UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
000-30527
(Commission file number)
OPTIMARK HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 22-3730995
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification No.)
10 Exchange Place, 24th Floor, Jersey City, NJ 07302
(Address of Principal Executive Offices) (Zip Code)
(201) 536-7088
(Registrant's telephone Number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes / / No /X/
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
At July 31, 2002, the number of shares outstanding of the registrant's common
stock was 33,369,913.
INDEX
Page No.
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PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2002
(Unaudited) and December 31, 2001 4
Consolidated Statements of Operations and Comprehensive
Loss for the Three Months Ended March 31, 2002 and
March 31, 2001 (Unaudited) 5
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2002 and March 31, 2001
(Unaudited) 6
Notes to Unaudited Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 20
PART II OTHER INFORMATION 21
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 22
Item 6. Exhibits and Reports on Form 8-K 23
2
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). These statements are based on our beliefs and
assumptions and on information currently available to us. Forward-looking
statements include the information concerning our possible or assumed future
results of operations set forth in Part I, Item 2 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Forward-looking
statements also include statements in which such words as "expect,"
"anticipate," "contemplate," "intend," "plan," "believe," "estimate," "consider"
or similar expressions are used.
Forward-looking statements are not guarantees of future performance.
They involve risks, uncertainties and assumptions, including the risks discussed
in Part II, Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's amended and restated
Annual Report on Form 10-K/A for the year ended December 31, 2001 as filed with
the Securities and Exchange Commission and elsewhere in this Quarterly Report.
Our future results and stockholder values may differ materially from those
expressed in or indicated by these forward-looking statements. Many of the
factors that will determine these results and values are beyond our ability to
control or predict. Investors are cautioned not to put undue reliance on any
forward-looking statements. In addition, we do not have any intention or
obligation to update forward-looking statements after the filing of this
Quarterly Report, even if new information, future events or other circumstances
have made them incorrect or misleading. For these statements, we claim the
protection of the safe harbor for forward-looking statements contained in
Section 21E of the Exchange Act.
3
OPTIMARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2002
(Unaudited) December 31, 2001
----------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................... $ 212,406 $ 1,624,017
Accounts receivable, less allowance for doubtful accounts of $73,002
at December 31, 2001 ............................................. -- 774,180
Other current assets ................................................ 264,115 446,911
------------- -------------
Total current assets ........................................ 476,521 2,845,108
PROPERTY AND EQUIPMENT - NET .......................................... 1,041,126 1,381,435
SOFTWARE LICENSES - NET ............................................... 2,973,767 59,347
OTHER ASSETS .......................................................... 610,015 837,072
------------- -------------
TOTAL ASSETS .......................................................... $ 5,101,429 $ 5,122,962
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
LIABILITIES:
CURRENT LIABILITIES:
Accounts payable and accrued liabilities .......................... $ 756,339 $ 678,901
Accrued compensation .............................................. 542,367 1,141,246
Loan payable ...................................................... 501,528 --
Net liabilities of discontinued operations (Note 4) ............... 13,403,266 13,816,260
Other current liabilities ......................................... 946,523 879,842
------------- -------------
Total current liabilities ................................... 16,150,023 16,516,249
------------- -------------
OTHER LIABILITIES:
Long term portion of license fee obligation ....................... 2,650,000 --
Minority Interest ................................................. 147,362 --
------------- -------------
Total other liabilities ..................................... 2,797,362 --
------------- -------------
COMMITMENTS AND CONTINGENCIES
MANDATORILY REDEEMABLE STOCK
Series E preferred stock, convertible, $0.01 par value;
1,000,000 shares authorized; 983,333 and 926,665 issued and
outstanding at March 31, 2002 and, December 31, 2001, respectively 14,437,426 13,630,854
Series F preferred stock, $0.01 par value; 7,400,000 shares
authorized and no shares issued and outstanding at
March 31, 2002 and December 31, 2001 respectively ................. -- --
Series G preferred stock, $0.01 par value; 300,000 shares
authorized, issued and outstanding at
March 31, 2002 and December 31, 2001 respectively ................. 3,000 3,000
------------- -------------
TOTAL MANDATORILY REDEEMABLE STOCK .................................... 14,440,426 13,633,854
------------- -------------
STOCKHOLDERS' DEFICIENCY:
Preferred stock, authorized and unissued 8,577,932
at March 31, 2002 and December 31, 2001
Series A preferred stock, convertible and participating,
$0.01 par value; 3,222,068 shares authorized; 925,683 shares
issued and outstanding at March 31, 2002 and December 31, 2001 .... 9,257 9,257
Series B preferred stock, convertible, $0.01 par value;
11,000,000 shares authorized; 10,820,000 shares issued and
outstanding at March 31, 2002 and December 31, 2001 ............... 108,200 108,200
Series C preferred stock, convertible, $0.01 par value;
8,250,000 shares authorized, issued and outstanding
at March 31, 2002 and December 31, 2001 ........................... 82,500 82,500
Series D preferred stock, convertible, $0.01 par value;
250,000 shares authorized, issued and outstanding
at March 31, 2002 and December 31, 2001 ........................... 2,500 2,500
Common stock, $0.01 par value; 150,000,000 shares
authorized; issued 36,612,557 shares at March 31, 2002
and December 31, 2001, respectively, of which 3,242,644 shares are
held as treasury stock at March 31, 2002 and December 31, 2001,
respectively ...................................................... 366,126 366,126
Warrants, common stock .............................................. 35,686,523 35,686,523
Additional paid-in capital .......................................... 301,687,065 301,687,065
Accumulated deficit ................................................. (366,165,836) (362,906,807)
