled systems using two digits rather than
four to define the applicable year. For example, computer
programs that contain time-sensitive software may recognize a
date using two digits of 00 as the year 1900 rather
than the year 2000. This could result in systems failure or
miscalculations causing disruptions of business operations.
We developed, purchased or licensed our internal
systems and software in the last few years. We designed the
internal systems and software which we developed to be fully
year 2000 compliant. We obtained representations from the
vendors of the internal systems and software which we purchased
or licensed that they are fully year 2000 compliant. For these
reasons, we have incurred no additional expense for year
2000-related remediation. We have not, however, tested our
internal systems and software to ensure that they are year 2000
compliant, but we intend to do so before September 30, 1999.
We have communicated with U.S. Clearing and
Automatic Data Processing, and will communicate with ConSors,
regarding their state of readiness for year 2000. We believe
they are the third parties whose systems failures due to year
2000 problems could most significantly impair our ability to
operate our business for an extended period of time. We have
received statements from U.S. Clearing and Automatic Data
Processing which represent that each of them is year 2000
compliant. We have very little or no control over either party
and generally have little ability to verify their claims to
being year 2000 compliant. If in fact either of these parties is
not year 2000 compliant, our customers ability to execute
trades on our web site could be significantly disrupted. We have
not had any communications with any other third parties upon
which we depend, including international partners, utility
companies, securities exchanges and Nasdaq, online and internet
service providers and content providers, regarding their year
2000 compliance efforts. Further, we have not been involved in
any testing programs with any of the third parties on which we
rely. In the most reasonably likely worst-case scenario, our
customers would not be able to access our web site, and we would
not be able to execute customer trades and/or our customers
would not be able to access fundamental market information. In
the event of a content providers year 2000 problem which
adversely affects our customers ability to access
information, we would make
arrangements with an alternate content provider to receive that
information. In the event of a year 2000-related failure which
adversely affects our customers ability to execute trades,
we would resort to a full manual override for all our trade
processing until the failure was remedied. These contingency
plans will not adequately address any year 2000-related failures
of our systems or those of third parties on which we depend and
if any year 2000-related failures occur, our business operations
will be materially adversely affected.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified
Public Accountants issued Statement of Position 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. This statement provides
guidance on accounting for the costs of computer software
developed or obtained for internal use, identifies
characteristics of internal use software and assists in
determining when computer software is for internal use. We have
adopted this statement effective January 1, 1999, and have begun
capitalizing some costs of developing internal use software that
would have been expensed under our previous accounting policy.
In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging
Activities, which defines derivatives, requires that all
derivatives be carried at fair value and provides for hedge
accounting when certain conditions are met. This statement will
be effective for us in 2001. We believe that the adoption of
this statement will not have a material impact on our financial
position or results of operation.
Quantitative and Qualitative Disclosures About
Market Risk
Our primary financial instruments are cash in banks
and short-term certificates of deposit. We do not believe that
these instruments are subject to material potential near-term
losses in future earnings from reasonably possible near-term
changes in market rates or prices. We do not have derivative
financial instruments for speculative or trading purposes. In
the normal course of business, our customers enter into
transactions where the risk of potential loss due to market
fluctuations or failure to perform exceeds the amounts reported
for the transaction. We have established policies, procedures
and internal processes governing our management of market risks
in the normal course of our business operations. We, along with
U.S. Clearing, continuously monitor our exposure to market and
counterparty risk through the use of a variety of financial,
position and credit exposure reporting and control procedures.
In addition, we review the credit-worthiness of each customer
and/or other counterparty with which we conduct business. We are
not currently exposed to any material currency exchange risks
because the risk is borne by our international customers and our
international partners, and we do not hold any assets or incur
any liabilities denominated in foreign currencies.
The following discussion of our business contains
forward-looking statements that are subject to risks,
uncertainties and assumptions, including those discussed under
Risk Factors. Our actual results, performance and
achievements in 1999 and beyond may differ materially from those
expressed in, or implied by, these forward-looking statements.
See Cautionary Note Regarding Forward-Looking
Statements.
Overview
We provide online brokerage services to individual
investors, primarily in the U.S. and Europe. Through our web
site, located at www.webstreet.com, our customers can
quickly execute equity and option trades at a low cost. They can
also conveniently access real-time trading information,
financial market data and account information, 24 hours a day,
seven days a week. By calling a toll-free telephone number,
customers can also enter orders 24 hours a day, seven days a
week through a licensed broker or our automated touch-tone
telephone trading service. During the six months ended June 30,
1999, online transactions constituted approximately 92% of our
transaction volume.
Our highly automated, easy-to-use and cost-effective
services enable self-directed individual investors to take
greater control of their investment decisions and financial
transactions. We provide our customers with a broad suite of
tools and information sources which they can use to manage their
financial portfolios, including:
|
|
a virtual trading pit with rapid online order entry,
transaction confirmations and account information updates;
|
|
|
dynamically updated real-time market data, including stock
quotes, market-maker information and financial news;
|
|
|
the ability to create customized stock watch lists and to
place a trade order from a watch list with one click of a
mouse;
|
|
|
portfolio tracking featuring historical and intra-day stock
charting;
|
|
|
an online help desk and 24 hours a day, seven days a week
toll-free telephone support; and
|
|
|
for investors in Germany and Iceland, the ability to trade in
U.S. securities markets from our web site.
|
The following leading financial and technology
publications have positively recognized our online brokerage
services:
|
|
Barrons gave us its highest rating, four stars, in
1999 and 1998, emphasizing that we have a dynamic site where
all pieces of research and trading are easily accessible;
|
|
|
SmartMoney rated us one of the top three overall online
brokerage firms in 1999 and 1998, due to our low commissions,
24-hour service, rapid technical support, free real-time
quotes and instantaneously updated online account information;
and
|
|
|
Time Digital rated us the third best online discount
brokerage service in 1999, noting that our trading pit allows
investors to monitor stock, fund and option activity, check
balances and positions and execute trades, all from a single
screen.
|
Industry Background
Increase In
Investment Activity
The U.S. market for equity securities has grown
dramatically in recent years, with equity capitalization
doubling in the past five years to over $15 trillion. During
this time, there has been a large increase in the
average daily trading volume in the U.S. securities market. In
addition to the strong U.S. market, the increased use of IRAs,
401(k)s, employee stock ownership plans, stock options and
mutual funds has created greater interest and participation of
individuals in the market.
Emergence of the
Internet and Online Commerce
In June, 1999, International Data Corporation, a
leading information technology data research firm, estimated
that the number of internet users worldwide exceeded 95 million
by the end of 1998, will exceed 170 million by the end of 2000
and will exceed 500 million by the end of 2003. The internet is
revolutionizing the way that organizations and consumers
interact and conduct business. The explosive growth in business
on the internet has been driven by the internets ability
to offer businesses and consumers a compelling and
cost-effective medium for communications and commerce through
its accessibility and convenience, use of open standards and
ability to enable real-time interactions. One driver of this
growth is the fact that consumers in the U.S. and
internationally are becoming more comfortable conducting
transactions on the internet. The increasing prevalence of
online commerce options, such as purchases and sales, funds
transfers and online banking, bill presentment and payment, has
also contributed to this growth by simplifying and automating
financial transactions for consumers, and in many cases,
significantly reducing costs for consumers by eliminating the
need for intermediaries that traditionally charge fees to
provide products, services or information.
Development of the
Online Brokerage Industry
The emergence of the internet is changing the
financial services industry, particularly the securities
brokerage sector. In fact, online brokerage firms have grown
significantly faster than the brokerage industry as a whole. We
believe the rapid development of the online brokerage industry
has been driven principally by the following factors:
|
|
Individual investors are increasingly taking direct control
over their personal financial affairs because they find it
more convenient than relying on traditional financial
intermediaries. Individual investors want the flexibility to
transact business at times and places that are convenient for
them. Online brokerage firms enable investors to place trades
24 hours a day from their homes, offices and other locations,
without the need to contact a broker;
|
|
|
In addition, individual investors are increasingly taking
direct control over their personal financial affairs because
they find it less expensive than relying on traditional
financial intermediaries. Online brokerage firms provide
investors with lower per-trade commissions due to the cost
savings associated with delivering brokerage services over the
internet. Online brokerage firms are also able to provide
investors with access to information at little or no charge
because of the low cost of exchanging information over the
internet; and
|
|
|
Further, individual investors have become increasingly
sophisticated and knowledgeable about investment strategies
and alternatives. In response, online brokerage firms have
developed a range of tools and services not currently offered
by traditional brokerage firms that meet the needs of these
investors, including access to stock quotes, company financial
information, investment advice and other investment
information online, as well as the ability to manage their
investment portfolios online.
|
We believe that, as online brokerage firms
continue to take advantage of the speed and other capabilities
of the internet, this rapid development of the online brokerage
industry will continue:
|
|
International Data Corporation estimates that the number of
U.S. online brokerage accounts is projected to grow from 6.7
million at the end of 1998 to over 24 million by 2003;
|
|
|
Forrester Research, Inc., a leading information technology
data research firm, estimates that online trades of retail
customers will grow from 25% of all retail stock trades in the
U.S. in the first quarter of 1999 to 50% by 2002; and
|
|
|
International Data Corporation estimates that the value of
assets held by customers in accounts with online brokerage
firms will grow from $324 billion in the U.S. at the end of
1998 to over $3 trillion in 2003.
|
International markets also present significant
opportunities for online brokers. While current web usage in
Europe and Asia trails U.S. rates, International Data
Corporation predicts that web penetration will grow faster in
Europe and Asia in the next several years than in the U.S. In an
August 1999 report, JP Morgan Securities, Ltd. forecasted that
European internet brokerage accounts will rise five-fold from
400,000 at the end of 1998 to almost 2.5 million by the end of
2000 and to 8.3 million by the end of 2002. JP Morgan also
estimated that there will be roughly 11.5 million online
investment orders executed in Germany in 1999.
Our Opportunity
We believe that these trends have contributed to a
growing opportunity for all providers of online financial
services. However, as U.S. and international investors continue
to desire greater control over their own financial decisions,
they are becoming more demanding of these financial services
providers. Investors are increasingly looking for:
|
|
quick and secure transaction execution;
|
|
|
immediate access to current financial information and
investment tools;
|
|
|
convenience, simplicity and ease of access;
|
|
|
certainty that trades will be completed reliably;
|
|
|
the ability to trade worldwide; and
|
The Web Street Solution
We have designed our web site and proprietary
trading systems from the ground up specifically to meet investor
demands. This contrasts the approach of many of our competitors
who have adapted existing systems designed for traditional
brokerage services. We provide easy-to-use and cost-effective
online brokerage services that satisfy our customers
specific investing needs. We enable individuals to take greater
control of their investment decisions and financial transactions
through the following features:
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Cost-Effective, Global Online Services. We have
capitalized on the global reach of the internet by enabling
customers worldwide to trade in U.S. securities on our web
site. By leveraging the low-cost infrastructure and
efficiencies of the internet, we are able to provide
cost-effective online brokerage services to a broad range of
customers around the world. Through our Unified Global
Brokerage Accounts, we currently enable investors in Germany
and Iceland to trade in U.S. securities markets from our web
site. For example, in December 1998, we established a mutually
exclusive arrangement with ConSors Discount-Broker, a
subsidiary of the German financial institution SchmidtBank and
a leading online discount brokerage firm in Europe. ConSors
had approximately 137,000 customer accounts as of June 30,
1999 and experienced an average annual growth in accounts of
440% from 1994 to 1999. We currently provide our services to
ConSors customers in Germany and expect to begin serving
ConSors customers in Austria, Italy, Luxembourg and
Switzerland in late 1999 or early 2000. Investors in these
European countries who trade U.S. securities through our
ConSors relationship pay the same low transaction fees as
investors who trade directly through us in the U.S.
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Real-Time Data. Our web site provides automatically
updated market data, including stock quotes, market-maker
information and financial news, in real time. Investors can
track the rapid movement of stock prices, as well as relevant
corporate and market news, on individually designed watch
lists. Our web site also provides account information that is
updated in real time, rather than periodically or
overnight, to allow our customers to better track their
positions. We notify customers as to the status of their
placed orders, usually within seconds of their order entry,
and update their account balances, usually within seconds of
filling the orders. Our technology gives customers real-time
buying power information and enables investors to make
informed investment decisions in a more timely and convenient
manner in constantly changing markets.
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Fast, Reliable and Efficient Trading System. We
specifically designed our systems and operations to exploit
the operating benefits of the internet, rather than simply to
link customers electronically to an existing traditional
brokerage operation. We have automated the online investment
process, significantly reducing the need for human
intervention to review or execute trades for our customers. As
a result, currently, approximately 90% of all our customer
orders are entered, processed and confirmed electronically.
This enables us to avoid the longer trade execution time,
personnel requirements, possibility of human error and costs
associated with less automated order entry and processing. In
addition, we designed our system with excess capacity to allow
uninterrupted access and rapid trade entry during periods of
heavy trading volume. Our system is fully redundant. If any
component fails, its back-up will automatically take over in a
manner that is transparent to our customers. Additionally, we
intend to develop a second data center in Arizona so that we
can (1) continue to serve our customers in the event of a
catastrophic systems failure at one of our facilities, (2)
increase our overall system capacity and (3) operate more
efficiently by splitting the demands on our system between two
facilities. Our system also allows for application programs to
be quickly modified in response to changing customer
requirements, for processing power to be quickly and easily
added without service interruption and for advanced and
complementary financial services and products to be easily
added. In addition, we offer highly secure services through
our use of encryption and authentication technology, allowing
investors to conduct transactions privately and with
confidence that their funds and securities are protected.
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User-Friendly Web Site. Our web site has user-friendly
graphical interfaces that make online investing easy and fast,
even for investors unaccustomed to conducting transactions
over the internet. Through our virtual trading pit, our
customers have quick and convenient access to a variety of
investment tools, including portfolio tracking, market-maker
information, historical and intra-day stock charting, market
and company news and investment research. Investors can even
customize user interfaces on our web site to select the market
and securities watch lists, news, charts and market analyses
that are most valuable to them based on their individual
investment objectives. With these tools, investors can
conveniently and quickly trade securities and access a wide
variety of financial and account information with just a few
clicks of their mouse and without changing screens on our web
site. In addition, our web site contains an online help desk
that provides basic information on how to use our services,
answers to frequently asked questions about our web site and
services and a glossary of frequently used financial terms.
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Continuous Access and Support. We offer customers the
ability to place orders with us 24 hours a day, seven days a
week. We submit orders placed after market hours for execution
upon the next days market opening. Customers can trade
securities through the internet, with licensed brokers over
the telephone or through our automated touch-tone telephone
trading service. Customers have the ultimate control over when
and where they trade securities. In addition, we believe that
offering quality customer service and support is critical to
building and maintaining high levels of customer satisfaction,
retention and loyalty. Our online help desk provides quick and
efficient answers to customers questions. In addition,
although we do not provide investment advice, we provide
toll-free telephone access to service representatives 24 hours
a day, seven days a week for customers requiring additional
information.
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Our Growth Strategy
Our objective is to be a leading provider of online
financial services. The key elements of our strategy to
accomplish this objective include the following:
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Expand Brand Awareness and Customer Base. We intend to
build on the positive marketplace perception of our web site
and online services by pursuing a focused advertising and
public relations campaign to enhance consumer recognition of
our brand, differentiate our online brokerage services,
increase visits to our web site and attract new accounts. In
particular, we intend to use a portion of our proceeds from
this offering for national and local advertising in financial
magazines and newspapers, on television, over the internet and
on the radio. We also intend to establish financial services
centers in strategic locations in major U.S. and international
cities, where visitors can learn about financial markets
around the world, domestic and international online investing,
opening an account with us and using our services. We opened
our first financial services center in Beverly Hills,
California in June 1999.
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Increase Global Market Presence. We have begun to
expand our global market presence by establishing
relationships with foreign brokerage firms. We have
relationships with ConSors and Landsbref, Ltd., the securities
house of The Bank of Iceland, which requires ConSors and
Landsbref to direct to us all their customers in Germany,
Austria, Iceland, Italy, Luxembourg and Switzerland who wish
to trade stocks and options in U.S. markets. We are exploring
alliances and joint venture opportunities with financial
institutions in other locations, including the United Kingdom,
Japan, Canada, France, Hong Kong, China, Australia and Latin
America. We may also establish our own, or acquire, operations
in key international markets.
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Facilitate Trading in World Markets through Unified Global
Brokerage Accounts. We have begun to offer Unified Global
Brokerage Accounts to online investors. Through these
accounts, we currently enable investors in Germany and Iceland
to trade in U.S. securities markets from our web site. We
expect that once fully operational, these accounts will allow
a customer to (1) view and value different types of securities
in various major global financial markets in the customer
s language of choice and (2) place orders in major global
financial markets. We plan to offer services tailored to
regional regulatory requirements and customs.
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Enhance Services to Encourage Increased Customer Account
Balances. We intend to encourage our customers to maintain
more of their investment assets with us by expanding our
product offerings. We intend to introduce new products,
including a mutual fund center and various fixed-income
products, and improvements to existing products, including
advanced option trading features and more competitive interest
rates on margin loans. We also intend to target high net worth
investors by marketing our private client group, Web Street
Elite. Through this group, investors who trade frequently or
maintain higher average asset balances in their accounts have
access to free streaming real-time quotes, Nasdaq Level-2
market-maker information, quick trade execution with one click
of a mouse and personalized customer service via a dedicated
toll-free number.
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Maintain and Enhance Technology Leadership. We are
committed to maintaining our proprietary trading system as one
of the most technologically advanced online trading sites on
the internet through the ongoing efforts of our sophisticated
in-house development team and technical consultants and
collaborations with other entities. By continuously investing
in our technology platform and operational software, we
believe we can add capacity to our system as needed, develop
new features that differentiate our services and increase
operational efficiencies. We intend to maintain a positive
work environment and offer competitive compensation incentives
so that we can continue to attract and retain top systems
developers and technology specialists.
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Offer a Broad Array of Financial Services. We intend to
offer a comprehensive package of financial services and
products in order to build our web site into a one-stop online
financial service destination
for consumers. For example, we provide our customers with the
opportunity to obtain a Web Street Platinum MasterCard issued
by First USA Bank. In addition, we may seek joint ventures
with commercial banks, mortgage companies and insurance
companies in order to provide our customers with online
banking, consumer credit, home mortgage brokerage services,
insurance and a variety of other complementary financial
services. In addition, we intend to engage in the online
distribution of securities, as a selling group member, in
public offerings led by established investment banking firms.
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Pursue Acquisitions, Joint Ventures and Partnerships.
We intend to expand our service and content offerings, expand
our customer base, increase our technical expertise and obtain
competitive advantages through acquisitions, joint ventures
and partnerships. We may seek to form relationships with
business partners to share technical and industry knowledge
and to pursue marketing opportunities.
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Our Services
We have designed our online brokerage services to
serve the needs of all types of self-directed investors,
regardless of their investing style, trade frequency or level of
sophistication. Our user-friendly web site enables customers to
trade securities easily and quickly online and, with its
advanced features, also provides customers with customized
direct access to a wide variety of investment tools and
real-time financial information. We provide customers 24-hour
access to their accounts, financial market news and trading
information through the internet and over the telephone. Our
proprietary transaction and order routing system provides quick
execution on most orders, timely on-screen trade confirmations
and access to up-to-the-minute account information.
