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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to _____
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Commission File Number: 001-11747
THE ASHTON TECHNOLOGY GROUP, INC.
DELAWARE 22-6650372
(State of incorporation) (I.R.S. Employer
Identification No.)
1835 MARKET STREET, SUITE 420
PHILADELPHIA, PENNSYLVANIA 19103
(215) 789-3300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 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 X No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practical date:
Common Stock $.01 par value 691,674,817
(Title of Class) (No. of shares as
of August 14, 2002)
THE ASHTON TECHNOLOGY GROUP, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 2002 and March 31, 2002...................4
Consolidated Statements of Operations -
For the Three Months Ended June 30, 2002 and 2001................................5
Consolidated Statements of Cash Flows -
For the Three Months Ended June 30, 2002 and 2001................................6
Notes to Consolidated Financial Statements.......................................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................15
Additional Factors that may Affect Future Results.................................20
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................................27
Item 2. Changes in Securities and Use of Proceeds ........................................27
Item 3. Defaults Upon Senior Securities ..................................................28
Item 4. Submission of Matters to a Vote of Security Holders ..............................28
Item 5. Other Information ................................................................28
Item 6. Exhibits and Reports on Form 8-K..................................................28
Signatures ................................................................................29
2
PART I - FINANCIAL INFORMATION
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements included in this document constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as
amended, and the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other important factors that could cause our actual results, performance, or
achievements to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
risks, uncertainties and other important factors include, among others:
.. availability, terms and deployment of capital;
.. our ability to successfully operate and obtain sustained liquidity in
our trading products in order to achieve profitability;
.. our ability to develop markets for our products;
.. our ability to develop intended future products;
.. fluctuations in securities trading volumes, prices and market
liquidity;
.. our dependence on arrangements with self-regulatory organizations;
.. our dependence on proprietary technology;
.. technological changes and costs of technology;
.. industry trends;
.. competition;
.. changes in business strategy or development plans;
.. availability of qualified personnel;
.. changes in government regulation;
.. general economic and business conditions; and
.. other risk factors referred to in this Form 10-Q under the heading
"Additional Factors That May Affect Future Results".
In some cases, you can identify forward-looking statements by terms
such as "may," "will," "should," "could," "would," "expects," "plans,"
"anticipates," "believes," "estimates," "projects," "predicts," "potential" or
"continue" or other forms of or the negative of those terms or other comparable
terms.
Although we believe that the expectations reflected in the
forward-looking statements are based on reasonable assumptions, we cannot
guarantee future results, levels of activity, performance or achievements.
Moreover, neither we nor any other person assumes responsibility for the
accuracy and completeness of such statements. We do not have a duty to update
any of the forward-looking statements after the date of this filing.
3
ITEM 1. FINANCIAL STATEMENTS
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, MARCH 31,
2002 2002
(UNAUDITED) (AUDITED)
------------ ------------
ASSETS
Cash and cash equivalents ......................................................$ 7,317,231 $ 635,087
Accounts receivable ............................................................ -- 4,798
Prepaid expenses and other current assets ...................................... 368,081 144,025
------------ ------------
Total current assets .................................................. 7,685,312 783,910
Property and equipment, net of accumulated depreciation ........................ 1,306,056 1,515,430
Exchange memberships ........................................................... 159,752 159,752
Investments in and advances to affiliates ...................................... -- 224,757
Other assets ................................................................... 129,585 102,782
------------ ------------
Total assets ..............................................................$ 9,280,705 $ 2,786,631
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Accounts payable and accrued expenses ..........................................$ 833,853 $ 1,935,926
Net liabilities of discontinued operations ..................................... 59,648 59,956
Short-term note, net of discount ............................................... -- 322,581
------------ ------------
Total current liabilities ................................................. 893,501 2,318,463
Secured note.................................................................... 3,660,327 --
Secured convertible note ....................................................... 110,565 4,711,400
Other liabilities............................................................... 51,675 41,044
------------ ------------
Total liabilities...................................................... 4,716,068 7,070,907
Commitments and contingencies
Preferred Stock - shares authorized: 3,000,000
590,000 shares designated as Series B - (liquidation preference equals
$240,000); shares issued and outstanding; ..................................... 240,000 240,000
Common stock - par value: $.01; shares authorized: 1,000,000,000 and
100,000,000; shares issued and outstanding; 691,674,817 and
68,282,250 ..................................................................... 6,916,749 682,823
Additional paid-in capital ..................................................... 85,252,716 79,217,625
Accumulated deficit ............................................................ (87,834,934) (84,414,829)
Accumulated other comprehensive loss............................................ (9,895) (9,895)
------------ ------------
Total stockholders' equity (deficiency) ................................... 4,564,636 (4,284,276)
------------ ------------
Total liabilities and stockholders' equity (deficiency) ...................$ 9,280,705 $ 2,786,631
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30,
---------------------------------
2002 2001
-------------- -------------
REVENUES .......................................................................$ 253,981 $ 205,738
-------------- -------------
EXPENSES:
Salaries and employee benefits............................................... 1,268,823 1,557,662
Non-cash compensation........................................................ 720,000 --
Professional fees............................................................ 151,591 793,265
Brokerage, clearing and exchange fees........................................ 185,477 533,503
Depreciation and amortization ............................................... 188,468 249,905
Loss on trading activities.................................................... -- 271,517
Selling, general and administrative ......................................... 515,407 827,315
-------------- -------------
Total costs and expenses .............................................. 3,029,766 4,233,167
-------------- -------------
Loss from operations......................................................... (2,775,785) (4,027,429)
-------------- -------------
Interest income.............................................................. 20,301 63,987
Interest expense............................................................. (428,723) --
Other income................................................................. 1,087 --
Equity in loss of affiliates................................................. (231,905) (11,095)
--------------- -------------
Net loss from continuing operations ...........................................$ (3,415,025) $ (3,974,537)
============== =============
Income /(loss) from discontinued operations of eMC........................... 308 (889)
-------------- -------------
Net loss .......................................................................$ (3,414,717) $ (3,975,426)
============== =============
Dividends attributed to preferred stock......................................... -- (664,600)
Dividends in arrears on preferred stock......................................... (5,385) (112,628)
-------------- -------------
Net loss applicable to common stock............................................$ (3,420,102) $ (4,752,654)
Basic and diluted net loss per common share from continuing operations..........$ (0.01) $ (0.14)
Basic and diluted net loss per common share from discontinued operations........$ (0.00) $ (0.00)
-------------- -------------
Basic and diluted net loss per common share.....................................$ (0.01) $ (0.14)
============== =============
Weighted average number of common shares outstanding, basic and diluted......... 428,214,900 33,227,145
============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
5
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED JUNE 30,
--------------------------------
2002 2001
------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations.............................................$ (3,415,025) $ (3,974,537)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................... 188,468 249,905