Accumulated other comprehensive loss ................................ (62,716) (62,504)
Treasury stock ...................................................... (1) (1)
------------- -------------
TOTAL STOCKHOLDERS' DEFICIENCY .............................. (28,286,382) (25,027,141)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY ........................ $ 5,101,429 $ 5,122,962
============= =============
See notes to consolidated financial statements
4
OPTIMARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
THREE MONTHS ENDED MARCH 31,
2002 2001
Unaudited Unaudited
--------- ---------
REVENUE:
Revenue from affiliate .................... $ -- $ 1,317,965
Revenue, other ............................ -- 2,100,000
------------ ------------
Total revenue ..................... -- 3,417,965
EXPENSES:
Cost of sales ............................. -- 2,250,851
Sales and marketing ....................... 313,848 446,203
Research and development .................. 1,462,859 1,544,053
General and administrative ................ 1,124,042 3,115,602
Depreciation and amortization ............. 390,833 1,033,728
------------ ------------
Total operating expenses .......... 3,291,582 8,390,437
OTHER (INCOME) EXPENSE:
Interest income ........................... (4,139) (19,803)
Interest expense .......................... 4,397 62,498
------------ ------------
Total other expense ............... 258 42,695
------------ ------------
LOSS FROM CONTINUING OPERATIONS ............. (3,291,840) (5,015,167)
DISCONTINUED OPERATIONS:
Loss from discontinued operations ......... -- --
Loss on disposal of discontinued operations (69,827) (681,283)
------------ ------------
Loss from discontinued operations ......... (69,827) (681,283)
------------ ------------
Loss before minority interest ............... (3,361,667) (5,696,450)
Minority interest in loss of subsidiary ..... 102,638 --
NET LOSS .................................... (3,259,029) (5,696,450)
OTHER COMPREHENSIVE LOSS:
Foreign currency translation adjustments .. 212 94,550
------------ ------------
COMPREHENSIVE LOSS .......................... $ (3,258,817) $ (5,601,900)
============ ============
LOSS PER SHARE - BASIC AND DILUTED:
Continuing operations ..................... $ (0.09) $ (0.14)
------------ ------------
Discontinued operations ................... $ (0.00) $ (0.02)
------------ ------------
Total loss per share ...................... $ (0.09) $ (0.16)
------------ ------------
Weighted average number of common
shares outstanding - basic and diluted . 36,369,913 36,612,557
============ ============
See notes to consolidated financial statements
5
OPTIMARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31
2002 2001
(Unaudited) (Unaudited)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ...................................................... $(3,259,029) $(5,696,450)
Deduct loss from discontinued operations ...................... (69,827) (681,283)
----------- -----------
Loss from continuing operations ............................... (3,189,202) (5,015,167)
----------- -----------
Adjustments to reconcile net loss from continuing operations to
net cash used in continuing operations:
Depreciation and amortization ............................... 390,833 1,033,728
Minority interest in income of subsidiary ................... (102,638) --
(Gain) loss on disposal of assets ........................... (333,924) (379)
Changes in operating assets and liabilities:
Receivables ................................................. 774,180 2,157,740
Other assets ................................................ 409,853 101,699
Accounts payable and accrued liabilities .................... (417,487) 458,106
Other liabilities ........................................... (135,957) 346,692
----------- -----------
Net cash used in continuing operations ........................ (2,604,342) (917,581)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment ........................... (12,000) (522,104)
Proceeds from disposal of assets .............................. 380,980 2,279
Net cash provided by/(used in) investing activities ......... 368,980 (519,825)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of preferred stock ................. 806,572 --
Proceeds from shareholder loan ................................ 500,000 --
Payments on capital leases .................................... -- (82,337)
----------- -----------
Net cash provided by/(used in) financing activities ......... 1,306,572 (82,337)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS ......................... $ (928,790) (1,519,743)
NET CASH USED IN DISCONTINUED OPERATIONS .......................... (482,821) (638,870)
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD ................ 1,624,017 2,919,548
----------- -----------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD ...................... $ 212,406 $ 760,935
----------- -----------
Supplemental disclosure of cash flow information:
Cash payments for interest - continuing operations ............ $ 4,397 $ 15,335
Cash payments for interest - discontinued operations .......... -- --
Non-cash transaction
Purchase of software license .................................. $ 3,000,000 $ --
See notes to consolidated financial statements
6
OPTIMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
1. GENERAL INFORMATION
OptiMark Holdings, Inc. ("Holdings" or the "Company") was established
on May 19, 2000, and became the sole stockholder of two operating subsidiaries
on June 12, 2000 pursuant to the reorganization of the legal structure of the
company formerly known as OptiMark Technologies, Inc. ("OTI"). OTI was the
successor to a company that had been founded in 1996 to begin development of the
OptiMark matching engine technology for use in an electronic trading system for
equity securities and related technologies. The reorganization was effected
pursuant to which (i) OTI formed Holdings as a direct wholly-owned subsidiary of
OTI, (ii) Holdings formed OTI Acquisition Corporation ("OTIA") as a direct
wholly-owned subsidiary of Holdings, (iii) OTI merged with OTIA pursuant to
Section 251(g) of the Delaware General Corporation Law, with the name of the
surviving company becoming OptiMark US Equities, Inc. ("UEI"), and with
stockholders of UEI being deemed to have received shares of Holdings by
operation of law. As a result of such merger, UEI became a direct wholly-owned
subsidiary of Holdings. References herein to the "Company" refer to Holdings and
its subsidiaries, with respect to periods following the reorganization, and to
OTI and its subsidiaries, with respect to periods prior to the reorganization.
Until September 19, 2000, the Company had operated in two segments, the
Exchange Solutions Services Business (formerly referred to as the Electronic
Markets Business) and the US Equities Business, under two separate wholly owned
subsidiaries, OptiMark, Inc. ("OptiMark"), and OptiMark US Equities, Inc.,
respectively. Effective September 19, 2000, the US Equities Business was
discontinued.