Stock and Options
Trading
Stock and options trading constituted essentially
all of our transaction volume during the six months ended June
30, 1999. Customers can place orders directly to buy and sell
Nasdaq and U.S. exchange-listed securities, as well as equity
and index options, through our automated order processing
system. We support a range of order types, including market
orders, good-till-canceled or day orders, stop orders, limit
orders and short sales. We electronically review the parameters
of an order, together with the customers buying power and
positions held, prior to executing an order. All listed market
orders, subject to certain size limitations, are executed at the
National Best Bid/Offer (NBBO) or better as soon as possible
after they are routed to the market-maker or exchange. The NBBO
is a dynamically updated representation of the combined highest
bid and lowest offer quoted across all U.S. stock exchanges and
market-makers registered in a specific security. Eligible orders
are exposed to the marketplace for possible price improvement,
subject to the NBBO. Limit orders are executed based on an
indicated price and time priority. All Nasdaq market orders,
subject to certain size limitations, are executed at the Best
Bid/Offer (Inside Market) or better as soon as possible after
they are routed to the market-maker in a given security. The
Best Bid/Offer (Inside Market) is equivalent to NBBO, but only
relates to Nasdaq stocks. All transaction and portfolio records
are electronically updated within seconds to reflect trading
activity. Buy and sell orders placed when the markets are closed
are automatically submitted prior to the next days market
opening. Account holders generally receive almost immediate
electronic notification of order executions, which are later
followed by printed trade confirmations and detailed monthly
statements.
We are currently developing various advanced trading
features, including the ability to program investments, to help
our customers effectively implement their investment strategies.
For example, we plan to enable customers to set profit and loss
parameters under which trades will be placed, with our systems
monitoring the market to automatically place the trade to
satisfy the parameters. We also plan to enable customers to
create baskets of stock that can be traded in a single order. In
addition, we are developing advanced options trading features
that will enable investors to place spread and straddle orders.
We offer low commissions on trades of listed and
Nasdaq securities, as well as equity and index options. Our
commissions on equities are currently $14.95 per internet trade,
$17.95 per automated touch-tone telephone trade and $24.95 per
trade executed by telephone through a registered representative.
On equity and index option trades, we also charge $14.95, $17.95
and $24.95 per trade, plus $1.75 per contract. We currently
offer commission-free trades on over-the-counter market orders and
limit orders of 1,000 or more shares for stocks priced at over
$2.00 per share. We can offer these commission-free trades
because, through our arrangement with U.S. Clearing, we
currently receive payment related to order flow of $0.025 per
share for over-the-counter trades priced at more than $2.00 per
share. Our current agreement with U.S. Clearing expires on April
30, 2000.
See BusinessOperationsClearing.
We are building a mutual fund center to enable our
customers to analyze, compare and trade online over 3,800 load
and no-load mutual funds in over 200 fund families. On our web
site, we expect to enable customers to:
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search the mutual funds we offer by name and criteria, such as
fees, performance and risk;.
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read the prospectuses for mutual funds they are interested in
and enter orders to purchase or sell an existing position; and
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automatically re-invest dividends and capital gains from
particular mutual funds.
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Currently, our customers can obtain information
regarding, and execute trades of, these mutual funds by
contacting one of our licensed brokers on the telephone.
Through our agreement with U.S. Clearing, our
customers are able to maintain margin accounts with U.S.
Clearing. In an account authorized for margin trading, U.S.
Clearing can lend our customers a portion of the market value of
certain securities maintained in the customers accounts up
to the limit imposed by the Federal Reserve Board of Governors
under Regulation T, which for most equity securities is
initially 50%. U.S. Clearing, at its discretion, may establish
higher margin requirements for volatile stocks. These loans are
collateralized by the securities in the customers
accounts. Our customers can use these margin loans to purchase
additional securities using our online brokerage services.
Customers may also sell securities short, without owning them,
in their margin account, subject to minimum equity and
applicable margin requirements and the availability of the
securities to be borrowed and delivered. We indemnify U.S.
Clearing for losses it suffers on loans to our customers secured
by securities in their accounts with us.
Together with U.S. Clearing, we proactively seek to
control the risks associated with these activities. We approve
new margin accounts only after reviewing the customers
credit history and relevant financial data. We require customers
to maintain margin collateral in compliance with various
regulatory and internal guidelines. Pursuant to these
guidelines, we monitor required levels daily, and where
necessary on an intra-daily basis, and require customers to
deposit additional collateral or reduce securities positions
when necessary. To date, we have experienced only modest losses
on these accounts, and we believe we have established adequate
credit assessment procedures.
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Market Data and Financial Information
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We continually receive from content providers a
direct feed of detailed stock quote data during trading hours
and market information and news throughout the day. Customers
can create their own personal lists of stocks and options for
quick access to this current pricing and other company
information and news 24 hours a day. We provide our customers
easy and free access from one screen to all the following
information:
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research and industry graphical reports of fundamental
investment information for approximately 7,000 companies and
100 industries, including company overviews, market trends,
earnings estimates, price-to-earnings ranges, stock price
charts and industry comparisons, from BASELINE Financial
Services, Inc.;
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unlimited 20-minute delayed stock quotes and expanded quotes
that provide more detailed information about a security,
including trading volume, 52-week highs and lows, earnings per
share and time and size of last sale. Customers also receive
100 real-time stock quotes for each trade they execute;
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up to 10 customized watch lists of 10 securities each and
real-time world financial news relating to these securities
from Reuters News Service, PR Newswire and Business Wire;
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summaries of composite indices, including for the major U.S.
exchanges, Nasdaq and S&P 500 and market look tables that
provide a quick glance at the market;
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initial public offering filing and pricing data from IPO.com,
provided by Reuters Reality Online;
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indices and key news items for over 20 major global financial
markets; and
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information about mutual funds, searchable by specific desired
criteria.
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We are continuously looking to enhance the ways we
can help investors develop and evaluate their investment
choices. Through our arrangement with Reuters Reality Online,
our customers can also view more detailed intra-day and
historical trading charts and quickly search for securities that
satisfy selected criteria. For example, a customer can find all
stocks in a particular industry that have a specified
price-to-earnings ratio. In addition to these basic services, we
offer customers the ability to receive unlimited bid and ask
quotes that are automatically updated in real time. Customers
can receive this real-time feature, which enables them to trade
while continually monitoring their various positions, for $29.95
per month. For an additional $50.00 per month, customers can
receive these real-time quotes and real-time Nasdaq Level-2
market-maker information, which consists of current lists of
market-makers for each Nasdaq security, the bid and offer by
market-maker, the size of the bid and offer and the time the
market-maker was quoted. Through Web Street on Demand, our
private label of Wall Street on Demand, we also enable our
customers to download or receive by fax detailed research
reports on companies from top research firms, including Standard
& Poors, First Call, Business Wire, Vickers and
Renaissance Capital. Customers are charged for these reports on
a per report basis. We also enable our customers who access Web
Street on Demand to receive a free stock portfolio management
tool.
Portfolio Tracking and Records Management
Customers have online access to a listing of all
their portfolio activity during the preceding 60 days, including
transaction data on the date of purchase, cost basis, current
price, current market value and margin balances. The system
automatically calculates unrealized profits and losses for each
asset held. Detailed account balance and transaction information
includes money market balances, buying power, net market
portfolio value, dividends, commissions paid, trade dates,
settlement dates, deposits and withdrawals. Brokerage history
includes a detailed status of all orders placed by a customer,
including whether any order is pending or open or has been
executed or canceled. Our customers can obtain historical
account, transaction and brokerage information that is more than
60 days old from our clearing agent. We are developing advanced
portfolio management features to enable customers to maintain
tax records, including total short-term or long-term capital
gain or loss, keep track of stock splits and create shadow
portfolios to include any number of financial instruments a
customer is interested in tracking, including assets held at
another brokerage firm.
Private Client Group
We recently established our private client group,
Web Street Elite, to offer premium service to our largest and
most active accounts. We currently offer this service to our
customers who have at least $500,000 in equity in their accounts
or trade more than 45 times per month. Clients in our private
client group receive free unlimited streaming real-time quotes,
Nasdaq Level-2 market-maker information, quick trade execution
with one click of a mouse and generally more personalized
service. Members of our private client group can reach us on a
dedicated toll-free telephone line any day of the week between
9:00 a.m. and 5:00 p.m., Eastern Time.
Cash Management Services
Customer payments are received through the mail or
federal wire system and are credited to customer accounts upon
receipt. Uninvested funds earn interest in a money market
account maintained by U.S. Clearing. In addition, we provide
free unlimited checking services through a commercial bank. We
also provide our customers with the opportunity to obtain a Web
Street Platinum MasterCard issued by First USA Bank. We enable
customers who have this credit card to view their credit card
account summaries on our web site.
International and Content Relationships
We pursue relationships with international financial
institutions and content providers to increase our access to
online consumers and expand the services and products we offer
to our online customers.
International
We are expanding into new markets through alliances
with financial institutions in international markets. These
relationships provide us access to international customer bases,
market knowledge and contacts. We believe that these alliances
can accelerate worldwide acceptance of our online brokerage
services and Unified Global Brokerage Accounts, which we intend
to make available to customers worldwide. In December 1998, we
entered into a mutually exclusive three-year agreement with
ConSors, under which ConSors is required to direct to us all its
customers in Germany, Switzerland, Austria, Italy and Luxembourg
who want to trade stocks or options in U.S. markets. We
currently provide our services to ConSors customers in Germany
and expect to begin serving ConSors customers in the four other
countries covered by this agreement in late 1999 or early 2000.
ConSors customers who trade in U.S. securities markets through
us pay the same low transaction fees as investors who trade
directly through us in the U.S. ConSors markets our online
services to, and provides customer service for, its
international customers at its own expense. We pay ConSors a
portion of the gross profits earned by us on trades executed by
these customers, which consist of revenues less trade clearing
and execution charges. In January 1999, we entered into a
similar agreement with Landsbref, under which Landsbref is
required to direct to us, and we currently provide our services
to all its customers in Iceland who want to trade stocks or
options in U.S. markets. We have created co-branded web sites
with ConSors and Landsbref which include information translated
into German and Icelandic. As of July 31, 1999, ConSors
customers have opened approximately 5,000 accounts and Landsbref
customers had opened approximately 1,000 accounts through these
co-branded web sites. We are exploring alliances and joint
venture opportunities in a number of other international
markets, including the United Kingdom, Japan, Canada, France,
Hong Kong, China, Australia and Latin America.
Content
We rely on leading content providers to provide us
with all of the financial information, market news, charts,
stock quotes, research reports and other fundamental data we
offer to our customers. These content providers include S&P
Comstock, BASELINE Financial Services, Reuters News Service,
Wall Street on Demand and PRNewswire, Business Wire and IPO.com
through Reuters Reality Online. We regularly add content to our
web site to satisfy the investing needs of our broad range of
customers.
We substantially completed our fully-automated
proprietary transaction and order routing system in July 1997.
This system leverages the speed and utility of the internet to
satisfy the demanding requirements of real-time online trading
activities. While many of our competitors require personnel to
review each order to confirm that the order is accurate and may
be executed by the customer, our systems eliminate the need for
this time-consuming human intervention in the vast majority of
cases. Our fully-automated systems instantaneously determine
whether customers orders can be placed, including
ascertaining whether there is an error in the order, whether the
customer has enough funds in his or her account and whether the
relevant market is open. This automation:
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substantially reduces trade execution time;
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makes it more likely that investors trades will be
completed at desired prices; because securities prices are
often extremely volatile, delays in execution can cause
customer market orders to be completed at prices that are
different from those available at the time the orders were
originally entered by investors;
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enables customers to know instantaneously when their
transactions have been completed and how their accounts have
been affected;
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minimizes human error; and
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lowers personnel costs.
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The primary components of our proprietary
transaction and order routing system include a graphical user
interface, an interface server that connects a customer to the
processor and an automated transaction processor. By using
object oriented analysis and design written in a combination of
C++ and Java programming languages, we are able to bring new
services to market quickly and serve an expanding customer base.
Our in-house developers, technology specialists and technical
consultants continually work to develop technologically advanced
services that are user-friendly, dependable and versatile. We
have also invested significantly in customer service software
products from third parties.
Our data center, located at our headquarters in
Deerfield, Illinois, supports systems, network, trading,
customer service and transaction redundancy. Our back-end system
is implemented using 64-bit multi-processor computers. Each
component of the system, including the databases, security
systems, order processors, market data sources, web servers,
firewalls and internet connections, is redundant to provide full
fault tolerance. We believe that a failure of any component of
the system should be transparent to the customer and should not
interrupt our operations. Our back-end computers are
interconnected via a redundant network. Our systems have access
to electricity from two separate power-generating stations. If
either one fails, we expect our system to continue operating
without interruption. To confirm the integrity of our systems,
each weekend we restart the systems and test back-up circuits.
In addition, we have contracted for the supply of mobile back-up
power generators, if needed. However, we do not currently have a
second data center. We intend to use a portion of the net
proceeds from this offering to develop a second data center in
Arizona.
See Use of Proceeds.
We have instituted a number of encryption and
protective features to ensure investor confidence and protect
customers assets and information. We provide our customers
with the ability to use either 40- or 128-bit encryption and
authentication technology for the security and authentication
necessary to effect secure transmission of confidential
information over the internet. The authentication technology we
use requires customers to use their password and user ID to
access various sites on the system, including their accounts,
and an additional password to enter most trade orders. Our
systems have other features to prevent unauthorized access,
including several layers of firewall protection.
Our system is designed to handle our anticipated
volume of customers, customer accounts and trade order flow. We
continually evaluate our system capacity and can easily and
quickly add processing power. In anticipation of significant
growth, we try to provide system capacity that it is at least
six months ahead of what we perceive as our current needs. We
measure our system capacity in terms of the number of web server
hits that we can process in a given unit of time. To date, the
number of hits our system has been required to process in any
10-minute period has never exceeded 33% of our capacity. We
depend on U.S. Clearing to provide clearing and execution
services for our customers. See OperationsClearing.
Marketing
We seek to attract new customers and increase
recognition of our brand through advertising, marketing, public
relations and establishment of financial services centers. Our
marketing strategy is based on a marketing model which employs a
mix of communications media. In 1998, we spent approximately
$8.2 million on marketing as follows: 60% over the internet, 21%
in print, 17.5% on television and 1.5% on radio. We scaled back
advertising expenses significantly in the first quarter of 1999
in advance of our introduction of a new advertising campaign. In
June 1999, we launched this new advertising campaign,
principally in the print medium, promoting the ease and
efficiency with which investors can invest through us. We intend
to devote a portion of our advertising and marketing
expenditures to:
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continuing this marketing campaign, including advertising in
the print, direct mail, television, radio and outdoor medias;
and
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targeting international customers.
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Direct Response
Advertising; Web Site Marketing
Our advertising focuses on building awareness of,
and distinguishing, our web site by marketing our online
services as a better and less expensive way to invest in
securities, access financial and market data and manage
investment portfolios. We place print advertisements in a broad
range of business, technology and financial publications,
including Barrons, Investors Business Daily,
Money, SmartMoney, USA Today, The Wall Street Journal and
Wired. We advertise in newspapers in major U.S. metropolitan
areas, including The Boston Globe, The Chicago Tribune, The
Los Angeles Times and The New York Times. We also
advertise on financial cable networks, local television networks
and local radio networks.
Our advertising directs interested prospects to our
web site for additional information. Through our web site,
prospective customers can get detailed information about our
services, use an interactive demonstration system, request
additional information and complete an account application. We
have also established marketing relationships with operators of
various other financial services web sites. For example, our
logo appears on the home page of the web site for CBS
Marketwatch.com and the market page of the web site for
TheStreet.com, Inc., two of the leading internet providers of
real-time business news, financial programming and financial
analysis tools. Other sites, such as Smartportfolio.com and
Zacks.com, have links to our web site. We believe these sites
help increase our brand awareness and generate leads, as
consumers increasingly look to the internet as a key source of
information and commercial activity. We closely monitor the
efficacy of our various direct response marketing efforts.
Public Relations
Program
We pursue public relations opportunities to build
brand awareness, including appearances on CNN, FoxNews, CBS
Weekend News and Bloomberg, in addition to profiles in Barron
s, Business Week, Crains Chicago Business Journal,
Forbes ASAP, Fortune, Money, Time, USA Today and The Wall
Street Journal. We also actively seek speaking opportunities
at industry conferences and events.
Financial Services
Centers
We opened our first financial services center in
Beverly Hills, California in June 1999. We intend to open
additional financial services centers in other select locations
in the U.S. and internationally to increase our brand awareness.
At our financial services center, customers can participate in
both group and personalized demonstrations of our online
services, open online trading accounts, personally interact with
our representatives, trade securities through a licensed broker,
drop off payments and attend investment training seminars. We
staff our center with professionals knowledgeable about
financial services and the internet.
Outdoor Advertising
We intend to establish billboards and other displays
in a few select, high-traffic locations to increase our brand
awareness. For example, we recently presented a comprehensive
display, consisting of promotional banners and other ads, at
Bostons South Station commuter train station.
Customer Service
We believe that providing effective customer service
to handle customer needs and requests is critical to our
success. At July 31, 1999, we employed 29 licensed brokers and
51 other customer service, margin department, technical and
other brokerage support personnel to handle customer inquiries.
Our customers can reach these customer service personnel by
e-mail or through a toll-free telephone number, 24 hours a day,
seven days a week. Our customer service personnel have immediate
access to customer account and systems related-information
necessary to quickly respond to customer inquiries. Our licensed
brokers and customer service representatives do not give
investment advice or solicit transactions. Our customer service
representatives help customers access our web site and handle
service and account inquiries. Our licensed
brokers address general brokerage and investment questions. Our
technical personnel address questions regarding our automated
processing of trades and use of the internet to invest online.
We believe that inexperienced investors and other individuals
not accustomed to conducting transactions on the internet
particularly desire the ability to speak directly with a person
about their questions. In addition, our web site contains an
online help desk that provides basic information on how to use
our services, answers to frequently asked questions about our
web site and services and a glossary of frequently used
financial terms. We believe our ongoing investment in technology
is also a key element in helping us provide fast and consistent
customer service. For example, we recently purchased
leading-edge customer service software and plan to upgrade our
telephone system in mid-1999 to better serve our customers. We
expect to open a service center in Chicago, Illinois by the end
of 1999, which will house additional customer service
representatives and technical support personnel and our licensed
brokers.
Our customer service personnel receive training in
brokerage operations, our policies and procedures and basic
telephone and clerical skills to ensure quality and accuracy. We
strive to respond quickly to telephone and e-mail inquiries,
rapidly resolve customer inquiries and maintain overall customer
satisfaction with our services. We record all telephone calls to
customer service personnel for purposes of training and
supervision and to assist in the resolution of customer disputes.
Operations
Order
Processing
We receive orders principally through the internet
and also by telephone. All market orders for listed securities
other than those with special qualifiers, subject to certain
size limitations based on the standard transaction size in the
primary market, are executed at the National Best Bid/Offer
(NBBO) or better at the time of receipt by the relevant
market-maker or exchange. Eligible orders are exposed to the
marketplace for possible price improvement, subject to the NBBO.
Limit orders are executed based on an indicated price and time
priority. All market orders for Nasdaq securities, subject to
certain size limitations based on the trading characteristics of
the particular security, are executed at the Best Bid/Offer
(Inside Market) or better at the time of receipt by the relevant
market-maker. Eligible orders are subject to possible price
improvement in the marketplace.