Common stock issued in connection with consulting agreement.................. 41,250 --
Common stock issued in connection with separation agreement.................. 720,000 --
Non-cash interest expense.................................................... 424,911 --
Equity in loss of affiliates................................................. 231,905 11,095
Changes in operating assets and liabilities:
Accounts receivable and prepayments.......................................... 4,798 480,313
Advances to affiliates....................................................... (7,148) (18,057)
Prepaid expenses and other current assets.................................... (224,056) --
Other assets................................................................. (26,803) --
Accounts payable and accrued expenses ....................................... (991,458) (214,778)
Other liabilities ........................................................... 10,631 6,637
------------ --------------
Net cash used in continuing operations................................. (3,042,527) (3,459,422)
Net cash used in discontinued operations............................... -- (80,098)
------------ --------------
Net cash used in operating activities.................................. (3,042,527) (3,539,520)
------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale (purchase) of property and equipment.................................... 20,905 (114,921)
Proceeds from maturity of securities available-for-sale...................... -- 500,000
Proceeds from issuance of note receivable.................................... (200,000) --
Cash received from notes receivable.......................................... 200,000 31,917
------------ --------------
Net cash provided by investing activities.............................. 20,905 416,996
------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of short term note.................................... 550,000 --
Issuance costs on common stock............................................... (296,234) (40,825)
Repayment of short term notes................................................ (550,000) --
Proceeds from issuance of secured convertible note........................... 2,727,273 --
Proceeds from issuance of common stock....................................... 7,272,727 --
------------ --------------
Net cash provided by (used in) financing activities.................... 9,703,766 (40,825)
------------ --------------
Foreign currency translation adjustment......................................... -- 22,713
------------ --------------
Net Increase / (decrease) in cash and cash equivalents.......................... 6,682,144 (3,140,636)
Cash and cash equivalents, beginning of period.................................. 635,087 6,028,883
------------ --------------
Cash and cash equivalents, end of period........................................$ 7,317,231 $ 2,888,247
============ ==============
Supplemental disclosure of non-cash activities:
Common stock issued in final arbitration settlement..........................$ 116,000 $ --
============ ==============
Common stock issued in connection with consulting agreement..................$ 41,250 $ --
============ ==============
Warrants issued in connection with exchange agreement........................$ 1,188,000 $ --
============ ==============
Beneficial conversion feature of secured convertible note....................$ 2,727,273 $ --
============ ==============
Common stock issued in connection with separation agreement..................$ 720,000 $ --
============ ==============
Conversion of short-term note into common stock..............................$ 500,000 $ --
============ ==============
Non-cash and accrued dividends on preferred stock............................$ 5,385 $ 777,228
============ ==============
The accompanying notes are an integral part of these consolidated financial
statements.
6
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared
without audit pursuant to the rules and regulations of the SEC. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such rules
and regulations. The accompanying consolidated financial statements reflect all
adjustments that are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented. Such adjustments are
of a normal recurring nature. Certain amounts in prior periods have been
reclassified for comparative purposes.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
These consolidated financial statements should be read in conjunction
with the audited financial statements and the notes thereto included in our
Annual Report on Form 10-K for the year ended March 31, 2002. The results for
the three months ended June 30, 2002 are not necessarily indicative of the
results that may be expected for the year ending March 31, 2003.
As of June 30, 2002, we conducted our business through the following
operating affiliates:
. ATG Trading, LLC (ATG Trading)
. Universal Trading Technologies Corporation (UTTC), and its
subsidiaries:
. Croix Securities, Inc. (Croix),
. REB Securities, Inc. (REB)
. Ashton Technology Canada, Inc. (Ashton Canada), and
. Kingsway-ATG Asia, Ltd. (KAA).
The accounts of each of our majority-owned subsidiaries, UTTC, ATG
Trading, and Ashton Canada are consolidated with those of Ashton in our
consolidated financial statements. We generally account for investments in
businesses of which we own between 20% and 50% of the outstanding equity using
the equity method. Under this method, the investment balance, originally
recorded at cost, is adjusted to recognize our share of net earnings or losses
of the affiliate as they occur, limited to the extent of our investment in and
advances to the investee. These adjustments are included in "equity in loss of
affiliates" in our consolidated statements of operations. Other investments in
which our interest is less than 20% and which are not classified as
available-for-sale securities are carried at the lower of cost or net realizable
value. We assess the need to record impairment losses on investments and record
such losses when the impairment is determined to be more than temporary in
nature.
The results of operations for each of our subsidiaries and equity method
investees are accounted for from their dates of formation or investment. All
significant intercompany accounts and transactions by and among Ashton and its
subsidiaries are eliminated in consolidation.
During the three months ended June 30, 2002, one customer accounted for
approximately 90% of our revenues.
DISCONTINUED OPERATIONS
We formed Electronic Market Center, Inc. (eMC) as a wholly owned
subsidiary in June 1998 to develop, operate and market a global electronic
distribution channel for financial products and services. In April 2000,
Ashton's board of directors agreed to fund eMC's initial development efforts. On
April 18, 2000, eMC acquired 100% of the stock of E-Trustco.com Inc., a
business-to-business electronic trust services company. E-Trustco's plan was to
offer and outsource objective financial advisory services through a
state-chartered trust company using eMC's electronic distribution channel.
7
After being unable to find other funding sources or consummate a sale of
eMC to a third party, eMC's board of directors voted on March 29, 2001 to begin
the orderly winding down of its operations, including terminating all of its
employees, selling its assets, and negotiating the settlement of its outstanding
liabilities. eMC's results are reflected as discontinued operations in the
consolidated financial statements for all periods presented.
GOMEZ, INC.
Gomez, was one of our majority-owned subsidiaries through December 1999.
As a result of Gomez's sale of preferred stock on December 30, 1999, our
ownership percentage in Gomez was reduced to below 50%. As of December 31, 1999,
we began accounting for our investment in Gomez under the equity method of
accounting due to the decrease in ownership and our reduced representation on
Gomez's board. As a result, we consolidated Gomez's operating results only
through December 31, 1999. Pursuant to the equity method of accounting, the
carrying amount of our remaining investment in Gomez was increased from a
deficit of $5,568,475 to zero.
In July 2001, Gomez raised approximately $1 million of capital from
certain existing investors in the form of senior secured notes. We participated
in that round of funding through the purchase of a senior secured note in the
amount of $38,633. The balance of the note and accrued interest thereon of
$41,289 was included in "Investments in and advances to affiliates" on our March
31, 2002 consolidated balance sheet. On November 7, 2001, Gomez completed the
sale and transfer of substantially all of its assets and liabilities to GZ
Advisors, Inc. Gomez, Inc. is being liquidated and GZ Advisors, Inc. has been
renamed Gomez, Inc. Currently, our investment in the new Gomez, Inc. consists of
the senior secured note that is convertible into approximately 1.4% of the fully
diluted common stock of the new Gomez, Inc. In addition, our series A preferred
stock in Gomez was converted into common stock of the new Gomez, Inc.,
representing an additional 1.1% of the fully diluted ownership. Pursuant to EITF
99-10 Percentage Used to Determine the Amount of Equity Method Losses, during
the three months ended June 30, 2002 we recognized our share of Gomez's losses
to the extent of our advances in the amount of $42,242.
2. RECENT DEVELOPMENTS
INVESTMENT BY OPTIMARK INNOVATIONS INC.
On May 7, 2002, Ashton and OptiMark Innovations Inc. (Innovations), a
Delaware Corporation, closed the transactions contemplated by the securities
purchase agreement by and between Ashton and Innovations dated as of February 4,
2002 (as amended on March 6, 2002 and May 3, 2002). Pursuant to the purchase
agreement, Ashton issued 608,707,567 shares of its common stock to Innovations.