On December 28, 2001, OptiMark formed a then majority-owned subsidiary,
OptiMark Innovations Inc. (formerly known as OTSH, Inc. and referred to below as
"Innovations"). Innovations was capitalized on December 31, 2001, and at that
time OptiMark held a 67% voting interest and the remaining interest was held by
SOFTBANK Capital Partners LP, SOFTBANK Capital LP and SOFTBANK Capital Advisors'
Fund LP (collectively, "SOFTBANK"). Innovations has authorized capital stock of
7,000 shares of common stock, par value $.01 per share (the "Innovations Common
Stock"), and 3,000 shares of preferred stock, par value $.01 per share (the
"Innovations Preferred Stock"). Innovations has designated 2,000 shares of
Innovations Preferred Stock, as "Non-Qualified Preferred Stock," which has a
cumulative preferred dividend at an annual rate of $500 per share, payable when
and if declared by the Board of Directors of Innovations. The liquidation
preference of the Non-Qualified Preferred Stock is equal to $10,000 per share
plus the aggregate amount of accrued and unpaid dividends or distributions. The
Non-Qualified Preferred Stock is also subject to a mandatory redemption, at a
price equal to the liquidation preference amount, in four equal quarterly
installments on December 31, 2016, March 31, 2017, June 30, 2017 and September
30, 2017. Innovations designated 1,000 shares of Innovations Preferred Stock as
"Series B Preferred Stock," which has a cumulative preferred dividend at an
annual rate of $519.21
7
per share, payable when and if declared by the Board of Directors of
Innovations. The liquidation preference of the Series B Preferred Stock is equal
to $10,389.61 per share plus the aggregate amount of accrued and unpaid
dividends or distributions. On December 31, 2001, OptiMark received 200 shares
of Innovations Common Stock in exchange for a cash payment of $500,000 and 2,000
shares of Non-Qualified Preferred Stock in exchange for the transfer to
Innovations of certain intangible assets consisting of software, a patent
application and other assets relating to a securities trading technology which
is under development (the "Assets"). The stated value of the Non-Qualified
Preferred Stock was the result of the evaluation by the board of directors of
Innovations of the value of the Assets based, in part, upon preliminary
discussions with independent parties regarding an approximate $10,000,000
investment for a one-third interest in Innovations (see Note 7). SOFTBANK
received 100 shares of Innovations Common Stock (the "SOFTBANK Shares") for
$250,000 cash. Simultaneously, SOFTBANK's remaining obligation to purchase
shares of Series E Cumulative Preferred Stock ("Series E Preferred Stock") from
Holdings pursuant to that certain Series E Preferred Stock Purchase Agreement,
dated as of June 29, 2001 (as amended on August 16, 2001 and November 16, 2001),
by and among Holdings and SOFTBANK was reduced by $250,000. Upon its formation
and initial capitalization, Innovations' aggregate assets consisted of the
Assets and $750,000 in cash. The principal business of Innovations is to (a)
consummate a purchase of a controlling interest in The Ashton Technology Group,
a Delaware corporation ("Ashton") through the purchase of Ashton's common stock
and (b) hold Ashton's common stock for the benefit of the shareholders of
Holdings and Innovations.
OptiMark also has an approximately 15% voting interest in Japan
OptiMark Systems, Inc. ("JOS"), a Japanese corporation. The investment in JOS
previously accounted for on the equity method does not have any carrying value
in financial statements of the Company as of March 31, 2002. JOS has realized
continuing losses since its inception in 1998. Since the Company has not
provided any guarantees and is not committed to provide any future funding to
JOS it has not recorded its equity share of JOS' losses, as the investment
cannot have a carrying value below $0 (see Note 7).
Effective in January 2002, the development, sales and marketing efforts
of the Exchange Solutions Services Business were suspended. As of that date, the
primary purpose of the Company was to hold the securities of Innovations and to
consummate financing and strategic transactions with other parties.
As a result of the capitalization of Innovations, Holdings and SOFTBANK
have certain call and put rights described below. The Independent Committee of
the Board has the right commencing October 1, 2002 and exercisable until
September 30, 2003, to recommend to the Board that Holdings purchase all, but
not less than all, of the SOFTBANK Shares for $125,000 in cash and 16,667 shares
of Series E Preferred Stock of Holdings. If the Board of Directors accepts such
recommendation, SOFTBANK would be obligated to sell the SOFTBANK shares for that
consideration.
Upon the occurrence of a Liquidity Event (defined below) on or before
September 30, 2003, the SOFTBANK Shares will be purchased by
8
Holdings for $125,000 in cash and 16,667 shares of Series E Preferred Stock of
Holdings. A "Liquidity Event" means any of the following: (i) Innovations' sale,
conveyance or other disposition of all or substantially all of its assets, (ii)
the acquisition of Innovations by another entity by means of merger or
consolidation resulting in the exchange of the outstanding shares of Innovations
for securities or other consideration issued, or caused to be issued, by the
acquiring entity or its subsidiary, unless the stockholders of Innovations
immediately prior to the consummation of such transaction hold at least 50% of
the voting power of the surviving corporation as a result of such transaction,
(iii) the consummation by Innovations of a transaction or series of related
transactions, including the issuance or sale of voting securities, if the
stockholders of Innovations immediately prior to such transaction (or, in the
case of a series of transactions, the first of such transactions) hold less than
50% of the voting power of Innovations immediately after the consummation of
such transaction (or, in the case of a series of transactions, the last of such
transactions), or (iv) any initial underwritten public offering of Innovations
Common Stock. Notwithstanding the foregoing, Holdings will not exercise this
call option in the event that the Independent Committee recommends that Holdings
not purchase the SOFTBANK Shares.
In the event that: (i) the call rights of Holdings described above have
not been exercised on or before September 30, 2003, (ii) the Independent
Committee no longer exists and (iii) no independent directors serve on the
Holdings Board of Directors and, after reasonable good faith efforts by the
remaining members of the Holdings Board of Directors, no independent persons
qualified to serve on the Holdings Board of Directors have been found or, if
found, are not willing to serve on the Holdings Board of Directors, then the
Holdings Board of Directors will engage an independent investment banking,
accounting or third party valuation firm to evaluate whether or not it is in the
best interests of Holdings that it purchase the SOFTBANK Shares. If such third
party determines it is in the best interests of Holdings to purchase the
SOFTBANK Shares, Holdings will be obligated to purchase such shares on or before
December 31, 2003 for $125,000 in cash and 16,667 shares of Series E Preferred
Stock of Holdings.
SOFTBANK has the right, commencing on October 1, 2002 and continuing
until September 30, 2003, to put all, but not less than all, of the SOFTBANK
Shares to Holdings in exchange for 16,667 shares of Series E Preferred Stock of
Holdings.
In the event that no put of, or call on, the SOFTBANK Shares has been
exercised by October 31, 2003, then commencing on November 1, 2003 and
continuing until November 30, 2003, SOFTBANK has the right to require Holdings
to purchase all, but not less than all, of the SOFTBANK Shares for 16,667 shares
of Series E Preferred Stock of Holdings.
DISCONTINUED OPERATIONS
On September 19, 2000, the Company announced its intention to
discontinue its US Equities Business. The Company has discontinued all
operations of the equities trading system for the US Equities Business and
terminated all communications networks and other related systems that were
necessary to support that business. Accordingly, results of
9
this operation have been classified as discontinued operations in the
consolidated financial statements and prior periods have been reclassified to
conform to this classification.