U.S. Clearing provides clearing and execution
services for our customers accounts. The clearing function
involves a sharing of responsibilities between the clearing
broker and the introducing broker. We, as introducing broker,
are responsible for all customer contact, including opening
customer accounts, responding to customer inquiries, accepting
customer orders and placing these orders with the clearing
broker. As clearing broker, U.S. Clearing provides back office
functions, including maintaining customer accounts, extending
credit to customers who maintain margin accounts, settling
securities transactions with the relevant securities clearing
houses, settling commissions and clearing fees, preparing and
distributing customer trade confirmations and account
statements, safeguarding funds and securities in customer
accounts, transmitting tax accounting information to customers
and the applicable tax authorities, forwarding prospectuses,
proxies and other stockholder information to customers and
preparing supporting books and records. U.S. Clearing
subcontracts with Automatic Data Processing, Inc. to process
data and maintain electronic files regarding our customers
transactions. U.S. Clearing charges us a fee for each customer
purchase or sale transmitted to them and pays us a fee on margin
loans and money fund balances with our customers.
Our current clearing agreement with U.S. Clearing
will end on April 30, 2000. By that time, we expect to:
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enter into a new agreement with U.S. Clearing;
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enter into a clearing arrangement with a different firm;
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enter into a joint venture with a clearing firm;
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acquire a clearing operation; or
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internally develop a self-clearing operation.
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The market for online brokerage services over the
internet is new, rapidly evolving and intensely competitive. We
expect this competition to further intensify in the future. In
the U.S., we encounter direct competition from other independent
online brokerage firms, as well as traditional discount
brokerage firms providing online and/or touch-tone telephone
services. These competitors include Ameritrade, Charles Schwab
and E*Trade. We are also encountering competition from
established full-commission brokerage firms, such as Merrill
Lynch, Morgan Stanley Dean Witter and Prudential Securities;
mutual fund sponsors; and other financial organizations, some of
which are actively expanding their online capabilities. In
particular, Merrill Lynch recently announced a plan to compete
aggressively in the online and discount brokerage services
markets. We may also face increased competition from commercial
banks and other financial institutions, insurance companies and
providers of online financial and information services, as these
companies expand their product lines.
We also face increasing competition in international
markets, both from international competitors and U.S.-based
brokerage firms that have established or acquired international
operations or entered into partnerships with international
brokerage firms. For example, several of the largest domestic
online brokerage firms are aggressively expanding into
international markets.
We believe that the principal competitive factors
affecting the market for online financial services are:
timeliness of execution;
depth, breadth and quality of services
and content;
ease of use, graphical user interface
look and feel;
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customer service and support;
cost;
brand loyalty; and
financial strength and innovation.
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Many of our existing and potential competitors may
have one or more of the following:
longer operating histories;
greater name recognition;
greater management depth and experience;
larger customer bases;
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greater financial, technical and marketing resources; and
a wider range of services and financial products.
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As a result, these competitors may be able to
adopt more aggressive pricing policies, respond more quickly to
new technologies, industry standards and customer demands,
undertake more extensive marketing campaigns, expand globally
more quickly and make more attractive offers to potential
employees and content providers. For example, one of our
competitors recently announced its plans to offer after-hours
trading, which will allow its customers the ability to buy and
sell stocks when regular exchanges are closed.
Intellectual Property and Other Proprietary
Rights
Our success and ability to compete depend to a
significant degree on our proprietary software and other
technology reflected in our web site. We have no patents for
this technology. We rely primarily on copyright and trade secret
law to protect our technology and trademark law to protect our
goodwill. The source code for our proprietary software is
protected both as a trade secret and as a copyrighted work. We
enter into confidentiality and assignment agreements with our
employees, consultants and vendors and generally control access
to, and distribution of, our software and other proprietary
information. We have registered our name, logo and various
advertising slogans as service marks in the United States. We
consider our service marks, particularly our family of Web
Street marks and related design marks, invaluable to our
ability to continue to develop and maintain the goodwill and
recognition associated with our brand. To date, we have
aggressively and successfully protected our marks against
infringement. For example, we recently negotiated the terms of a
voluntary injunction against a company using the mark
WebStNews.com in connection with a financial information
web site.
Employees
At July 31, 1999, we had 108 full-time and five
part-time employees. Of the full-time employees, 29 were
licensed brokers providing trade execution and customer support,
12 were engaged in technology and development, 46 were engaged
in customer service, margin department, technical support and
other brokerage operations and 21 were engaged in general
management, marketing, finance and administration. We plan to
continue paying bonuses and awarding stock options to our
management and non-management employees based upon our success
and their individual job performance. None of our employees is
covered by a collective bargaining agreement. We consider our
relations with our employees to be good.
Properties
Our headquarters and data center are located in
Deerfield, Illinois, where we occupy approximately 17,300 square
feet of office space under a lease that expires in April 2003.
We occupy 6,000 square feet of space in Northbrook, Illinois,
which we use for software development activities, under a lease
that expires in March 2002. Our first financial services center
occupies 2,600 square feet of office space in Beverly Hills,
California under a lease that expires in February 2001. We also
own approximately 30,000 square feet of real estate in Arizona
where we intend to build a separate data center. We are
currently negotiating a lease for another 33,000 square feet of
office space in downtown Chicago, Illinois which will house our
brokerage operations. We believe that, after we obtain these new
spaces, we will have adequate space to meet our needs for the
near future.
Legal Proceedings
On October 7, 1998, we filed a complaint against
Yahoo!, Inc., in the United States District Court for the
Northern District of Illinois, seeking $10 million in damages.
We brought the suit in connection with Yahoo!s failure to
fulfill its obligations under a sponsorship agreement with us
that obligated Yahoo! to properly maintain and run an
interactive stock trading game, the Investment Challenge, on
their Finance Quotes home page. We sponsored the game. Our
complaint alleges that Yahoo!s failure to adequately
maintain and run the Investment Challenge damaged our reputation
and our goodwill among users of the game. In addition, we have
also asked for a declaratory judgment from the court nullifying
an internet advertising agreement that we had
with Yahoo! due to the ill-will generated by Yahoo!s
defective operation of the Investment Challenge. On November 12,
1998, Yahoo! filed a counterclaim against us seeking $1.35
million for breach of the sponsorship agreement and the internet
advertising agreement. The parties are currently in the process
of discovery. We believe that our claims are well-founded and
that we have meritorious defenses to both of Yahoo!s
counterclaims. We do not believe that resolution of the
complaint, even if not in our favor, will have a material
adverse effect on our business, financial condition or operating
results.
We are not party to any other legal proceedings that
we believe would, individually or in the aggregate, have a
material adverse effect on our business, financial condition or
operating results.
Regulation and Supervision
The securities industry is subject to extensive
federal and state regulation and the regulations of various
self-regulatory organizations. We are registered as a
broker-dealer with the SEC and the NASD. Much of the regulation
of broker-dealers has been delegated to self-regulatory
organizations, principally the NASD, which has been designated
by the SEC as our primary regulator. These self-regulatory
organizations adopt rules, subject to approval by the SEC, that
govern the industry and conduct periodic examinations of our
operations. Securities firms are also subject to regulation by
state securities administrators in those states in which they
conduct business. We are also authorized by the Municipal
Securities Rulemaking Board (MSRB) to conduct transactions in
municipal securities on behalf of our customers and, as a
result, are subject to MSRB regulation with respect to these
transactions.
Broker-dealers are subject to regulations covering
all aspects of the securities business, including sales methods,
advertising and communications with the public, trade execution
and practices, trade reporting, use and safekeeping of customers
funds and securities, minimum capital requirements,
capital structure, record-keeping and disclosure and the conduct
of directors, officers and employees. We are required to comply
with many complex laws and rules, including rules relating to
possession and control of customer funds and securities, margin
lending and execution and settlement of securities transactions.
The SEC, the NASD or other self-regulatory organizations, such
as securities exchanges and state securities commissions, can
conduct administrative proceedings, which can result in censure,
fines, the issuance of cease-and-desist orders or the suspension
or expulsion of a broker-dealer or any of its officers or
employees or the imposition of limitations on its business
activities.
We are a member of the Securities Investor
Protection Corporation (SIPC), which provides, in the event of
our liquidation, up to $500,000 of protection for each of our
customers accounts held by our clearing agent, subject to
a limitation of $100,000 for claims for cash balances. In
addition, through U.S. Clearing we have obtained protection, in
excess of SIPC coverage, of $99,500,000 for each customer
account in the form of an excess security bond from Asset
Guaranty Insurance Company.
The NASD regulates all our marketing activities,
including advertising. The NASD also requires us to submit all
of our marketing materials for review and approval by a
registered principal prior to release, use or publication. We do
not currently solicit orders from our customers or make
investment recommendations, although we do make available to our
customers third-party research and information services. If we
were to solicit customer orders or make investment
recommendations, we would become subject to additional rules and
regulations, including those governing the suitability of
recommendations to customers and sales practices.
We are included from time to time in various
administrative proceedings and claims incident to the normal
conduct of our business, including customer complaints that are
reported to federal and state securities regulators, the NASD
and securities exchanges and other self-regulatory organizations.
As part of their regular reviews of brokerage firms,
the SEC and the NASD have audited our business operations. In
the course of these reviews, the SEC and NASD have required us
to modify our procedures to meet regulatory requirements.
We have begun to expand our U.S. securities trading
business to other countries and intend to broaden our customers
abilities to trade securities in major global financial
markets through the internet. In order to expand
our services globally, we must comply with the regulatory
requirements of each specific country in which we conduct
business. These requirements may include laws, rules and
regulations concerning many aspects of our business, including:
minimum capital;
capital structure;
record-keeping;
broker-dealer and employee registration requirements; and
the conduct of directors, officers and employees.
Compliance with the requirements of other regulatory
jurisdictions could impede our planned international expansion.
In addition, any failure to develop effective compliance and
reporting systems could result in regulatory penalties in the
applicable jurisdiction.
Net Capital Requirements
As a registered broker-dealer and a member of the
NASD, we are subject to the SECs Uniform Net Capital Rule.
The net capital rule is intended primarily to protect a
broker-dealers customers by measuring the general
financial integrity and liquidity of a broker-dealer and
requiring that at least a minimum part of its assets be kept in
relatively liquid form. Under the net capital rule:
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a broker-dealer must maintain a specified minimum net capital
requirement;
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a broker-dealer is prohibited from making dividend payments,
redeeming stock, repaying subordinated indebtedness and making
any unsecured advance or loan to a stockholder, employee or
affiliate, if its aggregate debit items rise beyond 5% of its
net capital or its ratio of aggregate indebtedness to net
capital exceeds 10 to 1; and
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the SEC may restrict a broker-dealer, for up to 20 business
days, from making any withdrawal of equity capital, or
unsecured loans or advances to stockholders, employees or
affiliates if (1) the capital withdrawal, together with all
other net capital withdrawals during a 30-day period, exceeds
30% of excess net capital and (2) the SEC concludes that the
capital withdrawal may be detrimental to the financial
integrity of the broker-dealer.
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If a broker-dealer fails to maintain the required
net capital, it may be subject to suspension or revocation of
registration by the SEC and suspension or expulsion by the NASD
and other regulatory bodies and limitations on its business
activities. The broker-dealer could ultimately be required to
liquidate its business.
Net capital is essentially defined as net worth,
plus qualifying subordinated borrowings and certain
discretionary liabilities, less certain mandatory deductions
that result from excluding assets that are not readily
convertible into cash and from valuing conservatively certain
other assets. Among these deductions are adjustments that
reflect the possibility of a decline in the market value of an
asset prior to its disposition.
As of June 30, 1999, we were required to maintain
minimum net capital of $94,187 and had total net capital of
approximately $2,552,401, or approximately $2,458,214 in excess
of the minimum amount required. If we provide clearing
activities and maintain our own customer accounts after our
current clearing agreement ends, our minimum regulatory net
capital requirements will increase significantly. As a
self-clearing firm, we would have to pay for a portion of the
securities purchased by our customers, to the extent the
purchases are made on margin. As of July 31, 1999, our customers
total margin debits at U.S. Clearing amounted to
approximately $50 million. We would have direct responsibility
for the clearance of customer securities transactions and for
the possession and control of customer securities and other
assets. We would also have to record on our balance sheet the
customer receivables and customer payables to us that are a
result of customer
margin loans and customer free credit balances, which would
significantly increase our total assets and total liabilities.
In addition, if we begin engaging in underwriting activities,
our minimum regulatory net capital requirements may increase
significantly.
Because of the growth in the online commerce market,
Congress has held hearings on whether to regulate providers of
services and transactions in the electronic commerce market. For
example, the U.S. Senate is currently considering a bill called
the Online Investor Protection Act that would protect investors
who use internet brokerages by enabling the SEC to monitor
online brokers, strengthen penalties for online fraud and give
investors access to quarterly reports of online brokers.
Recently, various regulatory and enforcement agencies have been
reviewing service and other issues, including systems capacity,
customer access, best execution practices and advertising
claims, as they relate to the online brokerage industry,
including us. For example, the New York Attorney Generals
Office recently began an inquiry into the online brokerage
industry because of a wave of complaints about system crashes,
delayed trades and busy signals. These reviews may result in
enforcement actions or new regulations.
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
other legislative developments, and we may be subject to
additional regulation as the market for online commerce evolves.
Federal or state authorities could enact laws, rules or
regulations affecting our business or operations. We also may be
subject to federal, state, local and foreign money transmitter
laws and state, local and foreign sales and use tax laws.
Due to the increasing popularity of the internet,
laws and regulations may be enacted relating to the internet,
covering issues such as user privacy, pricing, content, consumer
protection and quality of products and services. The
Telecommunications Act of 1996 prohibits the transmission over
the internet of certain types of information and content.
Although certain of these prohibitions have been held
unconstitutional, the increased attention focused upon these
liability issues as a result of the Telecommunications Act could
adversely affect the growth of the internet and online commerce.
In addition, several states have proposed legislation that would
limit the uses of personal information gathered over the
internet. The European Union has enacted its own privacy
regulations that may result in limits on the collection and use
of personal information gathered over the internet.
Directors and Executive Officers
The following table contains certain information
with respect to our directors and executive officers:
Name
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Age
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Principal
Positions
|
Joseph J. Fox
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33
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Co-Chairman of
the Board and Chief Executive Officer
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Avi Fox
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35
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Co-Chairman of
the Board and President
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Joseph A. Barr
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37
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Executive Vice
President, Chief Financial Officer and Treasurer
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Stuart A. Cohn
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47
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Executive Vice
President, General Counsel and Secretary
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William J.
Mania
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37
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Executive Vice
President and Chief Technology Officer
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John V.
Hackett
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33
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Senior Vice
President of Global Business Development
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D. Jonathan
Rosenberg
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31
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Executive Vice
President, Chief Operating Officer and Director
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Robert F.
Bernard
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38
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Director
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Fredric J.
Graber
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56
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Director
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Joseph J. Fox has been our chairman of the
board since our inception in September 1996, sharing the
chairman position with Avi Fox since June 1999, and has been our
chief executive officer since June 1999. Joseph Fox was our
president from September 1996 to June 1999. From January 1994 to
September 1996, Joseph Fox was president of Darwin Financial
Group, a Chicago-based private investment banking firm which
operated under the name A.F. Joseph & Company. Joseph Fox is
our Series 27 financial and operations principal.
Avi Fox has been one of our directors since
our inception in September 1996, sharing the chairman of the
board position with Joseph Fox since June 1999, and has been our
president since June 1999. Avi Fox was our chief executive
officer from September 1996 to June 1999. From January 1994 to
September 1996, Avi Fox was chief executive officer of Darwin.
Avi Fox has been a licensed stockbroker since 1987. He graduated
from the University of Illinois, Chicago, in 1986 with a B.A.
degree in communications.
Joseph A. Barr has been our chief financial
officer since July 1998 and one of our executive vice presidents
and our treasurer since February 1999. From July 1993 to July
1998, Mr. Barr was the director of internal audit and financial
planning for Safety-Kleen Corp., an environmental and industrial
service company listed on the New York Stock Exchange.
Previously, Mr. Barr was an audit and financial consulting
manager in the Chicago office of Arthur Andersen LLP, serving
publicly-held, multinational clients. He graduated in 1983 from
the University of Illinois at Urbana-Champaign with a B.S.
degree in accountancy. Mr. Barr is a certified public accountant.
Stuart A. Cohn has been our general counsel
since February 1998 and one of our executive vice presidents
since January 1999. From February 1994 to February 1998, Mr.
Cohn worked independently at the law offices of Stuart A. Cohn,
Ltd., representing us as a private practitioner. From 1991 to
1994, Mr. Cohn was a partner with the Chicago law firm
Schoenberg, Fisher & Newman, Ltd. Mr. Cohn graduated from
the University of Chicago in 1975 and the University of Chicago
Graduate School of Business in 1977. He graduated from the
University of Chicago Law School in 1980. Mr. Cohn is a
certified public accountant.
William J. Mania has been our chief
technology officer and one of our executive vice presidents
since June 1997. From 1993 to 1997, Mr. Mania worked in Chicago
as chief systems manager for ABN AMRO Bank, one of the world
s largest banks. From 1990 to 1993, Mr. Mania worked at
Hull Trading Company as manager of operations and system
administration. Mr. Mania received a B.S. degree in computer
science from Michigan Tech University and a masters degree
in computer science from DePaul University.
John V. Hackett has been our senior vice
president of global business development since March 1999. He is
responsible for developing new business opportunities, including
international alliances and ventures, product and service
enhancements and other strategic initiatives. From 1998 to March
1999, Mr. Hackett was vice president of corporate development
for Aztec Technology Partners, where he was involved with
corporate strategy and finance activities. From 1992 to 1998,
Mr. Hackett worked at Motorola/ARDIS as manager of business
development, where he was responsible for developing new
products and services for wireless networks. From 1987 to 1992,
he was a senior consultant with Andersen Consulting, providing
technology and strategy services to financial services clients.
Mr. Hackett received an M.B.A. from the University of Chicago
and B.S. degrees in mathematics and industrial management from
Purdue University.
D. Jonathan Rosenberg has been one of our
directors since August 1999, one of our executive vice
presidents since January 1999 and our chief operating officer
since March 1999. Mr. Rosenberg served as our director of
business development from March 1997 to March 1999. From August
1992 to March 1997, Mr. Rosenberg was a consultant with Tower
Analytics and Investigative Research Consulting. Mr. Rosenberg
also worked with Legal Econometrics, Inc., conducting
statistical research for members of the Major League Baseball
Players Association in their contract arbitration hearings. Mr.
Rosenberg graduated from DePaul University in 1989 with a B.S.
degree in economics.
Robert F. Bernard has been one of our
directors since August 1999. Mr. Bernard is the founder of
Whittman-Hart, Inc., a computer consulting services company
listed on the Nasdaq National Market, and has served as chairman
of the board and chief executive officer of Whittman-Hart since
its inception in 1984. From 1984 to August 1997, Mr. Bernard
also served as Whittman-Harts president. He was selected
as the KPMG Illinois High Tech Entrepreneur of the Year in 1992
and the Ernst & Young Illinois and Northwest Indiana Service
Entrepreneur of the Year in 1998.
Fredric J. Graber has been one of our
directors since August 1999. From 1992 to 1998, Mr. Graber was
principal and general partner of Baker Nye Greenblat, an
investment management partnership with capital in excess of $1
billion, where his responsibilities included trading, portfolio
management and new business development. Mr. Graber was a
partner of Lehman Brothers Inc. from 1968 to 1976. He graduated
from Princeton University in 1964 with a B.A. degree in
psychology.