In consideration for the shares, Innovations paid Ashton (i) $7,272,727 in cash
and (ii) intellectual property and other non-cash assets. In addition
Innovations loaned Ashton $2,727,273 in cash. The loan was evidenced by a senior
secured convertible note executed by Ashton in favor of Innovations. The note
accrues interest at a rate of 7.5% per annum and matures in May 2007. The note
is convertible at any time into 52,870,757 shares of Ashton common stock,
subject to customary anti-dilution adjustments. The note is secured by a pledge
and security agreement pursuant to which Innovations has received a blanket lien
on Ashton's assets, subject to the terms and conditions of the intercreditor,
subordination and standstill agreement by and among RGC, Innovations and Ashton.
Since the note was convertible into shares of Ashton common stock at a rate of
$0.05158 per share, and the market price of Ashton common stock was $0.17 on the
date of the agreement, Ashton recorded the beneficial conversion feature of the
note in accordance with EITF 98-5 Accounting for Convertible Securities with
Beneficial Conversion Features or Contingency Adjustable Conversion Ratios. We
recorded the beneficial conversion feature as a discount of $2,727,273 on the
note, and have amortized $80,303 as interest expense through June 30, 2002. Also
during the three months ended June 30, 2002, we accrued interest expense at a
rate of 7.5%, or $30,262, on the Innovations note. The note is reflected on the
June 30, 2002 consolidated balance sheet net of the remaining unamortized
discount of $2,646,970, plus the accrued interest of $30,262.
The intellectual property and non-cash assets transferred to Ashton by
Innovations as partial consideration for the purchase of Ashton's common stock
consists of:
. U.S. provisional patent application (No. 60/323,940 entitled
"Volume Weighted Average Price System and Method" filed on
September 1, 2001) that relates to Volume Weighted Average
Price, or "VWAP" trading. The provisional patent application
relates to processing orders for trading equity securities at
the VWAP and guaranteeing the price and quantity of trades who
submit orders.
8
. Trade secrets and know how relating to VWAP trading.
. An assignment to Ashton of a license for technology for use in
a system for VWAP trading.
. An assignment to Ashton of all rights, duties, and obligations
under a bilateral nondisclosure agreement between the licensor
of the technology above and Innovations.
. Software developed to implement critical components of the VWAP
trading system, including certain tools for testing, de-bugging
and building source code.
The provisional patent application will not provide any exclusive rights
to Ashton unless and until a patent is issued. There can be no assurance that
the provisional patent application will result in a patent being issued.
Ashton has not obtained an independent third party valuation of the
intellectual property and other non-cash assets. In accordance with Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
the recorded amount of the intellectual property and non-cash assets should be
based upon either the quoted market price of the shares sold to Innovations on
the date of closing, or the fair value of the assets acquired, whichever is more
clearly evident and thus, more reliably measurable. Although the fair value of
securities traded in the market is generally more clearly evident than the fair
value of assets acquired, Ashton has considered that its stock is thinly-traded
on the OTC Bulletin Board, its market price has experienced significant
fluctuations, and the number of shares outstanding has increased substantially
as a result of the transaction, and has concluded that the quoted market price
of the stock was not reflective of the fair value of the transaction.
Alternatively, Ashton considered a more appropriate measure of the value of the
transaction to be based on the fair value of the assets acquired, or $7,272,727,
the amount of cash received. The consolidated balance sheet reflects no value
for the intellectual property and non-cash assets received in the transaction
due to Ashton's inability to sell, transfer, license, rent or exchange those
assets.
As of June 30, 2002, Innovations owned approximately 88% of the
outstanding shares of Ashton common stock. Assuming conversion of the note
issued to Innovations, Innovations would own approximately 89% of Ashton common
stock. As long as Innovations owns a majority of our outstanding common stock,
Innovations will be able to elect a majority of our board of directors and
control the outcome of any other matter submitted to a vote of our stockholders.
On April 30, 2002, Innovations agreed to lend Ashton $300,000 to be
credited against the purchase price of the Ashton common stock that was
purchased pursuant to the securities purchase agreement by and between Ashton
and Innovations dated as of February 4, 2002. Additionally, on April 30, 2002,
Ashton agreed to lend OptiMark, Inc., the parent company of Innovations,
$200,000 to be credited at the closing against reimbursable expenses owed by
Ashton pursuant to the securities purchase agreement with Innovations. The notes
were satisfied on May 7, 2002 at the closing of the securities purchase
agreement with Innovations.
RGC BRIDGE LOAN AND EXCHANGE AGREEMENT
On April 11, 2002, RGC International Investors, LDC (RGC) agreed to lend
Ashton up to $250,000, repayable upon the closing of the securities purchase
agreement with Innovations. The loan accrued interest at a rate of 15% and was
secured by a blanket, first priority lien on all assets of Ashton. Ashton
borrowed the entire $250,000 in April 2002, and repaid it on May 7, 2002.
On May 7, 2002, Ashton entered into a securities exchange agreement with
RGC pursuant to which RGC exchanged its 9% secured convertible note for a
four-year, 7.5% non-convertible zero-coupon senior secured note in the principal
amount of $4,751,876 and a five-year warrant to purchase 9 million shares of
Ashton common stock at an exercise price of $0.0448 per share, subject to
customary anti-dilution adjustments. The exchange note is secured by a blanket,
first priority lien on all assets of Ashton (except for certain intellectual
property assets given as consideration to Ashton as part of the transaction with
Innovations), including, without limitation, Ashton's and UTTC's equity
interests in each of its subsidiaries. We recorded the fair value of the
warrant, or $1,188,000, as a discount on the note, and have amortized $43,725 as
interest expense through June 30, 2002. Also during the three months ended June
30, 2002, we recorded interest expense of $40,477 on the 9% note prior to the
exchange, and $52,726 on the 7.5% note after the exchange. The note is reflected
on the June 30, 2002 consolidated balance sheet net of the remaining unamortized
discount of $1,144,275, plus the accrued interest of $56,726.
9
Ashton may redeem the exchange note at any time, in whole but not in
part, for an amount equal to: 30% of the principal amount thereof plus all
accrued and unpaid interest in year one; 53.3% of the principal amount thereof
plus all accrued and unpaid interest in year two; 76.6% of the principal amount
thereof plus all accrued and unpaid interest in year three; and 100% of the
principal amount thereof plus all accrued and unpaid interest thereafter.
The warrant is immediately exercisable as to 2,250,000 shares of common
stock, becomes exercisable as to an additional 2,250,000 shares of common stock
on the 180th day and the 270th day after the date of the warrant and becomes
exercisable in full on the 360th day after the date of the warrant. In addition
the warrant becomes immediately exercisable in full in the event of a change of
control of Ashton, as such term is defined in the warrant agreement. In no
event, however, is RGC entitled to exercise and purchase shares of Ashton common
stock in excess of the number of shares of common stock which would result in
RGC's beneficially owning more than 4.9% of the outstanding shares of Ashton
common stock.
INTERCREDITOR, SUBORDINATION AND STANDSTILL AGREEMENT
On May 7, 2002 and in connection with the closing of the transactions
contemplated by the purchase agreement with Innovations and the securities
exchange agreement with RGC, Ashton, UTTC, RGC and Innovations entered into an
intercreditor, subordination and standstill agreement memorializing the
agreements of the parties as to the priority of payment and security with
respect to the obligations arising under the Innovations note and the exchange
note, respectively, and the rights and remedies of Innovations and RGC with
respect to such obligations. Pursuant to this agreement, RGC has a blanket,
first-priority lien on all of the assets of Ashton, except for certain
intellectual property assets given as consideration to Ashton as part of the
Innovations transaction.