CONTINUATION AS A GOING CONCERN
The Company's current cash and cash equivalents, plus the expected cash
flows for 2002, are not expected to be sufficient to meet its 2002 operating and
financial commitments. Accordingly, if the Company is unable to raise additional
cash either directly or through sale or borrowing against Innovations' holdings
of shares of the Ashton common stock, par value $.01 per share (the "Ashton
Common Stock"), or that certain senior secured convertible note of Ashton in
favor of Innovations (the "Note") (see Note 4) , the Company would face the
imminent and likely potential for bankruptcy or liquidation. If the Company is
forced to declare bankruptcy or pursue liquidation, the value of the Company's
assets may not be sufficient to pay its creditors in full and, accordingly, the
Company's common stock and preferred stock would have no value. The Company will
continue to seek additional funding both to support its operation as a holding
company as well as its very limited efforts related to potential new product
development. While the Company hopes to be able to obtain additional financing
for these limited product development activities, continue to borrow money or
raise capital through the sale or borrowing against the shares of Innovations
related to its holdings of shares of the Ashton Common Stock and the Note, the
Company may not be able to raise this capital before it runs out of cash. In
addition, the Company has pledged a portion of its shares of capital stock in
Innovations to SOFTBANK as payment for loans that have already been provided. In
the event that the Company does not have enough cash to pay the principal and
interest on these loans as they come due, the Company's holdings in Innovations
would be reduced accordingly. This would reduce the Company's ability to utilize
these assets to raise additional capital necessary to ensure continuation as a
going concern. There is no assurance that the Company's holdings in Innovations,
as represented by Innovations' holdings of shares of the Ashton Common Stock,
will have any value useable as collateral for a loan or sellable to raise cash
at any time or in a time frame that would let the Company continue as a going
concern.
2. PRESENTATION
Presentation - The accompanying unaudited, condensed, consolidated financial
statements include the accounts of the Company. In the opinion of management,
all adjustments have been made which are of a normal recurring nature, so as to
fairly state the results for the interim periods. All significant intercompany
transactions and balances have been eliminated. Certain footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to Securities and Exchange Commission ("SEC")rules and
regulations. The nature of the Company's business is such that the results of an
interim period are not necessarily indicative of the results for a full year.
These consolidated statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's audited financial
statements as of December 31, 2001 included in the Company's amended and
restated Annual Report
10
on Form 10-K/A, as filed with the Securities and Exchange Commission on July 22,
2002.
Use of Estimates - The preparation of financial statements, in conformity with
accounting principles generally accepted in the United States, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expense during the reporting periods. It is reasonably
possible that actual results could differ significantly from those estimates and
significant changes to estimates could occur in the near term.
Recent Accounting Pronouncements - In July 2001, the FASB issued SFAS 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 requires that
goodwill and other intangible assets with indefinite lives no longer be
amortized, but instead tested for impairment at least annually. In addition, the
standard includes provisions for the reclassification of certain existing
intangibles as goodwill and reassessment of the useful lives of existing
recognized intangibles. SFAS 142 is effective for fiscal years beginning after
December 15, 2001. As of January 1, 2002, OptiMark had no goodwill or intangible
assets recorded on its books. Therefore, management does not believe the
adoption of SFAS 142 has a significant impact on its financial position and
results of operations.
In July 2001 the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143") which requires the recognition of a liability for an
asset retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the carrying amount of the related long-lived
asset is correspondingly increased. Over time, the liability is accreted to its
present value and the related capitalized charge is depreciated over the useful
life of the asset. SFAS 143 is effective for fiscal years beginning after June
15, 2002. The Company is currently reviewing the impact of SFAS 143 on the
Company.
In August 2001, the FASB issued SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS 144 supersedes FASB Statement 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of", and the
accounting and reporting provisions of APB Opinion 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for
the disposal of a segment of a business. This Statement also amends ARB 51,
"Consolidated Financial Statements", to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The provisions of
this Statement are required to be applied starting with fiscal years beginning
after December 15, 2001. The Company adopted the new accounting standard for
2002 and determined it had no impact on its financial statements for the first
quarter.
3. DISCONTINUED OPERATIONS
Changes in Net Liabilities of Discontinued Operations from December 31,
2001 to March 31, 2002 is as follows:
11
Paid or Additional
Balance at Charged Accruals and Balance at
December 31, Against Other March 31,
2001 Liability Adjustments 2002
---- --------- ----------- ----
Net Liabilities of
Discontinued
Operations (13,816,260) 482,821 (69,827) (13,403,266)
4. FINANCING ACTIVITIES
On February 4, 2002, Ashton and Innovations entered into a securities
purchase agreement (as amended on March 6, 2002 and May 3, 2002, the "Securities
Purchase Agreement"). Pursuant to the terms of the Securities Purchase
Agreement, Innovations purchased 608,707,567 shares of Ashton common stock in
exchange for $7,272,727 in cash and intellectual property and other non-cash
assets of Innovations valued by Ashton and Innovations for the purposes of the
Securities Purchase Agreement at $20 million. The value ascribed to the
intellectual property and other non-cash assets by OptiMark Innovations was
based in part on preliminary discussions with a potential investor in
Innovations. Ashton or Innovations did not obtain an appraisal or other third
party valuation of the fair market value of the intellectual property and other
non-cash assets. There can be no assurance that the fair market value of the
intellectual property and other non-cash assets is equal to the value ascribed
to these assets by Innovations in the Securities Purchase Agreement.
On May 7, 2002 (the "Closing Date"), Innovations and Ashton closed the
transactions contemplated by the Securities Purchase Agreement.
In addition, pursuant to the terms of the Securities Purchase
Agreement, Innovations loaned approximately $2.7 million in cash to Ashton in
exchange for the Note. The Note will mature in five years, may, at the option of
Innovations, be convertible into shares of Ashton Common Stock at a rate of
$.0515838 per share (subject to customary anti-dilution adjustments after the
closing) and will accrue interest at a rate of 7.5% per annum. Currently, the
Note is convertible into 52,870,757 shares of Ashton Common Stock. The Note is
secured by a pledge and security agreement pursuant to which Innovations has
received a blanket lien on Ashton's assets, including, without limitation, the
pledge of the equity interests of Ashton and Universal Trading Technologies
Corporation, a Delaware corporation and majority-owned subsidiary of Ashton
("UTTC"), in each of ATG Trading LLC, wholly-owned subsidiary of Ashton,
Electronic Market Center, Inc., a majority-owned subsidiary of Ashton, Ashton
Technology Canada, Inc., a majority-owned subsidiary of Ashton , Croix
Securities, Inc., a wholly-owned subsidiary of UTTC, REB Securities Inc., a
wholly-owned subsidiary of UTTC; and NextExchange, Inc., a wholly-owned
subsidiary of UTTC.