Joseph Fox and Avi Fox are brothers. None of the
other executive officers or directors is related to any other
executive officer.
Classification of Board of Directors
We have divided our board of directors into three
classes with staggered three-year terms. At each annual meeting
of our stockholders, the successors to the directors whose terms
expire will be elected for three-year terms.
Arrangements for Election to Board of Directors
In voting agreements dated April 1, 1998, holders of
shares of common stock have agreed to vote their shares in favor
of electing to our board of directors those nominees determined
by Joseph Fox and Avi Fox. These agreements will expire upon the
transfer of the affected shares of common stock to an unrelated
third party following completion of this offering.
Committees of the Board of Directors
Our board of directors has established an audit
committee and a compensation committee, all the members of which
will be non-employee directors.
Our audit committee recommends the independent
public accountants to be engaged by us, reviews the plan, scope
and results of our annual audit and reviews our internal
controls and financial management policies with our independent
public accountants.
Our compensation committee establishes guidelines
and standards relating to the determination of executive
compensation, reviews executive compensation policies and
recommends to our board of directors
compensation for our executive officers and other employees. Our
compensation committee also administers our stock incentive
plans and determines the number of shares covered by, and terms
of, options to be granted to executive officers and other
employees under these plans.
Compensation of Directors
We will pay each of our directors who is not one of
our employees:
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an annual fee of $5,000;
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$1,000 for each board meeting attended; and
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$1,000 for each board committee meeting attended, but only
$500 for a committee meeting held the same day as a board
meeting.
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Compensation Committee Interlocks and Insider
Participation
During 1998, all of our executive officer
compensation decisions were made by Joseph Fox and Avi Fox, as
the board of directors.
In January 1999, we redeemed 2,000,000 shares of our
outstanding series C preferred stock for an aggregate redemption
price of $400,000. In April 1999, we redeemed all of the
1,000,000 remaining shares of our outstanding series C preferred
stock for an aggregate redemption price of $250,000. All of the
shares were held by Darwin Financial Group, of which Joseph Fox
and Avi Fox are the principal stockholders, directors and
executive officers.
Under unsecured promissory notes dated March 16,
1999, we loaned each of Joseph Fox and Avi Fox $110,000 at an
annual interest rate of 5%, to be repaid on or before March 16,
2001. As of July 31, 1999, the full principal amount of each of
the notes was outstanding.
Executive Compensation
The following table contains information with
respect to all compensation paid by us during 1998 to our chief
executive officer and our three other executive officers whose
combined salary and bonus exceeded $100,000 for 1998.
Summary Compensation Table
Name and Principal Positions
|
|
Annual Compensation
|
|
Long Term
Compensation
|
|
Salary($)
|
|
Bonus($)
|
|
Securities
Underlying
Options(#)
|
Joseph J. Fox
Co-Chairman and Chief
Executive Officer
|
|
$181,304
|
|
$80,000
|
|
|
|
|
Avi Fox
Co-Chairman and President
|
|
181,304
|
|
80,000
|
|
|
|
|
Stuart A. Cohn
Executive Vice President,
General Counsel and Secretary
|
|
115,865
|
|
20,000
|
|
|
|
|
William J.
Mania
Executive Vice President and
Chief Technology Officer
|
|
115,406
|
|
15,000
|
|
|
1998 Option Grants
The following table contains information regarding
our grant of stock options to our chief executive officer and
our three other executive officers whose combined salary and
bonus exceeded $100,000 for 1998.
Name
|
|
Individual Grants
|
|
Potential
Realizable Value
at Assumed
Annual Rates of
Stock Price
Appreciation for
Option Term(1)
|
|
Number of
Shares
Underlying
Options
Granted(#)
|
|
Percentage
of Total
Options
Granted to
Employees
in Fiscal
1998
|
|
Exercise
Price($/Sh)
|
|
Expiration
Date
|
|
|
|
|
|
5%($)
|
|
10%($)
|
Joseph J. Fox
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avi Fox
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stuart A. Cohn
|
|
(2)
|
|
14.8
|
%
|
|
|
|
2/1/03
|
|
|
|
|
|
|
(3)
|
|
10.8
|
|
|
|
|
9/1/08
|
|
|
|
|
William J.
Mania
|
|
(4)
|
|
5.6
|
|
|
|
|
2/1/00
|
|
|
|
|
|
|
(5)
|
|
6.5
|
|
|
|
|
9/1/08
|
|
|
|
|
|
|
(6)
|
|
5.4
|
|
|
|
|
9/1/08
|
|
|
|
|
(1)
|
Potential realizable value is presented net of the option
exercise price, but before any federal or state income taxes
associated with exercise. It is calculated assuming that the
fair market value on the date of the grant appreciates at the
indicated annual rates, compounded annually, for the term of
the option. The 5% and 10% assumed rates of appreciation are
mandated by the rules of the SEC and do not represent our
estimate or projection of future increases in the price of our
common stock. Actual gains will be dependent on the future
performance of our common stock and the option holders
continued employment through the vesting periods. The amounts
reflected in the table may not be achieved.
|
(2)
|
These options became exercisable as to
shares on February 1, 1998 and
shares on February 15, 1998 and become
exercisable as to shares
on February 1, 1999 and
shares on February 1, 2000.
|
(3)
|
These options become exercisable as to
shares on the earlier of 12 months after we
complete this offering or July 13, 2000 and
shares 18 months after we complete this
offering.
|
(4)
|
These options became exercisable as to
shares on February 1, 1998,
shares on October 1, 1998 and
shares on July 1, 1998.
|
(5)
|
These options become exercisable as to
shares on April 1, 2000 and
shares on April 1, 2001.
|
(6)
|
These options become exercisable as to
shares 18 months after we complete this offering.
|
1998 Option Values
The following table shows information regarding the
unexercised options held by our chief executive officer and our
three other executive officers whose combined salary and bonus
exceeded $100,000 for 1998 as of December 31, 1998. None of
these executive officers exercised any options during 1998.
Name
|
|
Number of
Shares
Underlying Unexercised
Options as of
December 31, 1998(#)
|
|
Value of
Unexercised in-
the-Money Options as of
December 31, 1998($)(1)
|
|
Exercisable/Unexercisable
|
|
Exercisable/Unexercisable
|
Joseph J. Fox
|
|
/
|
|
/
|
Avi Fox
|
|
/
|
|
/
|
Stuart A. Cohn
|
|
/
|
|
/
|
William J.
Mania
|
|
/
|
|
/
|
(1)
|
The value per option is calculated by subtracting the exercise
price of the option from the fair market value of our common
stock of $
per share on December 31, 1998, as determined by
our board of directors based on the most recent price prior to
December 31, 1998 at which we issued our common stock.
|
Employment Agreements
We have employment agreements with Joseph Fox, Avi
Fox, Stuart Cohn, Joseph Barr, Jonathan Rosenberg and William
Mania.
The employment agreements terminate upon the death,
disability or discharge of, or the voluntary termination of
employment by, the employee. The employment agreements generally
provide for payment of an annual base salary, which will be
reviewed each year and may not be decreased from the amount in
effect in the previous year. The employment agreements also give
each employee the right to be eligible for annual bonuses
determined by our board of directors and to participate in our
1999 incentive compensation plan and employee benefit programs.
The employment agreements impose on each employee
post-termination non-competition and confidentiality obligations.
The employment agreements provide for payments and
benefits upon termination of employment in addition to those
previously accrued. If the employees employment terminates
due to death or disability, the employee will receive:
|
|
instead of a bonus for that year, an amount equal to the
average bonus paid to him in the three preceding years,
prorated to reflect the part of the year completed before
termination, and
|
|
|
in case of disability, continued participation in our employee
benefit plans until age 65.
|
If we terminate the employees employment other
than for cause or after a change in control or if the employee
terminates employment for good reason, the employee will receive:
|
|
if the termination occurs within the period beginning 60 days
before a change in control and ending two years after a change
in control, an amount equal to
times the sum of his then-current annual salary plus
the average bonus paid to him in the three preceding years;
|
|
|
if the termination occurs at any time other than in the period
described above,
times the sum of his then-current salary plus an amount
equal to the average bonus paid to him for the three preceding
years;
|
|
|
instead of a bonus for that year, a cash payment equal to his
target annual incentive compensation for that year, which,
unless the termination occurs within the period beginning 60
days before a change in control and ending two years after a
change in control, will be prorated to reflect the part of the
year completed before termination;
|
|
|
continued participation in employee benefit plans for
years;
and
|
|
|
if payments under the employment agreement are subject to the
golden parachute excise tax, an additional gross-up amount so
that his after-tax benefits are the same as if no excise tax
had applied.
|
Stock Options and Incentive Compensation
Option
Agreements
Before we adopted our 1998 stock option plan in
September 1998, we issued individual option agreements to
various employees. Under these individual option agreements, we
currently have outstanding options to purchase
shares of common
stock. Our board of directors selected the grantees, determined
the number of option grants and determined the terms and
condition of the options. The exercise price of
of
these options was less than the fair market value of our common
stock at the time the options were issued.
1998 Stock
Option Plan
In September 1998, we adopted our 1998 stock option
plan to attract and retain the best available personnel for
positions of substantial responsibility, to provide additional
incentives to employees, directors and consultants and to
promote the success of our business. This plan provided for the
granting of incentive and non-qualified stock options to
employees, consultants and non-employee directors. Our board of
directors selected the participants, determined the number of
option grants and determined the terms and conditions of the
options. The term of each option issued was for no more than 10
years from the date it was issued. The exercise price of each of
the options was not less than the fair market value of our
common stock on the grant date.
We currently have outstanding options to purchase
shares of common stock under our 1998 stock option plan. We will
not make any additional awards under this plan.
1999 Incentive Compensation Plan
In
1999, we adopted our 1999 incentive compensation
plan. Our officers, employees, directors and consultants are
eligible to participate in this plan. The purpose of this plan
is to attract and retain persons eligible to participate in the
plan, motivate participants to achieve our long-term goals and
further align the interests of participants with those of our
other stockholders through compensation that is directly linked
to the profitability of our business and increases in
stockholder value. Under this plan, we have reserved
shares of our common stock for awards. Our compensation
committee will administer the 1999 incentive compensation plan.
This plan provides our compensation committee with broad
discretion to select the officers, employees and consultants to
whom awards may be granted, as well as the type, size and terms
and conditions of each award. The 1999 incentive compensation
plan will permit grants of the following types of awards:
|
|
non-qualified and incentive stock options;
|
|
|
stock appreciation rights; and
|
|
|
other stock-based awards.
|
Options granted will provide for the purchase of
common stock at prices determined by our compensation committee.
These exercise prices, however, cannot be less than the fair
market value of our common stock on the date the options are
issued.
Under the 1999 incentive compensation plan, we have
reserved
shares of
our common stock for stock options to be granted to non-employee
directors. The 1999 incentive compensation plan provides for the
automatic grant of (1) an option to purchase
shares of common stock to each
non-employee director on the date of this prospectus or, for any
director who joins our board after that date, upon joining and
(2) an option to purchase
shares of common stock on
the date of each later annual stockholders meeting to each
person who continues to serve as a non-employee director on that
date, except in the year that the non-employee director joins
our board of directors. Options granted to non-employee
directors will have an exercise price equal to the fair market
value of our common stock on the date of grant. Options granted
to non-employee directors on the date that we complete this
offering or upon joining the board will become exercisable in
four equal installments: on the date of grant and each of the
first three anniversaries after that date, as long as the
director continues to serve on our board. Half of the options
granted to non-employee directors at each annual meeting will
become exercisable on the date of grant and the other half will
become exercisable on the first anniversary of that date, as
long as the director continues to serve on our board. Stock
options granted to non-employee directors will expire ten years
after their date of grant.
1999 Employee Stock
Purchase Plan
In
1999, we adopted our 1999 employee stock purchase
plan under which a total of
shares of common stock are
available for sale to our employees. Our compensation committee
will administer the stock purchase plan. The stock purchase plan
permits our eligible employees to purchase common stock through
payroll deductions.
The stock purchase plan operates on a calendar year
basis. The stock purchase plan will be implemented in a series
of consecutive offering periods, each approximately three months
long. Each participant will be granted an option to purchase our
common stock on the first day of the three-month period, and the
option will be automatically exercised on the last day of each
offering period. The purchase price of each share of common
stock under the stock purchase plan will equal 85% of the lesser
of (1) the fair market value of our common stock on the first
date of the offering period or (2) the fair market value on the
date of purchase. Payroll deductions may not exceed $
for any
employee in any offering period. No more than
shares in the
aggregate may be issued to all participants in any offering
period.
No person can purchase common stock under the
stock purchase plan if that person, immediately after the
purchase, would own stock possessing 5% or more of the total
combined voting power or value of all outstanding shares of all
classes of our capital stock.
Limitation of Liability and Indemnification
Matters
Our amended and restated certificate of
incorporation contains provisions which eliminate the personal
liability of our directors to us or our stockholders for
monetary damages for breach of their fiduciary duty as a
director to the fullest extent permitted by the Delaware General
Corporation Law, except for liability:
|
|
for any breach of their 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;
|
|
|
for unlawful payments of dividends or unlawful stock
repurchases or redemptions; or
|
|
|
for any transaction from which the director derived an
improper personal benefit.
|
These provisions do not affect a directors
responsibilities under any other laws, including the federal
securities laws and state and federal environmental laws.
Our certificate of incorporation also contains
provisions which require us to indemnify our directors, and
permit us to indemnify our officers and employees, to the
fullest extent permitted by Delaware law, including those
circumstances in which indemnification would by law be
discretionary. However, we are not obligated to indemnify any
such person (1) with respect to proceedings, claims or actions
initiated or brought voluntarily by any such person and not by
way of defense, or (2) for any amounts paid in settlement of an
action indemnified against by us without our prior written
consent. We have directors and officers liability
insurance and have entered into indemnity agreements with each
of our directors providing for the indemnification described
above.
In January 1998, we sold
shares of our common stock to Rodney R.
Schoemann, Sr. for $1,000,000. In February 1998, we sold
shares of our common stock
to Mr. Schoemann for $2,500,000. In August 1998, we sold
shares of our common stock for
$125,000 to each of four Schoemann family trusts. We granted
certain demand registration and other rights with respect to the
shares of common stock purchased by Mr. Schoemann and these
trusts.
In February 1998, we granted Mr. Schoemann warrants
to purchase shares of
common stock at an exercise price of $
per share. In August 1998, we issued to each of Schoemanns
family trusts warrants to purchase
shares of our common stock at an exercise price of $
per share.
As of July 31, 1999, Mr. Schoemann and the Schoemann
family trusts collectively own
shares, or %, of our common
stock.
In March 1999, we entered into an agreement with Mr.
Schoemann under which Mr. Schoemann and the family trusts:
|
|
relinquished all demand registration rights;
|
|
|
waived all rights to require us to repurchase shares of our
common stock from Mr. Schoemann or the family trusts;
|
|
|
may sell up to an aggregate of
shares of common stock in this offering and
agreed not to sell publicly or dispose of any shares of our
common stock for a period of 180 days after the effective date
of the registration statement of which this prospectus is a
part; and
|
|
|
may participate as selling stockholders in a public offering
of our common stock after this offering.
|
In addition, we granted Mr. Schoemann warrants to
purchase shares of
our common stock at an exercise price of $
per share and warrants to purchase
shares of our common stock at an
exercise price of $ per share. We also
agreed to:
|
|
reduce the exercise price of the warrants granted to Mr.
Schoemann in February 1998 from $ per
share to $ per share;
|
|
|
reduce the number of shares of our common stock issuable upon
exercise of the warrants granted to the family trusts in
August 1998 from shares
to
shares;
|
|
|
reduce the exercise price of the warrants granted to the
family trusts in August 1998 from $
per share to $ per share; and
|
|
|
pay all reasonable costs and expenses associated with the sale
of common stock by Mr. Schoemann and the family trusts in this
offering and in the subsequent offering, if any.
|
See also ManagementCompensation
Committee Interlocks and Insider Participation for a
description of transactions between us and Joseph Fox and Avi
Fox.
Principal and Selling Stockholders
The following table contains information regarding
the beneficial ownership of our common stock as of August 24,
1999, and as adjusted to reflect the sale of the shares of
common stock in this offering, by:
|
|
each person or group of affiliated persons known by us to
beneficially own more than 5% of the outstanding shares of our
common stock;
|
|
|
each of our chief executive officer and our three other
executive officers whose combined salary and bonus exceeded
$100,000 for 1998;
|
|
|
each of the selling stockholders; and
|
|
|
all of our directors and executive officers as a group.
|
Unless otherwise indicated below, the persons in the
table have sole voting and investment power with respect to all
shares shown as beneficially owned by them. Beneficial ownership
is determined in accordance with the rules of the SEC. The
number of shares beneficially owned by a person and the
percentage ownership of that person include shares of our common
stock subject to options and warrants held by that person that
are currently exercisable or exercisable within 60 days of
August 24, 1999.
Name
|
|
Beneficial Ownership of
Common Stock
Prior to this Offering
|
|
Number of
Shares
Being Offered
|
|
Beneficial Ownership of
Common Stock
After this Offering
|
|
Number
|
|
Percent
|
|
|
Number
|
|
Percent
|
Avi Fox
|
|
|
|
|
|
|
|
|
|
|
Joseph J. Fox
|
|
|
|
|
|
|
|
|
|
|
Robert F.
Bernard
|
|
|
|
|
|
|
|
|
|
|
Fredric J.
Graber
|
|
|
|
|
|
|
|
|
|
|
D. Jonathan
Rosenberg
|
|
(1)
|
|
|
|
|
|
|
|
|
Rodney R.
Schoemann
|
|
(2)
|
|
|
|
|
|
|
|
|
Ambrosio &
Sirois Venture Partners, LP
Series V
|
|
|
|
|
|
|
|
|
|
|
William and
Edith Shutt, as joint tenants
|
|
|
|
|
|
|
|
|
|
|
Stuart A. Cohn
|
|
(3)
|
|
|
|
|
|
|
|
|
William J.
Mania
|
|
(4)
|
|
|
|
|
|
|
|
|
All directors
and executive officers as a
group (9 persons)
|
|
(5)
|
|
|
|
|
|
|
|
|
(1)
(2)
|
Includes shares of common stock issuable upon
exercise of options that are exercisable within 60 days of
August 24, 1999.
|
(3)
|
Includes shares of common stock issuable upon
exercise of options that are exercisable within 60 days of
August 24, 1999.
|
(4)
|
Includes shares of common stock issuable upon
exercise of options that are exercisable within 60 days of
August 24, 1999.
|
(5)
|
Includes shares of common stock issuable upon
exercise of options that are exercisable within 60 days of
August 24, 1999.
|
Description of Capital Stock
General
The following summary describes the material terms
of our capital stock. It summarizes material provisions of our
certificate of incorporation and by-laws. We will file these
organizational documents as exhibits to the registration
statement of which this prospectus is a part.