SHORT-TERM NOTE WITH HK WEAVER GROUP, LTD.
On January 30, 2002, HK Weaver Group, Limited, formerly known as
Kingsway Electronic Services, Limited, agreed to lend up to $500,000 to Ashton
under a bridge loan agreement. $250,000 of the loan amount was repayable through
the mandatory issuance of 5 million shares of Ashton common stock, and the
remaining $250,000 was either convertible into an additional 5 million shares of
Ashton common stock or repayable in cash, at the option of HK Weaver. The HK
Weaver loan was secured by 47 million shares of the common stock of KAA owned by
Ashton. HK Weaver is our joint venture partner in KAA, and is a holding company
and a subsidiary of Kingsway International Holdings Limited (KIHL).
We drew a total of $500,000 on the bridge loan during February 2002.
Since the note was convertible into shares of Ashton common stock at a rate of
$0.05 per share, and the market price of Ashton common stock was $0.25 on the
date of the bridge loan agreement, Ashton recorded the beneficial conversion
feature of the note in accordance with EITF 98-5 Accounting for Convertible
Securities with Beneficial Conversion Features or Contingency Adjustable
Conversion Ratios. We recorded the beneficial conversion feature as a discount
of $500,000 on the note, and amortized $322,581 as interest expense through
March 31, 2002. During the three months ended June 30, 2002, we recorded
interest expense for the remaining unamortized discount of $177,419. On May 7,
2002, HK weaver converted the entire $500,000 note into 10 million shares of
Ashton common stock.
Also in connection with the bridge loan, we granted HK Weaver a
three-year option to purchase two million shares of Ashton common stock at an
exercise price equal to the price per share paid by Innovations upon closing of
the securities purchase agreement between Ashton and Innovations, or $0.0448.
The options vest in quarterly installments of 500,000 each, beginning on August
7, 2002.
SEPARATION AGREEMENT WITH FREDERIC W. RITTEREISER
On April 15, 2002, we entered into a separation agreement with the Chief
Executive Officer, Frederic W. Rittereiser that became effective on May 7, 2002.
As consideration for Mr. Rittereiser's resignation, release of claims and
on-going non-solicitation, non-competition and non-disclosure obligations, Mr.
Rittereiser received: (i) a $100,000 cash payment, (ii) expenses incurred by Mr.
Rittereiser from January 18, 2002 through May 7, 2002 totaling $6,000 and (iii)
4.0 million shares of Ashton common stock to be registered with the first
registration statement filed by Ashton within 60 days of the effective date. In
addition, Mr. Rittereiser will receive (i) a
10
$50,000payment within one year of the effective date and (ii) healthcare
insurance paid by Ashton for one year followingthe effective date. During the
three months ended June 30, 2002, we recorded a non-cash compensation charge of
$720,000 related for the value of the shares issued. Mr. Rittereiser waived his
right to an extension of the exercise period for his vested non-qualified
options to purchase Ashton common stock. On July 3, 2002, the final $50,000
payment was made to Mr. Rittereiser and an amendment to the separation agreement
was made to permit Ashton to file a registration statement to register the
resale of his shares by no later than September 30, 2002.
PURCHASE OF KAA SHARES BY HK WEAVER GROUP, INC.
On January 30, 2002, Ashton and HK Weaver Group, Inc. entered into an
"Agreement For Sale And Purchase Of Shares in Respect of the Shares in Kingsway
ATG Asia Limited." Pursuant to the agreement, Ashton sold all of its KAA shares
to HK Weaver in exchange for a HK$23,400,000 zero-coupon note issued to Ashton
by HK Weaver, effective as of May 7, 2002. The note is convertible into HK
Weaver common stock upon an IPO of HK Weaver and listing of such stock on the
Growth Enterprise Market (GEM) of the Stock Exchange of Hong Kong. Upon
conversion of the note, Ashton shall receive HK Weaver shares equal to the total
principal amount of the note divided by the IPO price. Such shares will be
subject to a lockup for 18 months from their issuance date. In the event of
certain defaults identified in the note instrument or should HK Weaver shares
not be listed on GEM by January 30, 2003, Ashton's sole recourse is to redeem
the note and receive the return of its KAA shares. Because of the uncertainty as
to whether an HK Weaver IPO will eventually occur, we have determined the fair
value of our investment in KAA is $0, and we recorded a loss during the three
months ended June 30, 2002 of $189,653.
2002 OPTION PLAN
On June 13, 2002, Ashton's board of directors approved the 2002 Option
Plan, which is designed to enable Ashton to offer employees, directors and
consultants options to purchase Ashton common stock in order to attract, retain
and reward such individuals and to strengthen the mutuality of interests between
such individuals and Ashton's stockholders. 190,221,115 shares of common stock
have been reserved for issuance pursuant to the plan. The plan will be
administered by the board or a committee designated by the board. As of July 26,
2002, approximately 39 employees and 5 directors were potentially eligible for
grants under the 2002 Option Plan. The option price is based on the trading
price of the common stock. The plan contains provisions for granting various
awards, including non-qualified stock options and incentive stock options (ISO)
as defined in Section 422 of the Internal Revenue Code. On July 9, 2002, the
Administrator awarded employees as a group 104,621,612 ISO options at an
exercise price per share of eight cents ($0.08), and on July 16, 2002, the
Administrator awarded non-employee directors as a group 16,168,796 nonstatutory
stock options at an exercise price per share of eight ($0.08) cents. The grants
were all made with a standardized four (4)-year vesting schedule where 1/6th of
each individual's grant shall vest six months from May 7, 2002 (Vesting
Commencement Date), 1/6th shall vest one year from the Vesting Commencement
Date, and 2/9ths shall vest on each of the second, third, and fourth anniversary
dates from the Vesting Commencement Date, subject in each case to the individual
optionee's continuing to be affiliated with Ashton on such dates. The options
are contingent on stockholder approval of the plan. The board will request
stockholder approval of the 2002 Stock Option Plan at the Annual Meeting of
Stockholders on September 13, 2002.
SPECIAL MEETING OF STOCKHOLDERS
At a special meeting of stockholders held on April 18, 2002, our
stockholders approved proposals to (i) amend the Ashton certificate of
incorporation to increase our authorized common stock from 100 million shares to
one billion shares and (ii) amend the Ashton certificate of incorporation to
clarify the circumstances under which certain business opportunities that may be
brought to the attention of Innovations, OptiMark Holdings, Inc. (Holdings) or
an officer or director of Ashton, who simultaneously serves as an officer or
director of Innovations or Holdings, shall be deemed to be opportunities of
Ashton, Innovations and Holdings.
CONSULTING AGREEMENT WITH ARTHUR J. BACCI
On January 7, 2002, Ashton and Mr. Bacci, the former President and Chief
Operating Officer, and a former director of Ashton entered into a consulting
agreement. In consideration for his services in the negotiation of definitive
agreements with Innovations, Mr. Bacci received a payment of $10,000, and Ashton
paid Mr. Bacci's medical coverage through April 1, 2002. Further, on June 13,
2002, the Ashton Board agreed to issue 275,000 shares of common stock to Mr.