As of the Closing Date, Innovations owns approximately 80% of the
diluted outstanding shares of the Ashton Common Stock calculated as of May 3,
2002. Diluted shares include the outstanding shares of the Ashton Common Stock
and (i) shares of any series of capital stock of Ashton or its subsidiaries that
vote together with the Ashton Common
12
Stock, (ii) any outstanding options issued to employees and third parties, and
(iii) shares of the Ashton Common Stock, or any securities described in clause
(i) above, issuable pursuant to or upon conversion or exercise of all rights
granted to any party. Assuming conversion of the Note, Innovations would own
approximately an additional 7% of Ashton's fully-diluted shares of the Ashton
Common Stock, calculated as of May 3, 2002.
On March 21, 2002, the Company entered into a loan agreement with
certain of its shareholders. Under the terms of the agreement, the Company
borrowed $500,000 for a period of 180 days at an interest rate of 10% per annum.
The loan is secured by substantially all of the assets of the Company. In lieu
of repayment of principal in cash, the lenders may require the Company to repay
the principal amount of the loan by causing OptiMark, Inc. to transfer eight
shares of common stock and forty-eight shares of the Non-Qualified Preferred
Stock of Innovations subject to adjustment as provided in the loan agreement
with accrued interest payable in cash at maturity.
During the three months ended March 31, 2002, the Company sold 56,668
shares of Series E Preferred at $15 per share. The aggregate amount received
from this sale was $850,000, which was paid in cash. The shares were sold to
SOFTBANK Capital Partners LP, SOFTBANK Capital LP, SOFTBANK Capital Advisors
Fund LP, and Big Island LLC, each of whom is an "accredited investor" as defined
in Rule 501(a) under the Securities Act of 1933, as amended.
5. RELATED PARTY TRANSACTIONS
On February 7, 2002, a loan to an officer in the amount of $150,000
plus accrued interest was forgiven in accordance with the terms and conditions
of the officer's employment agreement.
6. COMMITMENTS AND CONTINGENCIES
OptiMark and certain of its subsidiaries are subject to the legal
proceedings described in the Company's amended and restated Annual Report on
Form 10-K/A for the year ended December 31, 2001, as filed with the Securities
and Exchange Commission on July 22, 2002.
Finova Capital Corporation (Plaintiff) v. OptiMark Technologies, Inc.,
OptiMark, Inc. and OptiMark Holdings, Inc. (Defendants), Superior Court of New
Jersey - Hudson County. Plaintiff filed this action on June 15, 2001, asserting
claims that allegedly arise out of an equipment lease agreement pursuant to
which it is alleged that OptiMark Technologies, Inc. (now known as OptiMark US
Equities, Inc.) agreed to lease certain equipment. Plaintiff contends that
OptiMark Technologies, Inc. breached the equipment lease by, among other things,
failing to pay the amounts due under the equipment lease. Based on these
allegations, Plaintiff has made claims for breach of contract, tortuous
interference, fraudulent conveyance of such equipment lease agreement and/or the
related equipment and/or other assets from OptiMark Technologies, Inc. to
OptiMark, Inc. and/or OptiMark Holdings, Inc. and damages in unspecified amounts
exceeding $6,000,000, plus interest, late charges, litigation costs and
expenses, and reasonable counsel fees. In the fourth quarter of 2001, most, if
not all, of the
13
equipment that was the subject of the equipment lease was returned consensually
to Plaintiff. The parties currently are engaged in exchanging responses to
written discovery requests. On February 14, 2002, Plaintiff made a motion to add
Innovations as a defendant in the case. In the motion, Plaintiff alleges that
the transfer of certain assets from OptiMark to Innovations on December 31, 2001
constituted a fraudulent conveyance of such assets. On March 25, 2002, the court
granted Finova permission to amend its complaint to include Innovations. The
amended complaint was served on Innovations on April 22, 2002 and Innovations
has until approximately mid-August 2002 to file a response to the complaint. On
June 13, 2002, Finova amended the complaint to include Ashton. The Defendants,
Innovations and Ashton intend to defend this action and the motion vigorously.
The outcome of this litigation cannot be predicted at this time, although it may
have a material affect on the Company's financial condition and results of
operations.
Comdisco, Inc. (Plaintiff) v. OptiMark Technologies, Inc. (now known as
OptiMark US Equities, Inc.) (Defendant) and Avnet, Inc. State of Connecticut
Superior Court, Judicial District of Fairfield at Bridgeport. Plaintiff filed a
Complaint on December 18, 2000. The action seeks possession of leased equipment,
proceeds from the sale of leased equipment, a deficiency judgment in an
unspecified amount, and fees and costs and interest. Since the complaint was
filed, most, if not all, of the equipment was returned consensually to
Plaintiff. Based on the complaint filed in a related action in New Jersey
(described below) and on other information received from Comdisco, it is
believed that amount of damages claimed is approximately $6,500,000. On March
30, 2001, the parties agreed to consolidate a related case captioned Comdisco,
Inc. v. OptiMark Technologies, Inc., Superior Court of New Jersey Law Division
Hudson County (filed on January 23, 2001) with the Connecticut proceeding. To
effect the consolidation, on or about April 2, 2001, the parties filed a
stipulation withdrawing Defendant's motion to dismiss Comdisco's Complaint filed
in the Superior Court of New Jersey. That motion had sought dismissal
principally on grounds that an identical action alleging breach of contract had
previously been filed by Comdisco in Connecticut State Court. In exchange for
Defendant's agreement to withdraw its motion, Comdisco agreed to withdraw its
New Jersey Complaint without prejudice. In June 2001, Comdisco made a motion for
summary judgment with respect to a claim against Avnet relating to a guaranty by
Avnet of Defendant's obligations under a Master Lease Agreement for computer
equipment leased from Comdisco. Avnet responded to Comdisco's motion by denying
liability under the guaranty and asserting a variety of special defenses. In
addition, Avnet filed a cross claim against Defendant. The cross claim alleges
that if Avnet is found liable under the guaranty, then Avnet becomes subrogated
to Comdisco's rights under the Master Lease Agreement to the extent of the
payments Avnet makes to Comdisco and that OptiMark is liable to Avnet for any
such payments. Defendant has responded to the cross-claim by denying its
material allegations. The Company intends to defend this action vigorously. On
February 12, 2002, Plaintiff filed a motion for default for failure to plead,
alleging that OptiMark Technologies, Inc. did not file a pleading responsive to
Plaintiff's second amended complaint. This default will be set aside if OptiMark
Technologies, Inc. files an answer before a judgment after default has been
rendered. OptiMark Technologies, Inc. intends to file such a
14
responsive pleading. The outcome of this litigation cannot be predicted at this
time, although it may have a material affect on the Company's financial
condition and results of operations.