Our certificate of incorporation authorizes us to
issue shares of
capital stock, of which
shares are designated common stock and
shares are designated preferred stock, including
shares
designated as series D junior participating preferred stock. We
currently have
shares of series A preferred stock
outstanding. Upon consummation of this offering, all of the
outstanding shares of series A preferred stock will
automatically convert into an aggregate of
shares of
our common stock, and there will be no shares of series A
preferred stock outstanding. Upon completion of this offering,
we will have
shares of common stock and no shares of preferred
stock outstanding. Of the
authorized shares of common stock, upon completion
of this offering:
|
|
shares will be issued and outstanding;
|
|
|
shares will be reserved for issuance upon exercise of
currently outstanding stock options;
|
|
|
shares will be reserved for issuance upon exercise of warrants;
|
|
|
shares will be reserved for future grants under our 1999
incentive compensation plan; and
|
|
|
shares will be reserved for issuance under our stock purchase
plan.
|
Common Stock
Holders of our common stock are entitled to one vote
per share on all matters submitted to a vote of stockholders.
Joseph Fox and Avi Fox have entered into a shareholders
agreement which provides that if one of them dies, the other
will have the power to vote the deceaseds shares. Subject
to the rights of holders of any outstanding preferred stock, the
holders of outstanding shares of common stock are entitled to
the dividends and other distributions as may be declared from
time to time by our board of directors from legally available
funds. Holders of our common stock have no preemptive,
subscription, redemption or conversion rights. Subject to the
rights of holders of any outstanding preferred stock, upon our
liquidation, dissolution or winding up and after payment of all
prior claims, the holders of shares of common stock outstanding
at that time are entitled to receive pro rata all of our assets.
All shares of common stock currently outstanding are, and all
shares of common stock offered by us in this offering, when duly
issued and paid for, will be, fully paid and nonassessable.
Preferred Stock
Because there will be no shares of preferred stock
outstanding when we complete this offering, the following
information does not pertain to our currently outstanding
preferred stock, but rather the preferred stock that we may
issue in the future under our certificate of incorporation. Our
board of directors, without further stockholder approval, may
issue preferred stock in one or more series from time to time
and fix or alter the designations, relative rights, priorities,
preferences, qualifications, limitations and restrictions of the
shares of each series. The rights, preferences, limitations and
restrictions of different series of preferred stock may differ
with respect to dividend rates, amounts payable on liquidation,
voting rights, conversion rights, redemption provisions, sinking
fund provisions and other matters. Our board of directors may
authorize the issuance of preferred stock which ranks senior to
our common stock for the payment of dividends and the
distribution of assets on liquidation. In addition, our board of
directors can fix limitations and restrictions, if any, upon the
payment of dividends on our common stock to be effective while
any shares of preferred stock are outstanding.
Our board of directors, without stockholder approval, can also
issue preferred stock with voting and conversion rights which
could adversely affect the voting power of the holders of common
stock. Our issuance of preferred stock may delay, defer or
prevent a change in our control. We have no present intention to
issue shares of preferred stock. We have designated
shares of preferred stock as series D
junior participating preferred stock in connection with our
stockholder rights agreement.
See Stockholder Rights Agreement.
We currently have outstanding warrants to purchase a
total of
shares of common
stock at a weighted average exercise price of $
per share. Of the
warrants:
|
|
warrants to purchase shares may not
be exercised until the first anniversary of their issuance and
expire five years after the date of grant;
|
|
|
warrants to purchase shares may
not be exercised until 15 months from the completion of this
offering and expire five years after we complete this offering;
|
|
|
warrants to purchase shares may
not be exercised until one year from the completion of this
offering and expire two years after we complete this offering;
and
|
|
|
warrants to purchase shares may
be currently exercised and expire two years after we complete
this offering.
|
Delaware Anti-Takeover Law
We are subject to the provisions of Section 203 of
the Delaware General Corporation Law. In general, this section
prohibits a publicly held Delaware corporation from engaging in
a business combination with an interested stockholder for a
period of three years after the date of the transaction in which
the person becomes an interested stockholder, unless:
|
|
before the date on which the stockholder became an interested
stockholder the corporations board of directors approved
either the business combination or the transaction in which
the person became an interested stockholder;
|
|
|
the stockholder acquires more than 85% of the outstanding
voting stock of the corporation, excluding shares held by
directors who are officers or held in certain employee stock
plans, upon consummation of the transaction in which the
stockholder becomes an interested stockholder; or
|
|
|
the business combination is approved by the board of directors
and by two-thirds of the outstanding voting stock of the
corporation which is not held by the interested stockholder,
at a meeting of the stockholders held on or after the date of
the business combination.
|
An interested stockholder is a person who, together
with affiliates and associates, owns, or at any time within the
prior three years did own, 15% or more of the corporations
voting stock. A business combination includes, without
limitation, mergers, consolidations, stock sale, asset sale or
other transactions resulting in a financial benefit to the
interested stockholder.
Anti-Takeover Effects of Certain Charter and
By-Law Provisions
Our certificate of incorporation and by-laws contain
a number of provisions relating to corporate governance and to
the rights of stockholders. These provisions include:
|
|
a requirement that stockholder action be taken only at
stockholder meetings and not by written consent if Joseph Fox
and Avi Fox beneficially own less than a majority of the
shares of common stock then outstanding;
|
|
|
notice requirements relating to nominations to our board of
directors and to the raising of business matters at
stockholder meetings;
|
|
|
a requirement that special meetings of stockholders only be
called by our chairman, president, or chief executive officer
or a majority of our board of directors; and
|
|
|
the classification of our board of directors into three
classes, with directors serving for staggered three-year terms.
|
These provisions may be deemed to have a potential
anti-takeover effect in that they may delay, defer
or prevent a change of our control.
Stockholder Rights Agreement
We entered into a stockholder rights agreement in
1999. As with most
stockholder rights agreements, the terms of our rights agreement
are complex and not easily summarized, particularly as they
relate to the acquisition of our common stock and to
exercisability. Therefore, you should carefully read our rights
agreement, which we will file as an exhibit to the registration
statement of which this prospectus is a part.
Our rights agreement provides that each outstanding
share of our common stock, including the shares listed in this
offering have one right to purchase one-hundredth of a share of
series D junior participating preferred stock attached to it.
The purchase price per one-hundredth of a share of preferred
stock under the rights agreement is $
which represents
times the average closing price of our common stock for
the first
days of trading after we complete this offering.
Initially, the rights under our rights agreement are
attached to outstanding certificates representing our common
stock, and we will not distribute separate certificates
representing the rights. The rights will separate from our
common stock and we will distribute separate certificates
representing the rights approximately 10 days after someone
acquires or commences a tender offer for 15% of our outstanding
common stock.
All shares of our common stock issued before the
date the rights separate from the common stock will be issued
with the rights attached. The rights are not exercisable until
the date the rights separate from the common stock. The rights
will expire on the tenth anniversary of the execution of the
rights agreement, unless we redeem or exchange them before that
date.
If an acquiror obtains or has the right to obtain
15% or more of our common stock, then each right will entitle
the holder, upon payment of the purchase price, to receive a
number of shares of our common stock equal to two times the
purchase price of the right. Each right will entitle the holder,
upon payment of the purchase price, to receive a number of
shares of common stock of the acquiror having a then current
market value of twice the purchase price if an acquiror obtains
15% or more of our common stock and any of the following occurs:
|
|
we merge into another entity;
|
|
|
an acquiring entity merges into us;
|
|
|
we sell more than 50% of our assets or earning power; or
|
|
|
the acquiror engages in certain self-dealing transactions with
us.
|
Under our rights agreement, any rights that are or
were owned by an acquiror of more than 15% of our outstanding
common stock will be null and void.
Our board of directors may, at its option, redeem
all of the outstanding rights under our rights agreement before
the earlier of (1) the time that an acquiror obtains 15% or more
of our outstanding common stock or (2) the final expiration date
of the rights agreement. The redemption price under our rights
agreement is $0.01 per right, subject to adjustment.
Holders of rights have no rights as our
stockholders, including the right to vote or receive dividends,
simply by virtue of holding the rights.
Our board of directors may amend any of the
provisions of the rights agreement, without the approval of the
holders of the rights, before the date that an acquiror obtains
15% or more of our outstanding common stock. However, after that
date, it can only amend the rights agreement in a manner which
would not adversely effect the interests of the holders of the
rights, other than the interests of any acquiror.
The rights contained in our rights agreement may
have anti-takeover effects. They may cause substantial dilution
to a person or group that attempts to acquire us, and may deter
acquirors from making takeover proposals or tender offers. The
rights are not intended to prevent a takeover, but rather are
designed to enhance the ability of our board to negotiate with
an acquiror on behalf of all the stockholders. In addition, they
should not interfere with a proxy contest.
Transfer Agent and Registrar
The transfer agent and registrar for our common
stock is
.
Shares Eligible for Future Sale
When we complete this offering, we will have a total
of
shares of
common stock outstanding. The
shares sold in this offering will be freely
tradable, unless they are purchased by our affiliates, as that
term is defined in Rule 144 under the Securities Act. The
remaining
shares will be restricted, which means they were
originally sold in offerings that were not subject to a
registration statement filed with the SEC. These restricted
shares may be resold only through registration under the
Securities Act or under an available exemption from
registration, including the exemption provided by Rule 144.
Lock-Up Agreements
Our directors and executive officers, the selling
stockholders and other holders of our common stock and options
to purchase our common stock have agreed with the underwriters
that, for a period ending 180 days, or in some cases 270 days,
from the date of this prospectus, they will not, without the
prior written consent of Fahnestock & Co. Inc. and subject
to limited exceptions, directly or indirectly publicly offer,
sell, transfer or dispose of any shares of our common stock, or
any securities convertible into or exercisable for shares our
common stock. The persons subject to their lock-up agreements
hold a total of
shares of our common stock, of which
shares are subject to the lock-up restrictions, and
options to purchase a total of
shares of our common stock, all of which are
subject to the lock-up restrictions. As a result of these
contractual restrictions, the shares subject to these lock-up
agreements cannot be sold until the agreements expire or unless
prior written consent is received from Fahnestock even if they
are earlier eligible for sale under Rule 144 or 144(k) of the
Securities Act discussed below. Any early waiver of the lock-up
agreements by the underwriters, which, if granted, could permit
sales of a substantial number of shares and could adversely
affect the trading price of our shares, may not be accompanied
by an advance public announcement by us.
See Underwriting.
Taking into account the lock-up provisions and the
status of the shares under Rules 144 and 144(k) under the
Securities Act, shares will
be eligible for sale on the date of this prospectus,
shares will become eligible for sale 180 days after the
date of this prospectus,
shares will become eligible for sale 270 days after the date of
this prospectus,
shares will become eligible for sale in
and
shares will
become eligible for sale in
, subject in some cases to volume and
manner of sale limitations discussed below.
Rule 144
In general, under Rule 144, beginning 90 days after
the date of this prospectus, a person, or persons whose shares
are aggregated, who has beneficially owned restricted shares for
at least one year, including a person who may be deemed our
affiliate, would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of:
|
|
one percent of the number of shares of our common stock then
outstanding; or
|
|
|
the average weekly trading volume of our common stock on the
Nasdaq National Market during the four calendar weeks before
the filing of a notice on Form 144 with respect to such sale.
|
Sales under Rule 144 are also subject to manner of
sale provisions and notice requirements and to the availability
of current public information about us. We are unable to
estimate accurately the number of restricted shares that will be
sold under Rule 144 because this will depend in part on the
market price of our common stock, the personal circumstances of
the seller and other factors.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to
have been our affiliate at any time during the 90 days before a
sale, and who has beneficially owned for at least two years the
shares proposed to be sold, would be entitled to sell these
shares under Rule 144(k) without complying with the manner of
sale, public information, volume limitation or notice provisions
of Rule 144. Therefore, subject to the lock-up agreements, our
stockholders may sell 144(k) shares after we complete this
offering.
Registration Rights
Under an agreement dated March 24, 1999 between us
and Mr. Schoemann, individually and as trustee of four Schoemann
family trusts, we agreed that if we undertake any underwritten
offering of our common stock after this offering, Mr. Schoemann
and the family trusts will be entitled to include in the
offering that number of shares of common stock which represents
the same percentage of the total number of shares to be sold in
the subsequent offering by selling stockholders as is the
percentage of outstanding shares of common stock then owned by
Mr. Schoemann and the family trusts in the aggregate.
Under subscription agreements we entered into in
late 1996 and early 1997, we agreed to register in this offering
50% of the shares
purchased under those agreements. William and Edith Shutts have
exercised their right to participate as a selling stockholder in
this offering. All other holders of these shares have waived
their right to participate in this offering. In addition, under
subscription agreements we entered into in late 1998 and 1999,
we agreed to register, upon request of the holders, the
shares purchased under
those agreements in any public offering of common stock we
undertake after this offering.
Any shares registered and sold in this offering or a
subsequent offering would be freely tradeable without
restriction under the Securities Act by the purchasers of the
shares, other than our affiliates.
Registration Statements on Form S-8
After we complete this offering, we intend to file
under the Securities Act one or more registration statements on
Form S-8 to register:
|
|
the shares of common stock
issuable upon exercise of outstanding options granted under
our 1998 stock option plan and individual option agreements;
|
|
|
the shares of common stock
reserved for future grants under our 1999 incentive
compensation plan; and
|
|
|
the up to shares of common
stock that we intend to offer for sale to our employees
pursuant to our stock purchase plan.
|
We expect these registration statements to become
effective upon filing with the SEC. Shares covered by these
registration statements will be freely tradeable, subject to
vesting provisions and, in the case of affiliates only, to the
restrictions of Rule 144, other than the holding period
requirement. The shares will also be subject to expiration of
the underwriters lock-up agreements discussed above.
Subject to the terms and conditions set forth in an
underwriting agreement among us, the underwriters, and the
selling stockholders, each of the underwriters named below, for
whom Fahnestock & Co. Inc. and Web Street Securities, Inc.
are acting as representatives, has severally agreed to purchase
from us the number of shares of common stock set forth opposite
its name below:
Underwriter
|
|
Number
of Shares
|
Fahnestock
& Co. Inc.
|
|
|
Web Street
Securities, Inc.
|
|
|
|
|
|
Total
|
|
|
The underwriting agreement provides that the
obligations of the underwriters are subject to conditions. The
underwriters are committed to purchase and pay for all the above
shares of common stock, if any are purchased.
Public Offering Price and Dealers Concession.
The underwriters propose to offer the shares of common stock
offered by this prospectus to the public at the initial public
offering price per share set forth on the cover page of this
prospectus and to certain dealers at that price less a
concession not in excess of [ ] per
share. The underwriters may allow, and these dealers may
reallow, concessions not in excess of [
] per share on sales to certain other dealers. After
commencement of this offering, the underwriters may change the
offering price, concessions and other selling terms. No change
will alter the amount of proceeds to be received by us as
described on the cover page of this prospectus.
Over-Allotment Option. We have granted the
underwriters an option, which may be exercised within 30 days
after the date of this prospectus, to purchase up to [
] additional
shares of common stock to cover over-allotments, if any, at the
initial public offering price less the underwriting discount, as
described on the cover page of this prospectus. If the
underwriters exercise this option in whole or in part, each of
the underwriters will be severally committed, subject to several
conditions, to purchase these additional shares of common stock
in proportion to their respective purchase commitments, as
indicated in the preceding table, and we will be obligated to
sell these additional shares to the underwriters. The
underwriters may exercise this option only to cover
over-allotments made in connection with the sale of the shares
of common stock offered by this prospectus. These additional
shares will be sold by the underwriters on the same terms as
those on which the shares offered by this prospectus are being
sold.
Underwriting Compensation. The following
table summarizes the compensation to be paid to the underwriters
by us in connection with this offering:
|
|
Per Share
|
|
Total
|
|
|
|
Without
Exercise of the
Over-Allotment Option
|
|
With
Exercise of the
Over-Allotment Option
|
Underwriting
discount
|
|
$[
]
|
|
$[
]
|
|
$[
]
|
In addition, the underwriters will receive
reimbursement of expenses equal to 0.5% of the aggregate
offering price.
Offering Expenses. We estimate that the
offering expenses payable by us will be $
.
Prospectus in Electronic Format. Web Street
Securities, as e-manager, is making an electronic version of
this prospectus available on a special web site located at
http://www.
. In addition, under e-dealer agreements, e-dealers
participating in this offering have agreed to make an electronic
version of this
prospectus available on web sites maintained by them. Other than
the electronic version of this prospectus, neither the
information on web sites maintained by the e-dealers nor the
information on our web site is a part of this prospectus or the
registration statement of which this prospectus is a part, and
none of this information has been approved or endorsed by us or
any underwriter. Accordingly, you should not rely on this
information in making a decision about whether to buy our common
stock.
Indemnification of Underwriters. In the
underwriting agreement, we and the selling stockholders have
agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or
to contribute to payments the underwriters may be required to
make in connection with these liabilities.
Discretionary Accounts. The underwriters have
informed us that they do not intend to confirm sales to any
account over which they exercise discretionary authority.
NASD Matters. The provisions of Rule 2720 of
the NASDs Conduct Rules apply to this offering because Web
Street Securities, a representative of the underwriters and
e-manager of this offering, is our affiliate. When an NASD
member participates in the underwriting of an affiliates
securities, the NASDs Conduct Rules provide that the
public offering price per share can be no higher than that
recommended by a qualified independent underwriter meeting
specified standards. In accordance with this requirement,
Fahnestock has assumed the responsibilities of acting as a
qualified independent underwriter and has recommended a public
offering price for shares of our common stock in compliance with
the requirements of Rule 2720 of the NASDs Conduct Rules.
Both in its role as lead manager of this offering and in its
role as a qualified independent underwriter, Fahnestock has
performed due diligence investigations and reviewed and
participated in the preparation of this prospectus and the
registration statement of which this prospectus is a part.
Fahnestock will not receive any additional compensation in
connection with acting as a qualified independent underwriter
with respect to this offering. We and the selling stockholders
have agreed to indemnify Fahnestock against certain liabilities
it may incur in connection with its responsibilities as a
qualified independent underwriter, or to contribute to payments
Fahnestock may be required to make in connection with those
liabilities.
Determination of Offering Price. There was no
market for our common stock before this offering. Accordingly,
the initial public offering price for the common stock will be
determined by negotiation between us and Fahnestock. Among the
factors to be considered in these negotiations will be:
|
|
the preliminary demand for our common stock;
|
|
|
the results of our operations in recent periods;
|
|
|
our financial condition;
|
|
|
estimates of our future prospects and of the prospects for the
industry in which we compete;
|
|
|
an assessment of our management;
|
|
|
the present state of our business operations and development;
|
|
|
the general state of the securities markets at the time of
this offering; and
|
|
|
the prices of similar securities of companies considered
comparable to us.
|
We have applied for listing of our common stock on
the Nasdaq National Market under the symbol WEBS. An active or
orderly trading market may not develop for our common stock, and
if a market does develop, our common stock may not trade at or
above the initial public offering price.
Stabilization and Other Transactions. In
order to facilitate this offering, persons participating in this
offering may engage in transactions that stabilize, maintain or
otherwise affect the price of our common stock during and after
this offering, including over-allotment, stabilizing and
short-covering transactions and the imposition of penalty bids.
Persons participating in this offering may also engage in
passive market-making
transactions in our common stock on the Nasdaq National Market.