Bacci in connection with his services in the Innovations transaction. We
included a
11
charge of $41,250 in professional fees for the three months ended June 30, 2002
related to the issuance of these shares.
SETTLEMENT OF FINAL ARBITRATION AWARD
On April 30, 2002, Ashton entered into a final settlement agreement with
Matthew Saltzman, the former President of eMC, in connection with the
arbitration award in the amount of $510,750 granted to Mr. Saltzman by the
American Arbitration Association on January 14, 2002. Pursuant to the
settlement, we agreed to pay an aggregate of $200,000 cash, issue 400,000 shares
of common stock, and grant certain rights related to eMC to satisfy the award in
its entirety. We paid an initial payment of $50,000 in February 2002. We made an
additional payment of $100,000 and issued 400,000 shares of Ashton common stock
on May 7, 2002. Pursuant to the final settlement agreement we will pay a final
payment of $50,000 together with interest accrued at a rate of 9% per annum on
or before May 7, 2003. For such consideration, Mr. Saltzman executed a release
and waiver of all claims against Ashton or any of its subsidiaries or
affiliates, including, without limitation, claims in connection with the
arbitration. We accrued $51,875 and $266,000 related to the unpaid portion of
the settlement as of June 30, 2002 and March 31, 2002, respectively.
3. EQUITY LINE OF CREDIT AGREEMENT
On July 10, 2001, we entered into an amended equity line arrangement
with Jameson Drive LLC. The equity line is in the form of a securities purchase
agreement and provides for the purchase by Jameson of up to $15 million worth of
shares of Ashton common stock over a 24-month period. We may request a draw on
the equity line by selling common stock to Jameson, and Jameson is obligated to
buy the shares, subject to the terms of the agreement.
There are a number of conditions that we must satisfy before Jameson is
obligated to buy our shares under the equity line, including that a registration
statement covering the resale of the shares purchased by Jameson is declared
effective by the SEC and remains effective. We have already issued the maximum
number of shares covered by the registration statement we filed during 2001 in
connection with the equity line. Therefore, we are unable to access the equity
line by issuing any additional shares until another registration statement
covering the resale of such shares is filed by us and declared effective by the
SEC. There is no guarantee that in the future we will be able to meet these or
any other conditions under the securities purchase agreement or the registration
rights agreement with Jameson, or that we will be able to make any additional
draws on the equity line. The agreement requires us to draw a minimum of $2.5
million over the term of the agreement, and we are limited to drawing a maximum
of $15 million. In order for us to fulfill our obligation to sell a minimum of
$2.5 million to Jameson, we would be required to draw an additional $700,000.
Based on the July 31, 2002 closing price of our common stock of $0.09 per share,
we would be required to issue an additional 8,641,975 shares of common stock to
satisfy this obligation. We have informed Jameson that our preference is to
terminate this agreement without drawing down additional funds. We have not
concluded discussions with Jameson and there is no certainty that we will be
successful in terminating this agreement on terms acceptable to both parties.
4. RELATED PARTY TRANSACTIONS
RELATIONSHIP WITH INNOVATIONS
On May 7, 2002, Ashton and Innovations closed the transactions contemplated by
the securities purchase agreement by and between Ashton and Innovations.
Pursuant to the purchase agreement, Ashton issued 608,707,567 shares of its
common stock to Innovations. In consideration for the shares, Innovations paid
Ashton (i) $7,272,727 in cash and (ii) intellectual property and other non-cash
assets. In addition Innovations loaned Ashton $2,727,273 in cash. The loan was
evidenced by a senior secured convertible note executed by Ashton in favor of
Innovations. The note accrues interest at a rate of 7.5% per annum and matures
in May 2007. The note is convertible at any time into 52,870,757 shares of
Ashton common stock, subject to customary anti-dilution adjustments. The note is
secured by a pledge and security agreement pursuant to which Innovations has
received a first-priority blanket lien on Ashton's assets.
As of June 30, 2002, Innovations owned approximately 88% of the
outstanding shares of Ashton common stock. Assuming conversion of the note
issued to Innovations, Innovations would own approximately 89% of Ashton common
stock, calculated as of May 7, 2002.
12
Mr. Warshaw, Ashton's interim Chief Executive Officer, is also the Chief
Executive Officer of OptiMark, Inc. ("OptiMark"), a stockholder of Innovations
and a wholly-owned subsidiary of OptiMark Holdings, Inc. ("Holdings"), and is
paid a base salary and a guaranteed bonus by OptiMark. OptiMark directly
compensates Mr. Warshaw for his duties as acting Chief Executive Officer of
Ashton. Ashton reimburses OptiMark for that portion of Mr. Warshaw's base salary
and guaranteed bonus that is attributable to his performance as the acting Chief
Executive Officer of Ashton. From May 8, 2002 through June 30, 2002, Ashton has
reimbursed OptiMark $39,317 related to Mr. Warshaw's compensation.
Investors' Rights Agreement
On May 7, 2002, Ashton and Innovations also entered into an Investors'
Rights Agreement (the Rights Agreement). Pursuant to the Rights Agreement,
Innovations acquired certain rights, including but not limited to: (i)
preemptive rights to subscribe for future sales by Ashton of Ashton common
stock, (ii) registration rights and (iii) the right to designate a number of
directors to Ashton's board of directors proportionate to Innovations' ownership
of Ashton common stock. In addition, so long as Innovations holds at least 20%
of Ashton's common stock, Ashton has agreed that it will not take certain
actions without Innovations' prior approval, including, among other things, (i)
the issuance of additional Ashton common stock (with certain exceptions), (ii)
the repurchase or redemption of its securities, (iii) a merger, consolidation or
sale of substantially all of its assets or (iv) engaging in any business other
than the business it currently engages in. So long as Innovations has the right
to appoint at least one director, certain actions by the Ashton's board of
directors cannot be taken without the approval of at least one of the directors
appointed by Innovations. Such actions include, among other things, making
capital expenditures in excess of certain limits, acquisitions or sales of
assets with a value in excess of $50,000 within any fiscal year, incurring debt
in excess of $100,000 (with certain exceptions) and repurchasing or redeeming
Ashton's securities.
Non-Competition Agreement
Ashton, Innovations and Holdings executed a non-competition agreement
upon the closing of the transaction. The parties currently do not compete. This
agreement precludes Innovations, OptiMark, Holdings or any entity that they
control from competing on a worldwide basis with Ashton in designing,
implementing or operating volume-weighted average pricing trading systems or
related services in U.S. and Canadian securities for themselves or any third
party. The agreement has a five-year term from the date of its execution.
Indemnification Agreement
OptiMark US Equities, Inc. (f/k/a OptiMark Technologies, Inc.), a
wholly-owned subsidiary of Holdings ("Equities"), is a defendant in a litigation
captioned Finova Capital Corporation v. OptiMark Technologies, Inc., OptiMark,
Inc. and OptiMark Holdings, Inc., Docket No.: HUD-L-3884-01, Superior Court of
New Jersey - Hudson County. Finova alleges, among other things, that Equities
has effected fraudulent conveyances of certain assets of Holdings (the
"Fraudulent Conveyance Claim"). On the Closing Date, Ashton and Equities entered
into an Indemnification Agreement (the "Indemnification Agreement"). Pursuant to
the Indemnification Agreement, in the event that Finova adds Ashton as a
defendant in the litigation, Equities will indemnify Ashton from and against the
entirety of any actions resulting from, arising out of, relating to, in the
nature of, or caused by the Fraudulent Conveyance Claim.