Management intends to vigorously contest these suits ; however, the
likelihood that these claims will result in loss or impairment of an asset is
probable. Any loss or impairment resulting from any of these suits may have a
material impact on the Company's financial position, results of operations and
cash flows in future years. An accrual of $13,525,000 with respect to these loss
contingencies has been recorded by the Company as part of its loss on
discontinued operations, which represents management's best estimate of the
outcome of the negotiations.
In August 2001, the Company entered into a new one-year employment
agreement with an officer of the Company, which provides for annual compensation
of $250,000 and a guaranteed bonus of $200,000, to be paid ratably over the term
of the agreement.
On February 21, 2002, Innovations entered into a software license
agreement in connection with the development of a Volume Weighted Average Price
trading platform. Under the terms of the agreement, Innovations is required to
pay $25,000 per month for ten years for the license and related support (see
Note 7).
7. SUBSEQUENT EVENTS
On April 11, 2002, the Company entered into a second loan agreement
with certain of its shareholders. Under this second loan agreement, the Company
borrowed $570,000 for a period of 180 days at an interest rate of 10% per annum.
The second loan is secured by substantially all of the assets of the Company. In
lieu of repayment of principal in cash, the lenders may require the Company to
repay the principal amount of the loan by causing OptiMark, Inc. to transfer
twelve shares of common stock and fifty-four shares of the Non-Qualified
Preferred Stock of Innovations subject to adjustment as provided in the second
loan agreement with accrued interest payable in cash at maturity.
On April 30, 2002, Draper Fisher Jurvetson ePlanet Ventures, L.P.,
Draper Fisher Jurvetson ePlanet Partners Fund, L.L.C. and Draper Fisher
Jurvetson ePlanet Ventures GmbH & Co. KG (collectively, "Draper") purchased 150
shares of Innovations Common Stock for an aggregate cash purchase price of
$375,000. On May 7, 2002, Draper purchased 963 shares of Innovations Series B
Preferred Stock for an aggregate cash purchase price of $9,630,000. As a result
of these transactions, OptiMark's ownership percent of Innovations was reduced
to less than 50%. Therefore, Innovations is no longer a subsidiary and will be
accounted for as an investment using the equity method of accounting.
On May 3, 2002, Innovations transferred its interest in the software
license and related obligation (see Note 6) to Ashton.
On May 24, 2002, the Company's agreement with Asset International was
terminated. Under the terms of the agreement, the Company returned
15
the shares representing its investment in Asset International and the Company
was relieved of any obligation to provide services to Asset International.
On May 31, 2002, the Company entered into a third loan agreement with
certain of its shareholders. Under this loan agreement, the Company borrowed
$1,650,000 for a period of 180 days at an interest rate of 10% per annum. The
third loan is secured by substantially all of the assets of the Company. In lieu
of repayment of principal in cash, the lenders may require the Company to repay
the principal amount of the loan by causing OptiMark, Inc. to transfer
twenty-eight shares of common stock and one hundred fifty-eight shares of the
Non-Qualified Preferred Stock of Innovations subject to adjustment as provided
in the third loan agreement with accrued interest payable in cash at maturity.
On May 31, 2002, the shareholders of JOS elected to dissolve the
company.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Discontinued Operations
On September 19, 2000, the Company announced its intention to
discontinue its US Equities Business. The Company has discontinued all
operations of the equities trading system for the US Equities Business and
terminated all communications networks and other related systems that were
necessary to support that business. Accordingly, results of this operation have
been classified as discontinued operations in the consolidated financial
statements and prior periods have been reclassified to conform to this
classification. The discussion of results of operations in this section relates
only to the Company's continuing operations, its Exchange Solutions Business.
Continuation as a Going Concern
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company has realized net
losses from operations each year since inception.
The Company's current cash and cash equivalents, plus the expected cash
flows for 2002, are not expected to be sufficient to meet its 2002 operating and
financial commitments. Accordingly, if the Company is unable to raise additional
cash either directly or through sale or borrowing against Innovations' holdings
of shares of the Ashton Common Stock or the Note, the Company would face the
imminent and likely potential for bankruptcy or liquidation. If the Company is
forced to declare bankruptcy or pursue liquidation, the value of the Company's
assets may not be sufficient to pay its creditors in full and, accordingly, the
Company's common stock and preferred stock would have no value. The Company will
continue to seek additional funding both to support its operation as a holding
company as well as its very limited efforts related to potential new product
development. While the Company hopes to be able to obtain additional financing
for these
16
limited product development activities, continue to borrow money or raise
capital through the sale or borrowing against the shares of Innovations related
to its holdings of shares of the Ashton Common Stock and the Note, the Company
may not be able to raise this capital before it runs out of cash. In addition,
the Company has pledged a portion of its shares of Capital Stock in Innovations
to SOFTBANK as payment for loans that have already been provided. In the event
that the Company does not have enough cash to pay the principal and interest on
these loans as they come due, the Company's holdings in Innovations would be
reduced accordingly. This would reduce the Company's ability to utilize these
assets to raise additional capital necessary to ensure continuation as a going
concern. There is no assurance that the Company's holdings in Innovations, as
represented by Innovations' holdings of shares of the Ashton Common Stock, will
have any value useable as collateral for a loan or sellable to raise cash at any
time or in a time frame that would let the Company continue as a going concern.
History of Losses
OptiMark has experienced losses each quarter since its inception.
Although the business has been restructured, losses are likely to continue for
the foreseeable future. As of March 31, 2002 the Company's accumulated deficit
was approximately $366,166,000.
Critical Accounting Policies
As a result of the Company's having discontinued its US Equities
Business and suspended its Exchange Solutions Services Business, the Company
considers the two critical policies described below to be most important to the
portrayal of its financial condition and that require the most subjective
judgment and, as a result decrease the inherent level of precision in our
financial statements.