Specifically, the underwriters may over-allot or otherwise
create a short position in our common stock for their own
account by selling more shares than have been sold to them by
us. The underwriters may elect to cover this short position by
purchasing shares of our common stock in the open market or by
exercising the over-allotment option granted to the
underwriters. In addition, the underwriters may stabilize or
maintain the price of our common stock by bidding for or
purchasing shares of our common stock in the open market and may
impose penalty bids, under which selling concessions allowed to
syndicate members or other broker-dealers participating in this
offering are reclaimed if shares of our common stock previously
distributed in this offering are repurchased in connection with
stabilization transactions or otherwise. The effect of these
transactions may be to stabilize or maintain the market price at
a level above that which might otherwise prevail in the open
market. The imposition of a penalty bid may also affect the
price of the common stock to the extent that it discourages
resales. We make no representation as to the magnitude or effect
of these stabilization transactions. Persons participating in
this offering may effect these transactions on the Nasdaq
National Market or otherwise and may discontinue these
transactions at any time.
Katten Muchin & Zavis, Chicago, Illinois, will
pass upon the validity of the common stock and other legal
matters for us. Cravath, Swaine & Moore, New York, New York,
will pass upon certain legal matters in connection with this
offering for the underwriters.
The consolidated financial statements as of December
31, 1997 and 1998 and for each of the two years ended December
31, 1998 and for the period from September 3, 1996 to December
31, 1996 included in this prospectus have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving
said reports.
We changed accounting firms from Grant Thornton LLP
to Arthur Andersen LLP, effective September 8, 1998, primarily
in contemplation of an initial public offering. Our board of
directors approved this decision. Grant Thornton did not (1)
issue any adverse opinion, (2) make any disclaimer of its
opinion or (3) qualify or modify its opinion as to uncertainty,
audit scope or accounting principles in its report for the year
ended December 31, 1997. We had no disagreements with Grant
Thornton about accounting principles or practices, financial
statement disclosure or auditing scope or procedure. Grant
Thornton has not audited or otherwise expressed an opinion on
any of the financial statements included in this registration
statement.
Where You Can Find More Information
We have filed a registration statement on Form S-1
with the SEC in connection with this offering. In addition,
after we complete this offering, we will be required to file
annual, quarterly and current reports, proxy statements and
other information with the SEC.
This prospectus is part of the registration
statement and does not contain all of the information included
in the registration statement and its exhibits and schedule.
Whenever a reference is made in this prospectus to any contract
or other document of ours, the reference may not be complete and
you should refer to the exhibits that are a part of the
registration statement for a copy of the contract or document.
You may read and copy our registration statement and
its exhibits and schedule at the following SEC public reference
rooms:
450 Fifth
Street, N.W.
Judiciary Plaza
Room 1024
Washington, D.C. 20549
|
|
Seven World Trade Center
Suite 1300
New York, NY 10048
|
|
Citicorp Center
500 West Madison Street
Suite 1400
Chicago, IL 60661
|
|
You may obtain information on the operation of the
SEC public reference room in Washington, D.C. by calling the SEC
at 1-800-SEC-0330. You may also inspect and copy the complete
registration statement and other information at the offices of
The Nasdaq Stock Market located at 1735 K Street, N.W.,
Washington, D.C. 20006-1500.
The registration statement is also available from
the SECs web site, located at http://www.sec.gov,
which contains reports, proxy and information statements and
other information regarding issuers that file electronically.
Index to Consolidated Financial Statements
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Web Street, Inc:
We have audited the accompanying consolidated
balance sheets of Web Street, Inc. (a Delaware Corporation) and
Subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders equity
and cash flows for each of the two years ended December 31, 1998
and 1997, and for the period from September 3, 1996 to December
31, 1996. These consolidated financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
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 audits 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
consolidated financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Web Street, Inc. and
Subsidiary as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the two years
ended December 31, 1998 and 1997, and for the period from
September 3, 1996 to December 31, 1996, in conformity with
generally accepted accounting principles.
The consolidated financial statements of Web Street,
Inc. and Subsidiary as of June 30, 1999 and 1998 were not
audited by us and, accordingly, we do not express an opinion on
them.
Chicago, Illinois
June 4, 1999 (except with respect to the matters
discussed in Note 13, as to which the date is August 20, 1999)
Web Street, Inc. and Subsidiary
Consolidated Balance Sheets
|
|
As
of December 31,
|
|
As of June 30,
1999
|
|
|
1997
|
|
1998
|
|
|
|
|
|
|
(unaudited)
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
1,272,041
|
|
|
$
1,579,639
|
|
|
$
3,398,652
|
|
Receivable
from clearing broker
|
|
|
|
|
1,008,716
|
|
|
851,557
|
|
Other
receivables
|
|
|
|
|
687,861
|
|
|
156,264
|
|
Property and
equipment, net
|
|
186,628
|
|
|
886,223
|
|
|
3,059,274
|
|
Prepaids and
other assets
|
|
55,000
|
|
|
333,185
|
|
|
1,092,381
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
1,513,669
|
|
|
$
4,495,624
|
|
|
$
8,558,128
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
301,566
|
|
|
$
1,823,400
|
|
|
$
2,062,679
|
|
Accrued
compensation and benefits
|
|
16,800
|
|
|
433,950
|
|
|
499,955
|
|
Other accrued
expenses
|
|
94,000
|
|
|
936,785
|
|
|
767,368
|
|
Deferred rent
|
|
|
|
|
150,378
|
|
|
148,230
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
$
412,366
|
|
|
$
3,344,513
|
|
|
$
3,478,232
|
|
Commitments
and contingencies (note 6)
|
|
|
|
|
|
|
|
|
|
Redeemable
common stock
|
|
277,500
|
|
|
624,375
|
|
|
|
|
Stockholders
equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock
Series A ($.01 par value; 500,000 shares
authorized; 112,500 issued and
outstanding as of December 31,
1997 and 1998 and June 30, 1999,
respectively)
|
|
1,125
|
|
|
1,125
|
|
|
1,125
|
|
Preferred stock
Series C ($.01 par value; 5,000,000 shares
authorized; 3,000,000, 3,000,000
and 0 issued and outstanding
as of December 31, 1997 and 1998
and June 30, 1999,
respectively)
|
|
30,000
|
|
|
30,000
|
|
|
|
|
Preferred stock
($.01 par value; 6,000,000 shares authorized; 0
issued and outstanding as of
December 31, 1997 and 1998 and
June 30, 1999, respectively)
|
|
|
|
|
|
|
|
|
|
Common stock
($.01 par value; 100,000,000 shares authorized;
15,152,723, 18,956,273 and
20,716,916 issued and outstanding
as of December 31, 1997 and 1998
and June 30, 1999,
respectively)
|
|
151,527
|
|
|
189,563
|
|
|
207,169
|
|
Receivable
from related party
|
|
|
|
|
(190,000
|
)
|
|
|
|
Additional
paid-in capital
|
|
4,323,624
|
|
|
16,343,846
|
|
|
21,947,004
|
|
Accumulated
deficit
|
|
(3,682,473
|
)
|
|
(15,847,798
|
)
|
|
(17,075,402
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders equity
|
|
$
823,803
|
|
|
$
526,736
|
|
|
$
5,079,896
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders equity
|
|
$
1,513,669
|
|
|
$
4,495,624
|
|
|
$
8,558,128
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial
statements.
WEB STREET, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Period from
inception
(September 3,
1996) to
December 31,
1996
|
|
Years Ended December 31,
|
|
Six Months Ended June 30,
|
|
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
|
|
(unaudited)
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction revenue
|
|
$
|
|
|
$
290,699
|
|
|
$7,350,246
|
|
|
$2,004,835
|
|
|
$9,879,755
|
|
Subscription service revenue
|
|
|
|
|
38,616
|
|
|
377,775
|
|
|
54,021
|
|
|
477,570
|
|
Interest income
|
|
|
|
|
|
|
|
162,912
|
|
|
63,551
|
|
|
314,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
|
|
329,315
|
|
|
7,890,933
|
|
|
2,122,407
|
|
|
10,672,159
|
|
Cost of
services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clearance and execution
|
|
|
|
|
143,603
|
|
|
2,794,584
|
|
|
707,484
|
|
|
4,376,646
|
|
Employee compensation and
benefits
|
|
|
|
|
226,641
|
|
|
1,375,203
|
|
|
431,786
|
|
|
1,257,813
|
|
Communication and data processing
|
|
|
|
|
127,886
|
|
|
946,150
|
|
|
324,568
|
|
|
619,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of
services
|
|
|
|
|
498,130
|
|
|
5,115,937
|
|
|
1,463,838
|
|
|
6,254,269
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and advertising
|
|
|
|
|
1,388,916
|
|
|
8,151,578
|
|
|
3,652,743
|
|
|
2,243,969
|
|
Technology development
|
|
|
|
|
429,769
|
|
|
1,559,306
|
|
|
587,361
|
|
|
912,502
|
|
General and administrative
|
|
115,792
|
|
|
1,279,181
|
|
|
4,882,562
|
|
|
2,109,650
|
|
|
2,489,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
115,792
|
|
|
3,097,866
|
|
|
14,593,446
|
|
|
6,349,754
|
|
|
5,645,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$(115,792
|
)
|
|
$(3,266,681
|
)
|
|
$(11,818,450
|
)
|
|
$(5,691,185
|
)
|
|
$(1,227,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted net loss per
common share
|
|
$
(0.01
|
)
|
|
$(0.25
|
)
|
|
$(0.71
|
)
|
|
$(0.35
|
)
|
|
$(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
used in computation of basic and
diluted net loss per common share:
|
|
12,308,862
|
|
|
12,872,442
|
|
|
16,740,600
|
|
|
16,391,708
|
|
|
20,404,466
|
|
See notes to consolidated financial
statements.
WEB STREET, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY
|
|
Common
Stock
|
|
Series A
Preferred Stock
|
|
Series C
Preferred Stock
|
|
Additional
Paid-In Capital
|
|
Accumulated
Deficit
|
|
Receivable
From Related
Party
|
|
Total
Stockholders
Equity
|
Issuance of
12,362,600 shares of
common stock at inception
|
|
$123,626
|
|
$
|
|
$
|
|
|
$(123,626
|
)
|
|
$
|
|
|
$
|
|
|
$
|
|
Issuance of
53,250 shares of common
stock
|
|
532
|
|
|
|
|
|
|
68,449
|
|
|
|
|
|
|
|
|
68,981
|
|
Additional
capital contributions
|
|
|
|
|
|
|
|
|
50,231
|
|
|
|
|
|
|
|
|
50,231
|
|
Net loss and
comprehensive loss from
inception to December 31, 1996
|
|
|
|
|
|
|
|
|
|
|
|
(115,792
|
)
|
|
|
|
|
(115,792
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity,
December
31, 1996
|
|
$124,158
|
|
$
|
|
$
|
|
|
$(4,946
|
)
|
|
$(115,792
|
)
|
|
$
|
|
|
$ 3,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of
Darwin Financial
Groups net assets in exchange for
3,000,000 shares of Series C
preferred stock
|
|
|
|
|
|
30,000
|
|
|
(7,346
|
)
|
|
|
|
|
|
|
|
22,654
|
|
Issuance of
2,736,867 shares of
common stock
|
|
27,369
|
|
|
|
|
|
|
3,604,502
|
|
|
|
|
|
|
|
|
3,631,871
|
|
Issuance of
112,500 shares of Series
A preferred stock
|
|
|
|
1,125
|
|
|
|
|
298,875
|
|
|
|
|
|
|
|
|
300,000
|
|
Additional
capital contributions
|
|
|
|
|
|
|
|
|
69,150
|
|
|
|
|
|
|
|
|
69,150
|
|
Compensation
associated with stock
options
|
|
|
|
|
|
|
|
|
63,389
|
|
|
|
|
|
|
|
|
63,389
|
|
Deemed
dividend to reflect discount
from fair value for issuance of
Series A preferred stock with
conversion terms
|
|
|
|
|
|
|
|
|
300,000
|
|
|
(300,000
|
)
|
|
|
|
|
|
|
Net loss and
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
(3,266,681
|
)
|
|
|
|
|
(3,266,681
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity,
December
31, 1997
|
|
$151,527
|
|
$1,125
|
|
$ 30,000
|
|
|
$4,323,624
|
|
|
$(3,682,473
|
)
|
|
$
|
|
|
$823,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
14,850 shares of common
stock as compensation
|
|
149
|
|
|
|
|
|
|
48,751
|
|
|
|
|
|
|
|
|
48,900
|
|
Issuance of
3,785,325 shares of
common stock
|
|
37,853
|
|
|
|
|
|
|
10,747,098
|
|
|
|
|
|
|
|
|
10,784,951
|
|
Exercise of
3,375 common stock
options
|
|
34
|
|
|
|
|
|
|
191
|
|
|
|
|
|
|
|
|
225
|
|
Receivable
from related party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(190,000
|
)
|
|
(190,000
|
)
|
Accretion on
redeemable common
stock
|
|
|
|
|
|
|
|
|
|
|
|
(346,875
|
)
|
|
|
|
|
(346,875
|
)
|
Compensation
associated with stock
options
|
|
|
|
|
|
|
|
|
1,224,182
|
|
|
|
|
|
|
|
|
1,224,182
|
|
Net loss and
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
(11,818,450
|
)
|
|
|
|
|
(11,818,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity,
December
31, 1998
|
|
$189,563
|
|
$1,125
|
|
$ 30,000
|
|
|
$16,343,846
|
|
|
$(15,847,798
|
)
|
|
$(190,000
|
)
|
|
$526,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase and
retirement of
3,000,000 shares of Series C
preferred stock
|
|
|
|
|
|
(30,000
|
)
|
|
(620,000
|
)
|
|
|
|
|
190,000
|
|
|
(460,000
|
)
|
Issuance of
1,552,518 shares of
common stock
|
|
15,525
|
|
|
|
|
|
|
5,429,505
|
|
|
|
|
|
|
|
|
5,445,030
|
|
Elimination of
common stock put
rights
|
|
2,081
|
|
|
|
|
|
|
622,294
|
|
|
|
|
|
|
|
|
624,375
|
|
Compensation
associated with stock
options and issuance of common
stock
|
|
|
|
|
|
|
|
|
171,359
|
|
|
|
|
|
|
|
|
171,359
|
|
Net loss and
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
(1,227,604
|
)
|
|
|
|
|
(1,227,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity,
June 30,
1999 (unaudited)
|
|
$207,169
|
|
$1,125
|
|
$
|
|
|
$21,947,004
|
|
|
$(17,075,402
|
)
|
|
$
|
|
|
$5,079,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial
statements.
WEB STREET, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Period from
inception
(September 3,
1996) to
December 31,
1996
|
|
Years Ended December 31,
|
|
Six Months
Ended June 30,
|
|
|
|
1997
|
|
1998
|
|
1998
|
|
1999
|
|
|
|
|
|
|
|
|
(unaudited)
|
Cash flows
from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$(115,792
|
)
|
|
$(3,266,681
|
)
|
|
$(11,818,450
|
)
|
|
$(5,691,185
|
)
|
|
$(1,227,604
|
)
|
Adjustments to reconcile net loss to net cash
used
in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
81,477
|
|
|
347,647
|
|
|
86,729
|
|
|
268,840
|
|
Compensation
expensestock and stock
option issuances
|
|
|
|
|
63,389
|
|
|
1,273,082
|
|
|
986,993
|
|
|
171,359
|
|
Deferred rent
amortization
|
|
|
|
|
|
|
|
150,378
|
|
|
37,863
|
|
|
(2,148
|
)
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in operating assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable
from clearing broker
|
|
|
|
|
|
|
|
(1,008,716
|
)
|
|
(515,927
|
)
|
|
157,159
|
|
Other
receivables
|
|
|
|
|
(5,000
|
)
|
|
(872,719
|
)
|
|
(131,850
|
)
|
|
531,597
|
|
Prepaids and
other assets
|
|
|
|
|
(50,000
|
)
|
|
(101,660
|
)
|
|
(104,393
|
)
|
|
(759,196
|
)
|
Increase (decrease) in operating liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
|
|
301,566
|
|
|
1,521,834
|
|
|
162,616
|
|
|
239,279
|
|
Accrued
compensation and benefits
|
|
|
|
|
16,800
|
|
|
417,150
|
|
|
(16,800
|
)
|
|
66,005
|
|
Other accrued
expenses
|
|
|
|
|
94,000
|
|
|
403,495
|
|
|
|
|
|
269,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used
in operating
activities
|
|
(115,792
|
)
|
|
(2,764,449
|
)
|
|
(9,687,959
|
)
|
|
(5,185,954
|
)
|
|
(284,836
|
)
|
Cash flows
from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, equipment and
software
|
|
|
|
|
(245,451
|
)
|
|
(1,038,909
|
)
|
|
(467,562
|
)
|
|
(2,441,891
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used
in investing
activities
|
|
|
|
|
(245,451
|
)
|
|
(1,038,909
|
)
|
|
(467,562
|
)
|
|
(2,441,891
|
)
|
Cash flows
from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
119,212
|
|
|
3,978,521
|
|
|
11,224,466
|
|
|
4,919,502
|
|
|
5,005,740
|
|
Issuance (redemption) of preferred stock
|
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
(650,000
|
)
|
Payment (to) from related party
|
|
|
|
|
|
|
|
(190,000
|
)
|
|
|
|
|
190,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by financing
activities
|
|
119,212
|
|
|
4,278,521
|
|
|
11,034,466
|
|
|
4,919,502
|
|
|
4,545,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash
equivalents
|
|
3,420
|
|
|
1,268,621
|
|
|
307,598
|
|
|
(734,014
|
)
|
|
1,819,013
|
|
Cash and cash
equivalents at beginning of period
|
|
|
|
|
3,420
|
|
|
1,272,041
|
|
|
1,272,041
|
|
|
1,579,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at end of period
|
|
$
3,420
|
|
|
$1,272,041
|
|
|
$1,579,639
|
|
|
$538,027
|
|
|
$3,398,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend to reflect discount from fair
value for issuance of Series A preferred stock
with
conversion terms
|
|
$
|
|
|
$300,000
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Acquisition of net assets in exchange for
3,000,000 shares of Series C preferred stock
|
|
$
|
|
|
$22,654
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Interest paid
|
|
$
|
|
|
$
|
|
|
$
338
|
|
|
$
|
|
|
$
948
|
|
Income taxes paid
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
See notes to consolidated financial
statements.
Web Street, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1Organization and Basis of
Presentation
Web Street, Inc. (known as Web Street Financial
Group, Inc. prior to February 9, 1999 and WebStreet.com Inc.
from February 9, 1999 to August 10, 1999 and hereinafter, the
Company) was incorporated on December 31, 1997 under
the laws of the state of Delaware. The Company conducts business
primarily through its wholly owned subsidiary, Web Street
Securities, Inc. Web Street Securities was formed as an Illinois
corporation on September 3, 1996 and is a registered
broker-dealer with the Securities and Exchange Commission and a
member of the National Association of Securities Dealers, the
Securities Investor Protection Corporation and the Municipal
Securities Rule Making Board. Web Street Securities is an
introducing broker-dealer that began operations as an online
broker in July 1997.
The Company has grown rapidly since its inception
and, although there can be no assurances, management expects
this rapid growth to continue. To achieve this growth, the
Company has invested in technology development and advertising
in order to build its systems, brand name and customer base. As
a result of these significant investments, the Company has
reported as of December 31, 1998 an accumulated deficit of
$15,847,798, including a net loss of $11,818,450 for the year
ended December 31, 1998. Further, the Company may continue to
incur net losses in 1999 and beyond as the Company makes
additional marketing and technology investments and continues to
build infrastructure to accommodate the anticipated growth in
business. However, the Company believes that it has cash
resources sufficient to meet its presently anticipated working
capital and capital expenditure requirements for at least the
next twelve months.