OptiMark's Control Over Ashton's Business Decisions And Board Of Directors
As long as Innovations owns a majority of our outstanding common stock,
Innovations will be able to elect a majority of our board of directors and
control the outcome of any other matter submitted to a vote of our stockholders.
Such matters could include the composition of our board of directors and,
through it, decisions with respect to our business direction and policies,
including the appointment and removal of officers; any determinations with
respect to mergers or other business combinations; acquisition or disposition of
assets; our capital structure; payment of dividends on our common stock; and
other aspects of our business direction and policies.
In addition, while Innovations owns at least 20% of our common stock,
Innovations will retain control over certain corporate decisions affecting
Ashton. See the description of the Rights Agreement set forth above.
13
SEPARATION AGREEMENT WITH FREDERIC W. RITTEREISER
On April 15, 2002, we entered into a separation agreement with Frederic
W. Rittereiser, Ashton's former Chief Executive Officer, that became effective
as of May 7, 2002. (See Note 2, RECENT DEVELOPMENTS.)
ADIRONDACK CAPITAL, LLC
In 1997, we retained Adirondack Capital, LLC to provide investment
banking and financial advisory services. K. Ivan F. Gothner, a member of our
board of directors through May 7, 2002, is the managing director of Adirondack.
We paid consulting fees to Adirondack amounting to $30,000 during the three
months ended June 30, 2001. We terminated the consulting agreement with
Adirondack effective December 1, 2001, and therefore did not pay any consulting
fees to Adirondack during the three months ended June 30, 2002. Mr. Gothner
received a monthly board retainer through May 7, 2002 when he resigned from the
board of directors.
CONSULTING AGREEMENT WITH ARTHUR J. BACCI
On January 7, 2002, Ashton and Mr. Bacci, the former President and Chief
Operating Officer, and a former director of Ashton entered into a consulting
agreement, whereby Mr. Bacci received a payment of $10,000, and paid medical
coverage through April 1, 2002. Further, on June 13, 2002, Ashton agreed to
issue 275,000 shares of common stock to Mr. Bacci (see Note 2, RECENT
DEVELOPMENTS).
5. NET LOSS PER SHARE
Net loss per share is computed in accordance with SFAS No 128, Earnings
per Share. SFAS 128 requires companies to present basic and diluted earnings per
share. Basic earnings per share excludes the dilutive effect of outstanding
stock options, warrants and convertible securities, whereas diluted earnings per
share includes the effect of such items. The effect of potential common stock is
not included in diluted earnings per share for the three- month periods ended
June 30, 2002 and 2001 because we have incurred net losses; therefore, the
effect of our dilutive securities is anti-dilutive in those periods.
6. COMPREHENSIVE LOSS
Total comprehensive loss, which includes net loss, unrealized gains and
losses on available-for-sale securities, and foreign currency translation
adjustments, amounted to $3,101,036 and $3,951,763, respectively, for the three
months ended June 30, 2002 and 2001.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (SFAS
No. 145). SFAS No. 145 eliminates Statement 4 (and Statement 64, as it amends
Statement 4), which requires gains and losses from extinguishments of debt to be
aggregated and, if material, classified as an extraordinary item, net of the
related income tax effect. As a result, the criteria in APB Opinion No. 30 will
now be used to classify those gains and losses. SFAS No. 145 amends FASB
Statement No. 13 to require that certain lease modifications that have economic
effects similar to sale-leaseback transactions are accounted for in the same
manner as sale-leaseback transactions. We do not expect the adoption of SFAS No.
145 will have a material impact on our financial statements.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Asset (SFAS No. 144), which is effective
January 1, 2002. SFAS No. 144 supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and
the accounting and reporting provisions relating to the disposal of a segment of
a business described in APB No. 30. We do not expect the adoption of SFAS No.
144 will have a material impact on our financial statements.
14
In July 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 143, Accounting for Retirement Obligations
(SFAS No. 143) that records the fair value of the liability for closure and
removal costs associated with the legal obligations upon retirement or removal
of any tangible long-lived assets. We do not expect the adoption of SFAS No. 143
will have a material impact on our financial statements.
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141, Business Combinations (SFAS No. 141)
and Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142). SFAS No. 141 addresses financial accounting
and reporting for business combinations. This statement requires the purchase
method of accounting to be used for all business combinations, and prohibits the
pooling-of-interests method of accounting. This statement is effective for all
business combinations initiated after June 30, 2001 and supercedes APB Opinion
No. 16, Business Combinations as well as FASB Statement of Financial Accounting
Standards No. 38, Accounting for Pre-acquisition Contingencies of Purchased
Enterprises. SFAS No. 142 addresses how intangible assets that are acquired
individually or with a group of other assets should be accounted for in
financial statements upon their acquisition. This statement requires goodwill to
be periodically reviewed for impairment rather than amortized, for fiscal years
beginning after December 15, 2001. SFAS No. 142 supercedes APB Opinion No. 17,
Intangible Assets. We do not expect the adoption of these standards to have a
material effect on our consolidated financial statements.
8. SUBSEQUENT EVENTS
On July 26, 2002 Ashton's board of directors approved, and recommended
that Ashton's stockholders approve, an amendment to Ashton's Certificate of
Incorporation to effect a "reverse stock split" in the range of ten (10) to
thirty (30) pre-split shares for one post-split share, the exact magnitude of
which would be determined by the board of directors. Depending on the exchange
ratio ultimately chosen by the board, the 691,674,817 currently outstanding
shares of common stock would be combined into between approximately 69,167,481
and 23,055,827 shares of common stock.
The reverse stock split, if implemented, would not change the number of
authorized shares of common stock as designated by our certificate of
incorporation or the par value of our common stock. Therefore, because the
number of issued and outstanding shares of our common stock would decrease, the
number of shares remaining available for issuance under our authorized pool of
common stock would materially increase.
Stockholders will be asked to approve the reverse split at Ashton's
Annual Meeting of Stockholders on September 13, 2002. If the reverse split is
approved by the stockholders of Ashton, the board of directors will set the
record date, which shall be no later than October 31, 2002 for stockholders
eligible to participate in the reverse stock split. The board will also
determine the appropriate conversion ratio based upon certain factors, including
but not limited to the then current price of Ashton's common stock and existing
and expected marketability and liquidity of the common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Ashton Technology Group, Inc. was formed as a Delaware corporation
in 1994. We provide equity trade execution services to global institutional
investors. Our goal is to provide liquidity in S&P 500, Nasdaq100 and Russell
1000 securities to global institutional investors at a low cost. Through our
guaranteed fill program, we offer a source of anonymous block liquidity with
minimal market impact.
We conduct our business through the following operating affiliates:
. Universal Trading Technologies Corporation, and its subsidiaries:
. Croix Securities, Inc.
. REB Securities, Inc.
. ATG Trading, LLC
. Ashton Technology Canada, Inc.