Reserve Related to Contract Renegotiations and Terminations. At the
time we discontinued the US Equities Business, this reserve was recorded to
reflect the contingent liability to those companies from which we had previously
contracted for leased equipment and related services. The reserve balance is
substantially less than the gross claims made by the former suppliers and
management must use substantial judgment based on, among other factors,
disputing the size of the gross claims based on contractual provisions,
asserting counterclaims and affirmative defenses, mitigating the claims through
returns or sales of leased equipment and negotiating substantial reductions in
the net amounts claimed after mitigation.
Impairment of Property and Equipment. As a result of the Company having
discontinued its US Equities Business in September 2000 and having suspended its
Exchange Solutions Services Business in January 2002, certain property and
equipment is no longer in use and must be considered impaired. Some of these
assets may be directly identifiable to the discontinued business; however, many
others are shared and/or non-specific and careful judgment is required to
determine the appropriate impairment reserve.
17
Results of Operations
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2001
Revenue. Total revenue for the three months ended March 31, 2002 was $0
as compared to approximately $3,418,000 for the three months ended March 31,
2001. Of these amounts, approximately $1,318,000 in 2001 was derived from
services provided to our affiliate, Japan OptiMark Systems, Inc. ("JOS"). The
balance in 2001 was derived from services to Nasdaq and the recognition of
revenue previously deferred. The reduction in services to JOS resulted from the
suspension of the JOS trading system which operated on the Osaka Securities
Exchange, per OptiMark's amended agreement with Japan OptiMark Systems, Inc.,
dated May 23, 2001. Billings for enhancement and maintenance ceased as of August
31, 2001.
Operating Expenses. Operating expenses for the three months ended March
31, 2002 totaled approximately $3,292,000 as compared to approximately
$8,390,000 for the three months ended March 31, 2001. The following is a
discussion of the changes as it relates to each of the components:
Cost of Sales. Cost of sales includes all direct costs and expenses
incurred in order to develop and implement our products. Cost of sales for the
three months ended March 31, 2002 totaled $0 as compared to approximately
$2,251,000 for the three months ended March 31, 2001. The decrease of $2,251,000
is due to the absence of revenue generating projects in 2002.
Sales and Marketing. Sales and marketing expense for the three months
ended March 31, 2002 totaled $314,000 as compared to approximately $446,000 for
the three months ended March 31, 2001. The decrease of $132,000 was primarily
due to a decrease in personnel related expenses, communication expense and
public relations expenses in connection with the decrease in resources utilized
in promoting the company's products and headcount reductions within the
marketing department.
Research and Development. Research and development expense totaled
approximately $1,463,000 for the three months ended March 31, 2002 compared to
approximately $1,544,000 for the three months ended March 31, 2001. The decrease
of $81,000 is primarily due to reduced expenditures to customize and develop
OptiMark's proprietary matching technology for use in future applications. The
decrease consists primarily of personnel related expenses and communication
expense.
General and Administrative. General and administrative expense totaled
approximately $1,124,000 for the three months ended March 31, 2002 as compared
to approximately $3,116,000 for the three months ended March 31, 2001. The
decrease of $1,992,000 is primarily due to a decrease in the cost of OptiMark's
bonus program, gain realized on the sale of assets and decreases in personnel
related expenses, corporate insurance expense and other general office expenses.
The cost of the
18
bonus program was $0 for the three months ended March 31, 2002 and approximately
$1,000,000 for the three months ended March 31, 2001.
Depreciation and Amortization. Depreciation and amortization expense
totaled approximately $391,000 for the three months ended March 31, 2002 as
compared to approximately $1,034,000 for the three months ended March 31, 2001.
The decrease of $643,000 is primarily due to the write off of assets deemed
permanently impaired during the latter part of 2001.
Other Income and Expense. Other income and expense includes interest
income on cash and cash equivalents and interest expense on capital leases.
Other expense, net, was approximately $300 for the three months ended March 31,
2002 as compared to other expense, net of approximately $43,000 for the three
months ended March 31, 2001. The decrease of $42,700 is due to a reduction in
interest incurred on capital lease obligations.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2002, OptiMark's principal sources of liquidity
consisted of approximately $212,000 of cash and cash equivalents as compared to
approximately $761,000 of cash and cash equivalents as of March 31, 2001.
Net cash used in continuing operating activities for the three months
ended March 31, 2002 was approximately $2,604,000 and net cash used in operating
activities for the three months ended March 31, 2001 was approximately $918,000.
The change in net operating cash flows was attributable to net losses in both
periods, partially reduced by non-cash charges such as depreciation and
amortization. The fluctuation between periods was also affected by net changes
in working capital.
Net cash provided by investing activities was approximately $369,000
for the three months ended March 31, 2002 and net cash used in investing
activities was approximately $520,000 for the three months ended March 31, 2001.
The cash provided by investing activities in 2002 primarily consisted of the
proceeds received from the sale of assets, chiefly computer equipment. The uses
of cash in 2001 for investing activities primarily consisted of the purchase of
a mainframe computer as part of a settlement of all amounts owed to a company
from which Optimark had previously leased equipment.
Net cash provided by financing activities for the three months ended
March 31, 2002 was approximately $1,307,000 and net cash used in financing
activities for the three months ended March 31, 2001 was approximately $82,000.
In 2002, cash was provided from the sale of Series E Cumulative Preferred Stock
("Series E Preferred") and a shareholder loan.
The results indicated for continuing operations in the Condensed
Consolidated Statements of Cash Flows for the three months ended March 31, 2002
are not necessarily indicative of the spending rates for the continuing
operations. The results from operations in future periods may differ materially
as we continue to focus our resources on the new business model.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's only exposure to market risk at March 31, 2002 is related
to interest rates.
Interest Rate Risk. As of March 31, 2002 OptiMark had cash and cash
equivalents of approximately $212,000 that consisted of cash and highly liquid
overnight investments. These investments may be subject to interest rate risk
however because of the low level of cash balances, any such risk would not be
material.
Foreign Currency Exchange Rate Risk. As of March 31, 2002, the Company
is not subject to foreign currency exchange rate risk.
Equity Price Risk. As of March 31, 2002, the Company is not subject to
equity price risk.
20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
OptiMark and certain of its subsidiaries are subject to the legal
proceedings described in the Company's amended and restated Annual Report on
Form 10-K/A for the year ended December 31, 2001, as filed with the Securities
and Exchange Commission on July 22, 2002.