The consolidated financial statements include the
accounts of the Companys subsidiary after elimination of
intercompany balances and transactions. Interim financial
information included in the accompanying consolidated financial
statements and notes are unaudited.
Note 2Summary of Significant Accounting
Policies
Transaction Revenue
The Company records commission income and payment
for order flow from securities transactions on a trade-date
basis, along with any related clearance and execution costs.
Substantially all of this income is earned under an agreement
with the Companys clearing broker, which expires April
2000. Commission income for the years ended December 31, 1998
and 1997 was $4,135,121 and $168,728, respectively, and the
payment for order flow for the years ended December 31, 1998 and
1997 was $3,215,125 and $121,971, respectively.
Interest Income
Interest income represents the Companys share
of interest on outstanding customer margin loans made by the
Companys clearing broker and fee income related to the
sweep of excess customer funds into money market instruments.
Depreciation and
Amortization
Depreciation on property and equipment is provided
on a straight-line basis using estimated useful service lives of
three to seven years. Leasehold improvements are amortized over
the lesser of the economic useful life of the improvement or the
term of the lease. Through December 31, 1998 the Company
capitalized all purchased software and is amortizing it over a
period of 3 years. The Company recorded depreciation and
amortization expense of $347,647, $81,477 and $0 for the years
ended December 31, 1998 and 1997, and for the period September
3, 1996 to December 31, 1996, respectively. Internally developed
software is expensed as incurred and has been included in
technology development expense.
Web Street, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Continued)
Advertising Costs
Advertising costs are expensed as incurred.
Employee Costs
Compensation and benefits expense for technology and
administrative personnel are included in technology development
and general and administrative expense, respectively, in the
consolidated statements of operations.
Fair Value of
Financial Instruments
All financial instruments are short-term and are
carried at cost, which approximates fair value.
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
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.
Income Taxes
The Company accounts for income taxes under the
provisions of SFAS No. 109, Accounting for Income Taxes.
SFAS No. 109 requires an asset and liability based
approach in accounting for income taxes. Deferred income tax
assets and liabilities are recorded to reflect the tax
consequences on future years of temporary differences of revenue
and expense items for financial statement and income tax
purposes. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets
will not be realized.
Stock-Based
Compensation
The Company accounts for employee stock-based
compensation using the intrinsic value method of accounting
prescribed in Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees.
The Company provides pro forma disclosures of net income
and earnings per share as required under SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 123
encourages but does not require companies to record compensation
cost for stock-based employee compensation plans based on the
fair-value method of accounting.
Impact of New
Accounting Standards
In March 1998, the American Institute of Certified
Public Accountants issued Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. SOP 98-1 provides guidance on
new cost recognition principles. This statement is effective on
a prospective basis only for financial statements for fiscal
years beginning after December 15, 1998. The Company has adopted
SOP 98-1 effective January 1, 1999, and has commenced capitalizing
certain direct costs of developing internal use software, which
would otherwise have been expensed under its previous accounting
policy. Capitalized costs for the six-month period ended June
30, 1999 amounted to $200,626.
Web Street, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Continued)
Interim Financial
Statements (Unaudited)
The accompanying consolidated balance sheet as of
June 30, 1999 and the consolidated statements of operations and
cash flows for the six months ended June 30, 1999 and 1998 and
the consolidated statement of changes in stockholders
equity for the six months ended June 30, 1999 are unaudited. In
the opinion of management, these statements have been prepared
on the same basis as the audited financial statements and
include all adjustments, consisting of normal recurring
adjustments, necessary for fair presentation of interim periods.
Operating results for the six month period ended June 30, 1999
are not necessarily indicative of the results that may be
expected for the full year ended December 31, 1999 or for any
future interim period.
Segment Information
Currently, the Company does not manage its business
by different operating segments.
Note 3Receivable from Clearing Broker
Receivable from clearing broker represents the net
settlement due to the Company for customer trading activity
payable by its clearing broker. The receivable from clearing
broker at December 31, 1998 and 1997 consists of the following:
|
|
1998
|
|
1997
|
Rebates
receivable payment for order flow
|
|
$
651,925
|
|
$
|
Commissions
receivable
|
|
356,791
|
|
|
|
|
|
|
|
|
|
$1,008,716
|
|
$
|
|
|
|
|
|
The clearing and depository operations for the
Companys securities transactions are performed by a
clearing broker pursuant to a clearing agreement. The clearing
agreement required the Company to maintain a minimum deposit of
$50,000 with the clearing broker at December 31, 1997. The
Company has agreed to increase the amount of this deposit over
time to $150,000. The balance was $94,576 at December 31, 1998.
These amounts are included in other assets in the consolidated
balance sheets.
The Company has agreed to indemnify its clearing
broker for losses that the clearing broker may sustain as a
result of the failure of the Companys customers to satisfy
their obligations related to securities purchased or sold
through the Company. The Company experienced losses of $107,245,
$275,886, $111,534, and $0, for the six months ended June 30,
1999, and for the years ended December 31, 1998 and 1997, and
for the period September 3, 1996 to December 31, 1996 related to
the failure of its customers to satisfy their outstanding
unsecured margin loan obligations.
Note 4Other Receivables
The balance in other receivables at December 31,
1998 includes $674,250 of receivables from common stock
subscriptions executed in December 1998 and collected in January
1999.
Note 5Property and Equipment
Property and equipment, net at June 30, 1999,
December 31, 1998 and 1997 consists of the following:
|
|
June 30,
1999
|
|
1998
|
|
1997
|
|
|
(unaudited)
|
|
|
|
|
Hardware and
equipment
|
|
$2,147,746
|
|
|
$783,737
|
|
|
$110,064
|
|
Furniture and
fixtures
|
|
405,265
|
|
|
156,287
|
|
|
72,782
|
|
Software
|
|
260,413
|
|
|
161,243
|
|
|
85,259
|
|
Leasehold
improvements
|
|
910,480
|
|
|
205,747
|
|
|
|
|
Land
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
3,748,904
|
|
|
1,307,014
|
|
|
268,105
|
|
Less
accumulated depreciation and amortization
|
|
(689,630
|
)
|
|
(420,791
|
)
|
|
(81,477
|
)
|
|
|
|
|
|
|
|
|
|
|
Total property
and equipment, net
|
|
$3,059,274
|
|
|
$886,223
|
|
|
$186,628
|
|
|
|
|
|
|
|
|
|
|
|
Web Street, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Continued)
Note 6Commitments
The Company has obligations under various
noncancellable operating leases for office space, computer and
other office equipment and automobiles that expire on various
dates through April 1, 2003. Rent expense for the years ended
December 31, 1998 and 1997 and for the period September 3, 1996
to December 31, 1996 was $526,222, $145,297and $38,385,
respectively. Future aggregate minimum annual rent payments
under leases with an initial term of one year or more are as
follows:
1999
|
|
$
881,973
|
2000
|
|
864,500
|
2001
|
|
771,152
|
2002
|
|
566,807
|
2003
|
|
129,054
|
|
|
|
Total
|
|
$3,213,486
|
|
|
|
Note 7Litigation
On October 7, 1998, the Company filed a complaint
against Yahoo!, Inc., in the United States District Court for
the Northern District of Illinois, seeking $10 million in
damages. The Company brought the suit in connection with Yahoo!
s failure to fulfill its obligations under a sponsorship
agreement with the Company to properly maintain and run an
on-line investment game. The Company is also seeking a
declaratory judgment regarding its obligations under a financial
services link agreement that it entered into with Yahoo!
relating to advertising on Yahoo!s web site. On November
12, 1998, Yahoo! filed a counterclaim against the Company for
alleged breach of the financial services link agreement and the
sponsorship agreement, seeking total damages of $1.35 million.
The parties are currently in discovery. In the opinion of
management and the Companys outside counsel, the Company
has meritorious legal defenses with respect to this action. The
Company does not believe that the resolution of the litigation,
even if not in its favor, will have a material adverse effect on
its business, financial condition or operating results.
The Company is, from time to time, a party to
certain other pending and threatened legal actions arising in
the ordinary course of its business. Management does not believe
that any such current matters, either individually or in the
aggregate, will have a material adverse effect on the Company
s results of operations or its financial condition.
Web Street, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Continued)
Note 8Income Taxes
Significant components of the Companys
deferred tax assets and liabilities at December 31, 1998 and
1997 are as follows:
|
|
1998
|
|
1997
|
Deferred tax
assets
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$5,257,739
|
|
|
$1,203,025
|
|
Compensation expense recorded in connection
with stock issuance and
options
|
|
492,082
|
|
|
24,595
|
|
Accrued expenses
|
|
75,698
|
|
|
44,715
|
|
Depreciation and amortization
|
|
35,856
|
|
|
13,107
|
|
Other
|
|
970
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
5,862,345
|
|
|
1,285,442
|
|
Other
|
|
(9,252
|
)
|
|
(18,379
|
)
|
|
|
|
|
|
|
|
|
|
5,853,093
|
|
|
1,267,063
|
|
Valuation
allowance
|
|
(5,853,093
|
)
|
|
(1,267,063
|
)
|
|
|
|
|
|
|
|
Net deferred
tax assets
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Because the Company has incurred net operating
losses since its inception, valuation allowances have been
provided in amounts equal to the deferred tax asset at December
31, 1998 and 1997. At December 31, 1998, the Company had
approximately $13.5 million of net operating loss carryforwards.
Of these carryforwards, $3.1 million will begin expiring in
2012. The remaining amounts will begin expiring in 2018.
A reconciliation of the Companys effective
income tax rate to an amount computed by applying the statutory
federal tax rate to the Companys pretax loss is as follows:
|
|
1998
|
|
1997
|
|
1996
|
Tax benefit at
federal statutory rate
|
|
(34.0
|
%)
|
|
(34.0
|
%)
|
|
(34.0
|
%)
|
State income
taxes, net of federal tax benefit
|
|
(4.8
|
)
|
|
(4.8
|
)
|
|
(4.8
|
)
|
Increase in
valuation allowance
|
|
38.7
|
|
|
38.8
|
|
|
38.8
|
|
Other
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax
rate
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
Note 9Stockholders Equity
Preferred Stock
The Companys Certificate of Incorporation, as
amended, authorizes 500,000 shares of Series A preferred stock,
5,000,000 shares of Series C preferred stock, and 6,000,000
additional shares of preferred stock which may be issued from
time to time in one or more series, each having a par value of
$.01. This additional preferred stock was authorized without any
rights, preferences, specifications or designations. These
shares may be issued by the Companys board of directors
without further approval of the stockholders.
Series A
The Series A preferred stock carries voting rights
of four votes per share, and at all times will have four times
the vote of common shares on a per share basis. Dividends are
payable only as and when declared, and
do not accumulate, on the common stock in a ratio of $4.00 for
each Series A preferred share per $1.00 of dividend on each
common share. Once declared, dividends on the Series A preferred
stock must be paid in full before any dividend on common stock
may be declared. The Series A preferred stock is also entitled
to a $6.67 per share liquidation preference. Each share of the
Series A preferred stock will automatically convert into four
shares of common stock upon the completion of a public offering
of the common stock of the Company or upon the same conditions
described for Series C preferred stock. The Company currently
has 112,500 shares of Series A preferred stock issued and
outstanding, which were issued during 1997. These shares were
issued at a discount from fair market value, based on the prices
of recent sales of common stock by the Company to third parties.
The difference between the price realized by the Company and the
fair market value of $300,000 is reflected as a deemed dividend
in the accompanying consolidated statement of changes in
stockholders equity.
Series C
The Companys Certificate of Incorporation, as
amended, authorizes 5,000,000 shares of Series C preferred
stock, $.01 par value, which may be issued by the Companys
board of directors without further approval of the stockholders.
The Series C preferred stock has no voting rights. Dividends are
payable only as and when declared, and do not accumulate, and
dividends may be declared on other classes of stock without
being declared on the Series C preferred stock. Each Series C
share will convert automatically into one share of common stock:
(1) upon the completion of a public offering of the common stock
of the Company; (2) upon the sale of all or substantially all of
the assets of the Company; or (3) upon the sale(s) of stock
constituting in the aggregate more than 50% of the voting stock
of the Company. At December 31, 1998 and 1997, 3,000,000 shares
of Series C preferred stock were held by Darwin Financial Group,
a company substantially owned by two officers of the Company. On
January 13, 1999, the Company repurchased and retired 2,000,000
of these shares for consideration of $400,000 and on April 15,
1999 the Company repurchased and retired the balance of
1,000,000 of these shares for consideration of $250,000.
Common Stock
The Companys Certificate of Incorporation, as
amended, authorizes 100,000,000 shares of common stock, $.01 par
value, which may be issued by the Companys board of
directors without further approval of the Companys
stockholders.
During 1996, the Company issued 12,362,600 shares of
common stock to founders at inception and 53,250 additional
shares of common stock for total net proceeds of $68,981,
representing an average price per non-founder share of $1.30.
During 1997, the Company issued 2,944,992 shares of common stock
(208,125 of such shares providing for the right to sell shares
back to the Company as discussed below) for total proceeds of
$3,909,371, representing an average price per share of $1.33.
During 1998, the Company issued 3,788,700 shares of common stock
for total net proceeds of $10,785,176. The price per share
issued in 1998 ranged from $3.00 to $4.00 and averaged $2.98 per
share, exclusive of 3,375 shares issued upon the exercise of
options with an exercise price of $0.067 per share.
During 1997, 208,125 shares of common stock were
issued with a right entitling the holder to sell the shares back
to the Company at fair market value during a period between 60
and 180 days after a public offering of the Companys
common stock. These shares are shown on the accompanying
consolidated balance sheet as redeemable common stock and are
recorded at the fair market value at December 31, 1998 and 1997,
based on the most recent prices realized by the Company in the
sale of common stock to third parties. The increase in fair
market value during 1998 is shown as accretion on redeemable
common stock in the
accompanying consolidated statement of changes in stockholders
equity. This right was eliminated during March 1999, and
as a result, the common stock has been reclassified as permanent
equity.
Of the shares of common stock issued during 1998,
188,304 of these shares provided that, if subsequent private
equity financing were to occur at prices below the prices paid
for these shares, additional shares would be issued to the
holders of these shares to effectively provide for the
subsequent pricing. An additional 95,031 shares were issued
during 1998 pursuant to these pricing terms.
Also during 1998, the Company issued 14,850 shares
of common stock to employees and outside consultants for
services rendered. The Company recorded compensation and
consulting expense, and an increase in paid-in capital, in the
amount of $48,900. Compensation expense was computed based on
the most recent prices realized by the Company in the sale of
common stock to third parties.
Note 1
0Stock Options and Warrants
Common Stock Warrants
In connection with the sale of shares of its common
stock, the Company has also issued common stock warrants to
purchase its common stock with various terms and conditions. The
terms of the warrants are summarized below:
Year
issued
|
|
Shares
issuable
under warrants
|
|
Exercise
period
|
|
Exercise
price
|
1996
|
|
26,625
|
|
From one to
two years
following a IPO
|
|
$4.00 per share
|
|
1997
|
|
41,250
|
|
From one to
two years
following a IPO
|
|
$4.00 per share
|
|
1997
|
|
225,000
|
|
From one to
two years
following a IPO
|
|
Greater of
$4.00 or
IPO price
|
|
1998
|
|
710,273
|
|
From 15 months
to five
years following an IPO
|
|
$3.00 per share
|
|
1998
|
|
27,687
|
|
From 15 months
to five
years following an IPO
|
|
$4.00 per share
|
|
1998
|
|
120,000
|
|
From 15 months
to five
years following an IPO
|
|
$4.17 per share
|
|
1998
|
|
375,000
|
|
From February
6, 1998 to
two years following an IPO
|
|
$6.00 per share
|
The total number of shares of common stock issuable
under the warrants was 26,625 at December 31, 1996, 292,875 at
December 31, 1997 and 1,525,835 at December 31, 1998. The
weighted average exercise price of all outstanding warrants at
December 31, 1998 and 1997 was $4.39 and $4.00, respectively. In
March 1999, in connection with the elimination of the right to
sell shares back to the Company discussed previously, the
warrants with an exercise price of $4.17 and $6.00 per share
were modified to provide for an exercise price of $4.00 per
share.
Common Stock Options
Before adopting its stock option plan (the Plan
) in September 1998, the Company issued individual option
agreements to various employees and outside service providers.
Under these individual option
agreements, the Company had outstanding options to purchase
694,746 shares of its common stock as of December 31, 1998. The
Companys board of directors selected the grantees,
determined the number of shares covered by option grants and
determined the terms and condition of the options. The exercise
price of $.067 for options to purchase 667,746 shares, was less
than the fair market of the Companys common stock at the
time the options were issued. Compensation expense has been
recorded for these options based on the difference between the
exercise price and managements estimate of the fair market
value of the Companys common stock. This estimate was
based on the most recent price per share of common stock sold to
third parties at the respective dates of grant. The compensation
expense is being recorded over the vesting period of the
respective stock options, ranging from immediate vesting to two
years. The Company recorded compensation expense of $1,224,182
and $63,389 for the years ended December 31, 1998 and 1997,
respectively, related to these options. The remaining options to
purchase 27,000 shares issued pursuant to individual option
agreements have an exercise price of $4.00, which management
believes was not less than the fair market value of the Company
s common stock at the date of grant.
In September 1998, the Company adopted its stock
option plan (the Plan) which provides for the
granting of incentive stock options, non-qualified stock options
and stock purchase rights to employees, consultants and
non-employee directors. Operating as the compensation committee,
the board of directors selected the participants; determined the
number of option grants and determined the terms and conditions
of the options. The term of each option issued was for no more
than ten years from the date it was issued. The exercise price
of the options was not less than the fair market value of the
underlying common stock at the time the options were granted.
This determination was made by management based on recent sales
of the Companys common stock to third parties. The Plan
provides for the issuance of up to 3,000,000 shares of the
Companys common stock to employees, directors, and
consultants. At December 31, 1998, the Company had granted
options to purchase 787,500 shares of stock, and reserved
2,212,500 shares for future awards under the Plan. The Company
will not issue any more awards under the Plan.
Web Street, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Continued)
A summary of the status of the Companys
option plans for the years ended December 31, 1997 and 1998 is
presented in the table and narrative below:
|
|
Years Ended December 31,
|
|
|
1997
|
|
1998
|
|
|
Wtd
Avg.
Ex Price
|
|
Shares
|
|
Wtd
Avg.
Ex Price
|
|
Shares
|
Outstanding at
beginning of year
|
|
$
|
|
|
|
$0.067
|
|
97,970
|
|
Options
Granted
|
|
0.067
|
|
97,970
|
|
2.25
|
|
1,162,652
|
|
Options
Exercised
|
|
|
|
|
|
0.067
|
|
(3,375
|
)
|
Options
Forfeited
|
|
|
|
|
|
|
|
|
|
Options
Expired
|
|
|
|
|
|
|
|
|
|
Options
Canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
end of year
|
|
0.067
|
|
97,970
|
|
2.08
|
|
1,257,247
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at
end of year
|
|
$0.067
|
|
32,345
|
|
$0.34
|
|
385,995
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of options granted
|
|
$1.63
|
|
|
|
$2.03
|
|
|
|
The options to purchase 1,257,247 shares of common
stock listed as outstanding in the table above at December 31,
1998 have exercise prices ranging between $0.067 and $4.00 and
have a weighted average exercise price of $2.08 and a weighted
average remaining contractual life of 9.15 years. As of December
31, 1998, the Company has also granted options to purchase a
total of 225,000 shares of its common stock, which become
exercisable 18 months following an initial public offering, with
an exercise price equal to the initial public offering price.