. Kingsway-ATG Asia, Ltd. (KAA)
15
As a result of the transaction with OptiMark Innovations, as more fully
described in the Notes to the unaudited consolidated financial statements,
Ashton and its subsidiaries have made substantive changes to its existing
business model and operation of its subsidiaries, including deploying the
majority of our resources to Croix Securities, Inc. and ATG Trading LLC in order
to 1) expand the universe of securities in which we provide liquidity, 2) expand
the sessions in which we provide liquidity, 3) initiate a proprietary trading
algorithm which allows us to provide guaranteed liquidity to our customers at
the volume-weighted average price (VWAP), and 4) lowering our total cost of
executing, clearing and settling trades.
THE ASHTON TECHNOLOGY GROUP, INC.
Ashton provides various services and support to its broker-dealer
subsidiaries, Croix and ATG Trading. Some of the services and support that
Ashton provides include finance, accounting, legal, compliance/ regulatory,
technology, marketing, operations, customer relationship management, and human
resources services.
UNIVERSAL TRADING TECHNOLOGIES CORPORATION
UTTC was incorporated in February 1995 with the business objective of
designing, developing and utilizing the Universal Trading System (UTS) and
future products appropriate for the securities trading market. In September
1995, UTTC entered into an agreement with the Philadelphia Stock Exchange (PHLX)
to employ the UTS. The UTS was later renamed eVWAP, and is operated by its
subsidiary REB Securities, Inc. under the regulatory supervision of the PHLX.
In October 1995, we acquired 80% of the common stock of UTTC, and in
December 1998, our ownership of UTTC was increased to 93%. UTTC's wholly-owned
broker-dealer subsidiary, REB, operates the eVWAP facility of the PHLX. UTTC's
wholly-owned broker-dealer subsidiary, Croix, operates our guaranteed liquidity
program on an agency basis.
Croix Securities, Inc. (Subsidiary of UTTC)
Croix was formed in February 1999 as a wholly owned subsidiary of UTTC.
Croix is a registered broker-dealer with the PHLX and the NASD that focuses on
providing block liquidity for buy-side institutions. Croix fills orders by
matching its customers' orders with liquidity from various providers
anonymously, thereby protecting Croix's client trade information and minimizing
market impact. Croix has an average of over 200 million shares of liquidity
available for its clients in the S&P 500, Nasdaq 100 and 700 of the Russell 1000
stocks. On May 30, 2002, Croix launched the offering of its new interval
product. The interval product provides for balance of day VWAP on half hour time
intervals from 9:30 A.M to 2:00P.M. for the above mentioned securities. Croix
operates strictly as an agency broker that matches buy-side institutional orders
with other buy-side or liquidity provider orders. Ashton is currently preparing
to re-launch the Croix Securities business under a new brand and identity.
Croix's sales and sales trading team consists of sales executives
responsible for new account acquisition, and sales traders responsible for daily
coverage of existing accounts. As of August 1, 2002, Croix had 26 accounts
signed up and ready to trade. From May 7, 2002 through August 1, 2002, Croix
signed up 10 new customers. Our overall customer mix consists of 14 investment
managers, five broker-dealers, four hedge funds and two pension funds. As of
August 1, 2002, four accounts were actively trading with Croix.
REB Securities, Inc. (Subsidiary of UTTC)
REB is a wholly owned subsidiary of UTTC and is a PHLX and NASD
registered broker-dealer. REB operates as the facilities manager for the eVWAP,
and does not engage in any other broker-dealer activities. eVWAP is a fully
automated system that permits market participants to trade eligible securities
before the market opens at the volume-weighted average price for the day. We
launched eVWAP for New York Stock Exchange-listed U.S. stocks during August
1999.
We are currently working with the PHLX to determine whether the eVWAP
system presents a sustainable business model that will generate profitable
revenue for Ashton and for the PHLX. There is no assurance that we will succeed
in reaching a mutually satisfactory business arrangement and therefore we, the
PHLX, or both parties may decide to terminate our current relationship.
16
ATG TRADING LLC
ATG Trading is a broker-dealer engaged in proprietary trading. On June 19, 2002,
ATG Trading applied to become a member of the NASD. We plan to operate ATG
Trading as our principal trading entity that would execute orders to provide
liquidity at the VWAP for securities in the S&P 500, Nasdaq 100 and the majority
of Russell 1000 stocks to various broker-dealers. We plan to use our trading
algorithm to execute orders for the purpose of minimizing the cost of providing
liquidity to our clients at the VWAP. ATG Trading plans to offer its liquidity
to broker-dealers, including Croix, at competitive price levels. ATG Trading was
inactive from January 2002 until July 2002, when we began testing our trading
algorithm. Ashton is currently preparing to re-launch the ATG Trading business
under a new brand and identity.
ASHTON TECHNOLOGY CANADA, INC.
On December 20, 1999, we entered into an agreement to create Ashton
Canada to develop, market and operate intelligent matching, online transaction
systems and distribution systems for use by U.S. and Canadian financial
intermediaries. On June 8, 2000, Ashton Canada entered into an agreement with
the Toronto Stock Exchange to market, deploy, and operate our proprietary eVWAP,
as a facility of the Toronto Stock Exchange for Canadian securities. On January
12, 2001, the Ontario Securities Commission approved an amendment to the Rules
and Policies of the Toronto Stock Exchange, allowing the implementation of eVWAP
as a facility of the Toronto Stock Exchange and allowing Participating
Organizations and eligible institutional clients access to the eVWAP facility.
At this time, the Toronto Stock Exchange has deferred implementing eVWAP as a
facility in 2002, and Ashton Canada has reduced expenses and staffing to address
the reduced prospects for near-term revenues from such a facility.
KINGSWAY-ATG ASIA, LTD.
On December 16, 1999, we finalized a joint venture agreement with
Kingsway International to create KAA. Because we own less than 50% of the equity
of KAA, we account for our investment in KAA under the equity method of
accounting, as required by generally accepted accounting principles in the
United States. We are currently working with management of KAA to determine the
optimal way to develop our business of offering liquidity at the VWAP in Far
East Asia.
On January 30, 2002, Ashton and HK Weaver Group, Inc. entered into an
"Agreement For Sale And Purchase Of Shares in respect of the shares in Kingsway
ATG Asia Limited." Pursuant to the agreement, Ashton has sold all of its KAA
shares to HK Weaver in exchange for a HK$23,400,000 zero-coupon note issued to
Ashton by HK Weaver, effective as of May 7, 2002. The note is convertible into
HK Weaver common stock upon an IPO of HK Weaver and listing of such stock on the
Growth Enterprise Market (GEM) of the Stock Exchange of Hong Kong. Upon
conversion of the note, Ashton shall receive HK Weaver shares equal to the total
principal amount of the note divided by the IPO price. Such shares will be
subject to a lockup for 18 months from their issuance date. In the event of
certain defaults identified in the note instrument or should HK Weaver shares
not be listed on GEM by January 30, 2003, Ashton's sole recourse is to redeem
the note and receive the return of its KAA shares.
Since our inception we have not realized an operating profit and have
reported significant losses. Our business is subject to significant risks, as
discussed further in the section entitled "Additional Factors That May Affect
Future Results."