Finova Capital Corporation (Plaintiff) v. OptiMark Technologies, Inc.,
OptiMark, Inc. and OptiMark Holdings, Inc. (Defendants), Superior Court of New
Jersey - Hudson County. Plaintiff filed this action on June 15, 2001, asserting
claims that allegedly arise out of an equipment lease agreement pursuant to
which it is alleged that OptiMark Technologies, Inc. (now known as OptiMark US
Equities, Inc.) agreed to lease certain equipment. Plaintiff contends that
OptiMark Technologies, Inc. breached the equipment lease by, among other things,
failing to pay the amounts due under the equipment lease. Based on these
allegations, Plaintiff has made claims for breach of contract, tortuous
interference, fraudulent conveyance of such equipment lease agreement and/or the
related equipment and/or other assets from OptiMark Technologies, Inc. to
OptiMark, Inc. and/or OptiMark Holdings, Inc. and damages in unspecified amounts
exceeding $6,000,000, plus interest, late charges, litigation costs and
expenses, and reasonable counsel fees. In the fourth quarter of 2001, most, if
not all, of the equipment that was the subject of the equipment lease was
returned consensually to Plaintiff. The parties currently are engaged in
exchanging responses to written discovery requests. On February 14, 2002,
Plaintiff made a motion to add Innovations as a defendant in the case. In the
motion, Plaintiff alleges that the transfer of certain assets from OptiMark to
Innovations on December 31, 2001 constituted a fraudulent conveyance of such
assets. On March 25, 2002, the court granted Finova permission to amend its
complaint to include Innovations. The amended complaint was served on
Innovations on April 22, 2002 and Innovations has until approximately mid-August
2002 to file a response to the complaint. On June 13, 2002, Finova amended the
complaint to include Ashton. The Defendants, Innovations and Ashton intend to
defend this action and the motion vigorously. The outcome of this litigation
cannot be predicted at this time, although it may have a material affect on the
Company's financial condition and results of operations.
Comdisco, Inc. (Plaintiff) v. OptiMark Technologies, Inc. (now known as
OptiMark US Equities, Inc.) (Defendant) and Avnet, Inc. State of Connecticut
Superior Court, Judicial District of Fairfield at Bridgeport. Plaintiff filed a
Complaint on December 18, 2000. The action seeks possession of leased equipment,
proceeds from the sale of leased equipment, a deficiency judgment in an
unspecified amount, and fees and costs and interest. Since the complaint was
filed, most, if not all, of the equipment was returned consensually to
Plaintiff. Based on the complaint filed in a related action in New Jersey
(described below) and on other information received from Comdisco, it is
believed that amount of damages claimed is approximately $6,500,000. On March
30, 2001, the parties agreed to consolidate a related case captioned Comdisco,
Inc. v. OptiMark Technologies, Inc., Superior Court of New Jersey Law Division
Hudson
21
County (filed on January 23, 2001) with the Connecticut proceeding. To
effect the consolidation, on or about April 2, 2001, the parties filed a
stipulation withdrawing Defendant's motion to dismiss Comdisco's Complaint filed
in the Superior Court of New Jersey. That motion had sought dismissal
principally on grounds that an identical action alleging breach of contract had
previously been filed by Comdisco in Connecticut State Court. In exchange for
Defendant's agreement to withdraw its motion, Comdisco agreed to withdraw its
New Jersey Complaint without prejudice. In June 2001, Comdisco made a motion for
summary judgment with respect to a claim against Avnet relating to a guaranty by
Avnet of Defendant's obligations under a Master Lease Agreement for computer
equipment leased from Comdisco. Avnet responded to Comdisco's motion by denying
liability under the guaranty and asserting a variety of special defenses. In
addition, Avnet filed a cross claim against Defendant. The cross claim alleges
that if Avnet is found liable under the guaranty, then Avnet becomes subrogated
to Comdisco's rights under the Master Lease Agreement to the extent of the
payments Avnet makes to Comdisco and that OptiMark is liable to Avnet for any
such payments. Defendant has responded to the cross-claim by denying its
material allegations. The Company intends to defend this action vigorously. On
February 12, 2002, Plaintiff filed a motion for default for failure to plead,
alleging that OptiMark Technologies, Inc. did not file a pleading responsive to
Plaintiff's second amended complaint. This default will be set aside if OptiMark
Technologies, Inc. files an answer before a judgment after default has been
rendered. OptiMark Technologies, Inc. intends to file such a responsive
pleading. The outcome of this litigation cannot be predicted at this time,
although it may have a material affect on the Company's financial condition and
results of operations.
Management intends to vigorously contest these suits ; however, the
likelihood that these claims will result in loss or impairment of an asset is
probable. Any loss or impairment resulting from any of these suits may have a
material impact on the Company's financial position, results of operations and
cash flows in future years. An accrual of $13,525,000 with respect to these loss
contingencies has been recorded by the Company as part of its loss on
discontinued operations, which represents management's best estimate of the
outcome of the negotiations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2002, the Company sold 56,668
shares of Series E Preferred at $15 per share. The aggregate amount received
from this sale was $850,000, which was paid in cash. The shares were sold to
SOFTBANK Capital Partners LP, SOFTBANK Capital LP, SOFTBANK Capital Advisors
Fund LP, and Big Island LLC, each of whom is an "accredited investor" as defined
in Rule 501(a) under the Securities Act of 1933, as amended. The issuance of the
Series E Preferred constitutes a private placement under Section 4(2) of the
Securities Act of 1933, as amended, and Rule 506 promulgated thereunder.
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
10.1 Separation Agreement, dated April 11, 2002, by and between
OptiMark Holdings, Inc. and Neil G. Cohen.
99 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
B. Reports on Form 8-K
Form 8-K, filed January 15, 2002, responding to Items 2 and 7.
The Report related to the capitalization of OptiMark Innovations Inc. (formerly
known as "OTSH, Inc.").
Form 8-K, filed January 31, 2002, responding to Items 5 and 7.
The Report related to the settlement reached between the Company and a former
vendor.
Form 8-K, filed February 8, 2002, responding to Items 7 and 9.
The Report related to the execution of the Securities Purchase Agreement between
the Ashton Technology Group, Inc. and OptiMark Innovations Inc.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
OPTIMARK HOLDINGS, INC.
August 26, 2002
By: /s/ Robert J. Warshaw
--------------------------------
Name: Robert J. Warshaw
Title: Chief Executive Officer
and Principal Financial Officer