In accordance with SFAS No. 123, Accounting
for Stock-Based Compensation, the Company applied APB
Opinion No. 25 and related interpretations in accounting for its
stock options, and accordingly does not record compensation
costs. Had compensation costs for stock options been determined
consistent with SFAS No. 123, the Companys net loss and
loss per share would have been as shown below:
|
|
Years Ended December 31,
|
|
|
1997
|
|
1998
|
Net Loss:
As Reported
|
|
$(3,266,681
|
)
|
|
$(11,818,450
|
)
|
As Adjusted
|
|
$(3,244,735
|
)
|
|
$(11,531,526
|
)
|
Primary loss
per share: As Reported
|
|
$(0.25
|
)
|
|
$(0.71
|
)
|
As Adjusted
|
|
$(0.25
|
)
|
|
$(0.69
|
)
|
The fair value of each option grant is estimated on
the date of grant using the minimum value option pricing model
with the following weighted-average assumptions used for the
option grants in 1998 and 1997: risk-free interest rates of
5.28%; expected dividend yield of 0.00%; expected life of 10.0
years; and expected volatility of 0.00%.
Note 11Off-Balance Sheet Risk and
Concentration of Credit Risk
In the normal course of business, the Company
executes, as agent, transactions on behalf of its customers
where the risk of potential loss due to market fluctuations
(market risk) or failure of the customers to perform (credit
risk) exceeds the amounts reported for the transaction. The
Company, along with its clearing broker, continuously monitors
its exposure to market and counterparty risk through the use of
a variety of financial,
position and credit exposure reporting and control procedures. In
addition, the Company reviews the credit-worthiness of each
customer and/or other counterparty with which it conducts
business.
Note 12Regulatory Requirements
As a registered broker-dealer, Web Street
Securities, Inc. is subject to the Uniform Net Capital Rule,
Rule 15c3-1 under the Securities Exchange Act of 1934, as
amended, which requires that it maintain minimum net capital, as
defined, of 6
2
/
3
%
of aggregate indebtedness or $5,000, whichever is greater, and
maintain a ratio of aggregate indebtedness to net capital, as
defined, not to exceed 15 to 1. At December 31, 1998, Web Street
Securities had net capital of $161,911, which exceeded the
minimum net capital requirements by $33,816 and a ratio of
aggregate indebtedness to net capital of 11.9 to 1. At June 30,
1999, Web Street Securities had unaudited net capital of
$2,552,401, which exceeded the minimum net capital requirements
by $2,411,120 and a ratio of aggregate indebtedness to net
capital of 0.5 to 1.
Web Street Securities is exempt from the customer
protection rule, Rule 15c3-3 under the Securities Exchange Act
of 1934, under paragraph (k)(2)(ii) of that rule because it
introduces customers to another broker and does not hold
customer funds or securities.
Note 13Subsequent Events
In January 1999, the Company issued 1,552,518 shares
of its common stock for gross proceeds of $6,094,235 in various
private placement transactions with third parties.
Prepaid and other assets at June 30, 1999 includes
approximately $270,000 due from officers of the Company. Of such
amount, $220,000 relates to two $110,000 loans made to each of
its principal stockholders in March 1999. The principle bears
interest at an annual interest rate of 5% and is due March 16,
2001. Interest is payable quarterly.
In July 1999, the Company completed a three-for-two
stock split effected by the issuance of new shares of common
stock as a dividend. All common stock share and Series A
preferred stock amounts and earnings per share data included in
these financial statements have been restated to reflect the
stock split. In addition, the par value of the additional shares
associated with this split has been reclassified from additional
paid-in capital to Series A preferred stock and common stock.
The Company equitably adjusted the number of shares of common
stock underlying, and exercise prices of, outstanding options
and warrants and the conversion prices of convertible preferred
stock.
In August 1999, the Company issued an additional
shares of its common stock for gross proceeds of $2,082,000 in
various private placement transactions with third parties.
On August 24, 1999, the Company filed a registration
statement on Form S-1 under the Securities and Exchange Act of
1933 to sell
shares of its common stock in an initial public stock
offering.
In 1999, the
Company increased the number of authorized shares of common
stock to and completed a
-for- stock
split.
[INSIDE BACK COVER]
[Photograph of our financial services
center in Beverly Hills, California.]
We opened our first financial services center in
Beverly Hills, California in June 1999. Visitors to the center
can learn about online investing, opening an account with us and
using our services.
[WEB STREET LOGO]
Web Street, Inc.
Shares
Common Stock
PROSPECTUS
, 1999
Fahnestock & Co. Inc.
Web Street Securities, Inc.
You should rely only on the information contained
in this prospectus. No dealer, salesperson or other person is
authorized to give information that is not contained in this
prospectus. This prospectus is not an offer to sell nor is it
seeking an offer to buy these securities in any jurisdiction
where the offer or sale is not permitted. The information
contained in this prospectus is correct only as of the date of
this prospectus, regardless of the time of the delivery of this
prospectus or any sale of these securities.
Until
, 1999, all dealers that effect transactions
in these securities, whether or not participating in this
offering, may be required to deliver a prospectus. This is in
addition to the dealers obligation to deliver a prospectus
when acting as underwriters and with respect to their unsold
allotment or subscriptions.
PART II
Information not Required in the Prospectus
Item 13. Other Expenses of Issuance and
Distribution
Set forth below is an estimate of the approximate
amount of fees and expenses, other than the underwriting
discount, payable by Web Street, Inc. (the Registrant
) in connection with the issuance and distribution of its common
stock pursuant to the prospectus contained in this Registration
Statement. The Registrant will pay all of these expenses.
|
|
Approximate
Amount
|
SEC
registration fee
|
|
$13,900
|
NASD filing
fee
|
|
5,500
|
Nasdaq listing
fee
|
|
*
|
Accountants
fees and expenses
|
|
*
|
Legal fees and
expenses
|
|
*
|
Transfer agent
and registrar fees and expenses
|
|
*
|
Printing and
engraving expenses
|
|
*
|
Miscellaneous
expenses
|
|
*
|
|
|
|
Total
|
|
$
*
|
|
|
|
*To be provided by
amendment
All expenses other than the SEC registration fee and
NASD filing fee are estimated.
Item 14. Indemnification of Directors and
Officers
The Registrants Amended and Restated
Certificate of Incorporation will provide that the Registrant
shall indemnify its directors to the full extent permitted by
the General Corporation Law of the State of Delaware and may
indemnify its officers and employees to such extent, except that
the Registrant shall not be obligated to indemnify any such
person (1) with respect to proceedings, claims or actions
initiated or brought voluntarily by any such person and not by
way of defense or (2) for any amounts paid in settlement of an
action indemnified against by the Registrant without the prior
written consent of the Registrant. Prior to the completion of
this offering, the Registrant will enter into indemnity
agreements with each of its directors. These agreements may
require the Registrant, among other things, to indemnify such
directors against certain liabilities that may arise by reason
of their status or service as directors, to advance expenses to
them as they are incurred, provided that they undertake to repay
the amount advanced if it is ultimately determined by a court
that they are not entitled to indemnification, and to obtain
directors liability insurance if available on reasonable
terms.
In addition, the Registrants Amended and
Restated Certificate of Incorporation will provide that a
director of the Registrant shall not be personally liable to the
Registrant or its stockholders for monetary damages for breach
of his or her fiduciary duty as a director, except for liability
(1) for any breach of the directors duty of loyalty to the
Registrant or its stockholders, (2) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing
violation of law, (3) for willful or negligent conduct in paying
dividends or repurchasing stock out of other than lawfully
available funds or (4) for any transaction from which the
director derives an improper personal benefit.
Reference is made to Section 145 of the General
Corporation Law of the State of Delaware which provides for
indemnification of directors and officers in certain
circumstances.
The Registrant intends to purchase a directors
and officers liability insurance policy prior to
completion of this offering.
Under the terms of the Underwriting Agreement, the
Underwriters have agreed to indemnify, under certain conditions,
the Registrant, its directors, certain of its officers and
persons who control the Registrant within the meaning of the
Securities Act of 1933.
Item 15. Recent Sales of Unregistered
Securities
The following information does not reflect a
three-for-two split of the Registrants common stock
effective as of July 1999, a -for-one
split of the Registrants common stock effective as of
1999 or the
conversion of each outstanding share of the Registrants
preferred stock into one share of common stock to be effected
upon consummation of this offering.
In December 1996, Web Street Securities, Inc., a
wholly-owned subsidiary of the Registrant (Web Street
Securities), issued 28,400 to five investors, consisting
of joint owners and individuals, in exchange for cash in the
aggregate amount of $68,981.
In January 1997, Web Street Securities issued
3,000,000 shares of Special Class B non-voting stock in exchange
for certain assets of Darwin Financial Group, Inc. (d/b/a A.F.
Joseph & Company).
In March 1997, Web Street Securities issued 60,000
shares of Series A preferred stock to two investors who were
joint owners, in exchange for cash in the aggregate amount of
$300,000 and 50,000 shares of common stock and 3,680 shares of
Series A preferred stock in Darwin Financial Group, Inc. (d/b/a
A.F. Joseph & Company).
In May 1997, Web Street Securities issued 10,000
shares of common stock to an individual investor for cash in the
aggregate amount of $25,000.
In June 1997, Web Street Securities issued 146,000
shares of common stock to twelve investors who were individuals
and joint tenants, in exchange for cash in the aggregate amount
of $383,000.
In July 1997, Web Street Securities issued 20,000
shares of common stock to three investors, consisting of joint
tenants and individuals, in exchange for cash in the aggregate
amount of $22,500.
In August 1997, Web Street Securities issued 46,643
shares of common stock to nine investors, consisting of joint
owners and individuals, in exchange for cash in the aggregate
amount of $116,608.
In September 1997, Web Street Securities issued
128,000 shares of common stock to ten investors, consisting of
individuals and a trust, in exchange for cash in the aggregate
amount of $320,000.
In October 1997, Web Street Securities issued 4,000
shares of common stock to an individual investor in exchange for
cash in the amount of $10,000.
In November 1997, Web Street Securities issued
65,000 shares of common stock to eight investors, consisting of
individuals and joint owners, in exchange for cash in the
aggregate amount of $162,500.
In December 1997, Web Street Securities issued
1,026,612 shares of common stock to three individual investors
in exchange for cash in the aggregate amount of $2,603,800.
In January 1998, Web Street Securities issued
298,223 shares of common stock to ten investors, consisting of
joint owners and individuals in exchange for cash in the
aggregate amount of $1,342,000. In this same month, the
Registrant issued 560,556 shares of common stock to an
individual investor who owns over 5% of our outstanding common
stock, in exchange for cash in the aggregate amount of
$2,500,000.
In February 1998, the Registrant issued 5,000 shares
of common stock at $4.50 per share to an individual investor in
exchange for cash in the aggregate amount of $22,500.
In accordance with an Agreement and Plan of Merger
dated March 19, 1998, (1) each share of Web Street common stock
converted into 1.25 shares of our common stock; (2) each share
of Web Street Series A preferred stock converted into 1.25
shares of our Series A preferred stock; and (3) each share of
Web Street Special Class B stock converted into one share of our
Series C preferred stock.
In May 1998, the Registrant issued 20,000 shares of
common stock to an individual investor in exchange for cash in
the aggregate amount of $120,000.
In June 1998, the Registrant issued 155,834.33
shares of common stock to twelve investors, consisting of
individuals and joint tenants, in exchange for cash in the
aggregate amount of $935,004.
In August 1998, the Registrant issued 119,583 shares
of common stock to six investors, consisting of trusts and a
corporation, in exchange for cash in the aggregate amount of
$800,000.
In October 1998, the Registrant issued 58,729.71
shares of common stock to three individual investors in exchange
for cash in the aggregate amount of $299,999.
In November 1998, the Registrant issued 19,777
shares of common stock to two individual investors in exchange
for cash in the aggregate amount of $89,000.
In December 1998, the Registrant issued 1,151,687
shares of common stock to eleven investors, consisting of
individuals and partnerships, in exchange for cash in the
aggregate amount of $5,182,600.
In January 1999, the Registrant issued 1,027,513.13
shares of common stock to forty investors, consisting of
individuals, joint tenants, partnerships and corporations, in
exchange for cash in the aggregate amount of $6,094,234.75.
In January and April 1999, the Registrant redeemed
all outstanding shares of series C preferred stock.
In August 1999, the Registrant issued 244,942 shares
of common stock to eight investors, consisting of individuals
and partnerships, in exchange for cash in the aggregate amount
of $2,082,000. In connection with this issuance, the Registrant
issued warrants exercisable for shares of
common stock at an exercise price of $ per
share to Talisman Inc., which acted as placement agent for the
issuance.
No underwriters were involved in any of the
transactions described above. All of the securities issued in
the foregoing transactions were issued by the Registrant in
reliance upon the exemption from registration available under
Section 4(2) of the Securities Act, including Regulation D
promulgated thereunder, in that the transactions involved the
issuance and sale of Registrants securities to financially
sophisticated entities or individuals who represented that they
were aware of Registrants activities and business and
financial condition, and who took these securities for
investment purposes and understood the ramifications of their
actions. In addition, the substantial majority of the purchasers
have represented that they were accredited investors
as defined in Regulation D. Each purchaser represented that it
was acquiring such securities for investment for its own account
and not for distribution. All certificates representing the
stock issued have a legend imprinted on them stating that the
shares have not been registered under the Securities Act and
cannot be transferred until properly registered under the
Securities Act or an exemption applies.
Item 16. Exhibits and Financial Statement
Schedules
1*
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|
Form of
Underwriting Agreement.
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|
2
|
|
Agreement and
Plan of Merger dated March 19, 1998 between Registrant, Web
Street
Securities, Inc., an Illinois corporation, and Web Street
Securities, Inc., a Delaware
corporation (Web Street Securities).
|
3.1*
|
|
Amended and
Restated Certificate of Incorporation of the Registrant.
|
|
3.2*
|
|
Amended and
Restated By-laws of the Registrant.
|
|
4.1*
|
|
Specimen stock
certificate representing common stock.
|
|
4.2*
|
|
Rights
Agreement dated as of
, 1999 between
the Registrant and
.
|
|
4.3*
|
|
Form of
Certificate of Designation of series D junior participating
preferred stock.
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|
5*
|
|
Opinion of
Katten Muchin & Zavis as to the legality of the securities
being registered
(including consent).
|
|
10.1
|
|
Registrant
s 1998 Stock Option Plan.
|
|
10.2
|
|
Form of Option
Agreement under the Registrants 1998 Stock Option Plan.
|
|
10.3
|
|
Form of Option
Agreement prior to Registrants 1998 Stock Option Plan.
|
|
10.4*
|
|
Registrant
s 1999 Incentive Compensation Plan.
|
|
10.5*
|
|
Form of Option
Agreement under the 1999 Incentive Compensation Plan.
|
|
10.6*
|
|
Registrant
s 1999 Employee Stock Purchase Plan.
|
|
10.7*
|
|
Employment
Agreement between the Registrant and Joseph J. Fox.
|
|
10.8*
|
|
Employment
Agreement between the Registrant and Avi Fox.
|
|
10.9*
|
|
Employment
Agreement between the Registrant and Joseph A. Barr.
|
|
10.10*
|
|
Employment
Agreement between the Registrant and Stuart A. Cohn.
|
|
10.11*
|
|
Employment
Agreement between the Registrant and William J. Mania.
|
|
10.12*
|
|
Employment
Agreement between the Registrant and D. Jonathan Rosenberg.
|
|
10.13*
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|
Form of
Indemnification Agreement for Directors and Executive Officers.
|
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10.14**
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|
Joint
Brokerage Agreement dated as of December 11, 1998 between
Webstreet Securities
and ConSors Discount-Broker.
|
|
10.15
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|
Online Service
Agreement dated January 19, 1999 between Webstreet Securities
and
Landsbref, Ltd.
|
|
10.16
|
|
Full Service
Agreement dated January 19, 1999 between Webstreet Securities
and
Landsbref, Ltd.
|
|
10.17
|
|
Clearing
Agreement dated as of April 18, 1997 between Webstreet
Securities and U.S.
Clearing Corp. and amendment dated April 30, 1999.
|
|
10.18
|
|
Sublease
Agreement dated April 15, 1998 between the Registrant and
Western Diversified
Life Insurance Company.
|
|
16
|
|
Letter of
Grant Thornton, LLP to the Securities and Exchange Commission
|
|
21
|
|
Subsidiaries
of the Registrant.
|
|
23.1
|
|
Consent of
Arthur Andersen LLP with respect to financial statements of
the Registrant.
|
|
23.2
|
|
Consent of
Katten Muchin & Zavis (contained in its opinion to be
filed as Exhibit 5
hereto).
|
24
|
|
Power of
Attorney (included on signature page hereto).
|
|
27
|
|
Financial Data
Schedule
|
*
|
To be filed by amendment
|
**
|
A portion of the exhibit has been omitted pursuant to a
request for confidential treatment
|
Item 17. Undertakings
The Registrant hereby undertakes:
|
(1) To provide
to the underwriters at the closing specified in the
underwriting agreement, certificates in such denominations and
registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
|
|
(2) Insofar as
indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised
that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Securities Act
and will be governed by the final adjudication of such issue.
|
|
(3) For
purposes of determining any liability under the Securities
Act, (a) the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared
effective and (b) each post-effective amendment that contains
a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
|
Signatures
Pursuant to the requirements of the Securities Act
of 1933, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Deerfield, and State
of Illinois, on the 24th day of August, 1999.
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Chief Executive Officer and
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Power of Attorney
Each person whose signature appears below hereby
constitutes and appoints Joseph J. Fox, Stuart A. Cohn and Mark
D. Wood, and each of them, his true and lawful attorneys-in-fact
and agents, with full power of substitution, to sign on his
behalf, individually and in each capacity stated below, all
amendments and post-effective amendments to this Registration
Statement on Form S-1 (including any registration statement
filed pursuant to Rule 462(b) under the Securities Act of 1933,
and all amendments thereto) and to file the same, with all
exhibits thereto and any other documents in connection
therewith, with the Securities and Exchange Commission under the
Securities Act of 1933, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every
act and thing requisite and necessary to be done in and about
the premises, as fully and to all intents and purposes as each
might or could do in person, hereby ratifying and confirming
each act that said attorneys-in-fact and agents may lawfully do
or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act
of 1933, this Registration Statement has been signed below by
the following persons in the capacities indicated on August 24,
1999.
Signature
|
|
Title
|
|
|
/S
/ JOSEPH
J. FOX
Joseph J. Fox
|
|
Co-Chairman
of the Board and Chief Executive
Officer (principal executive officer)
|
|
|
/S
/ AVI
FOX
Avi Fox
|
|
Co-Chairman
of the Board and President
|
|
|
/S
/ JOSEPH
A. BARR
Joseph A. Barr
|
|
Executive
Vice President, Chief Financial Officer
(principal financial and accounting officer) and
Treasurer
|
|
|
/S
/ ROBERT
F. BERNARD
Robert F. Bernard
|
|
Director
|
|
|
/S
/ FREDRIC
J. GRABER
Fredric J. Graber
|
|
Director
|
|
|
/S
/ D. JONATHAN
ROSENBERG
D. Jonathan Rosenberg
|
|
Executive
Vice President, Chief Operating Officer
and Director
|