For the Three Months Ended June 30, 2002 Compared to the Three Months Ended June
30, 2001
We incurred a net loss from continuing operations totaling $3,415,025,
or $0.01 per share, for the three months ended June 30, 2002, compared to
$3,974,537 or $0.14 per share, for the three months ended June 30, 2001. The
decrease is primarily due to a decrease in salaries, professional fees,
brokerage, clearing and exchange fees, depreciation, losses on trading
activities, and general and administrative costs, offset by increases in
interest and other non-operating expenses.
Ashton's revenues totaled $253,981 for the three-month period ended June
30, 2002, and $205,738 for the three-month period ended June 30, 2001. 100% of
the revenues in the current year period were from securities commissions on
trades executed through Croix, while the revenues in the prior year period were
from both Croix commissions and the operation of eVWAP. Approximately 90% of the
revenues during the three-month period ended June 30, 2002 were from
transactions with a single customer, while approximately 90% of the revenues
17
during the three-month period ended June 30, 2001 were from transactions with
four customers. The 23.5% increase in revenues this year is despite a
substantial decrease in the number of shares executed, and is primarily due to
the fact that all of our volume was from trades executed through Croix. eVWAP
has a substantially lower fee structure than the commission structure in place
for the guaranteed liquidity program offered by Croix. Total shares decreased to
8.8 million during the three-month period ended June 30, 2002 from 23.6 million
shares during the same period last year as a result of our scale-back in
operations to focus on the close of the Innovations transaction, which occurred
on May 7, 2002, limitations on our business due to the minimal net capital
levels prior to the transaction with Innovations, and the integration of the
technology, marketing, and product strategy, all of which will be used in the
re-launch of our business.
Salaries and employee benefits decreased 18.5% to $1,268,823 for the
three-month period ended June 30, 2002 from $1,557,662 for the three-month
period ended June 30, 2001. The decrease was primarily due to a decrease in the
number of employees, a temporary salary reduction program in place prior to May
7, 2002, when the Innovations transaction closed, and permanent salary
reductions which were put in place after May 7, 2002. Both the temporary and
permanent salary reductions were applied to substantially all employees,
including the executive management team. During the three-month periods ended
June 30, 2002 and 2001, we employed an average of 38 and 53 employees,
respectively.
We recorded a non-cash compensation charge of $720,000 during the three
months ended June 30, 2002 for the cost of shares issued to Frederic W.
Ritterieser, Ashton's former Chief Executive Officer, in connection with his
separation agreement on April 15, 2002.
Professional fees decreased 80.9% to $151,591 during the three months
ended June 30, 2002 from $793,265 during the three months ended June 30, 2001.
The decrease was primarily a result of a decrease in outsourced labor and
temporary personnel working on the development of our trading systems, and a
decrease in legal expenses. Consulting and temporary personnel decreased to
$96,833 for the three months ended June 30, 2002 from $536,333 during the three
months ended June 30, 2001. In addition, legal expenses decreased approximately
$123,000 for the period, although we recognized $296,234 in legal costs as a
reduction to additional paid-in capital related to the closing of the
Innovations transaction during the current year period.
Brokerage, clearing and exchange fees decreased to $185,477 for the
three months ended June 30, 2002 from $533,503 for the three months ended June
30, 2001. This decrease is a result of fewer trades executed through Croix and
ATG Trading, as well as a decrease in certain execution costs per share. Shares
traded decreased as a result of our scale-back in operations to focus on the
close of the Innovations transaction and preparations for the re-launch of our
business.
Depreciation for the three-month period ended June 30, 2002 decreased
24.6% to $188,468 from $249,905 for the three-month period ended June 30, 2001.
Capital expenditures decreased to $3,008 for the three months ended June 30,
2002 compared to $114,921 in the same period last year.
We recorded a loss on proprietary trading activities of $0 and $271,517
during the three months ended June 30, 2002 and 2001, respectively. The trading
account was previously used by ATG Trading to provide liquidity to participants
in eVWAP and to provide our management with real-time experience with
volume-weighted average price trading and risk management techniques. ATG
Trading was inactive during the three-month period ended June 30, 2002, however
we began trading in July 2002 to test our proprietary VWAP algorithm, and we
anticipate trading on a larger scale during September 2002.
Selling, general and administrative expenses totaled $515,407 and
$827,315 for the three months ended June 30, 2002 and 2001, respectively. The
37.7% decrease is primarily a result of a decrease in occupancy expenses,
communication expenses, marketing and advertising expenses, and travel and
entertainment expenses. Occupancy expenses decreased $61,913 or 25% due to the
renegotiation of our lease at 1900 Market Street in Philadelphia. Our
communications expenses decreased approximately 26% due to the cancellation or
renegotiation of various contracts. Marketing and advertising expense decreased
by $44,817 or 70%, due primarily to cost savings initiatives during April and
May of 2002. Travel and entertainment expenses were decreased by approximately
$45,000 due to less traveling and a focus on decreasing such costs during the
period.
Interest income decreased to $20,301 for the three months ended June 30,
2002 from $63,987 for the three months ended June 30, 2001, as a result of the
lower average cash and cash equivalents balances.
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Interest expense of $428,723 for the three months ended June 30, 2002
was comprised primarily of $110,565 related to the secured convertible note that
we executed with Innovations on May 7, 2002, $136,928 related to the secured
convertible notes with RGC and $177,419 on the short-term note with HK Weaver
(see "Notes to Unaudited Consolidated Financial Statements").
Equity in loss of affiliates amounted to $231,905 and $11,095 for the
three month period ended June 30, 2001 and 2002, respectively. These amounts
represent in the write off of our investment in KAA ($189,653) and the
write-down of our investment in Gomez ($42,252).
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, we had total assets of $9,280,705 compared to
$2,786,631 at March 31, 2002. Current assets at June 30, 2002 totaled $7,685,312
and current liabilities from continuing operations were $833,853. Stockholders'
equity (deficiency) increased to $4,564,636 at June 30, 2002 from ($4,284,276)
at March 31, 2002 due primarily to the equity investment made by Innovations on
May 7, 2002.
At June 30, 2002, our principal sources of liquidity consisted of cash
and cash equivalents of $7,317,231, compared to cash and cash equivalents of
$635,087 at March 31, 2002. The increase in cash and cash equivalents is
primarily a result of the investment by Innovations on May 7, 2002.
Investment by OptiMark Innovations, Inc.
On May 7, 2002, Ashton and OptiMark Innovations Inc. closed the
transactions contemplated by the securities purchase agreement by and between
Ashton and Innovations dated as of February 4, 2002 (as amended on March 6, 2002
and May 3, 2002). Pursuant to the purchase agreement, we issued 608,707,567
shares of Ashton common stock to Innovations. In consideration for the shares,
Innovations paid us $7,272,727 in cash and transferred intellectual property and
other non-cash assets to us. In addition, Innovations loaned us $2,727,273 in
cash. The loan is evidenced by a senior secured convertible note executed by
Ashton in favor of Innovations. The note accrues interest at a rate of 7.5% per
annum and matures in May 2007. The note is currently convertible into 52,870,757
shares of Ashton common stock, subject to customary anti-dilution adjustments.
The note is secured by a pledge and security agreement pursuant to which
Innovations has received a first-priority blanket lien on Ashton's assets.
We believe that without generating any revenues from our operations, the
$10,000,000 gross proceeds we received upon closing of the transactions
contemplated by the purchase agreement with Innovations should be sufficient to
fund our operations through March 31, 2003. There can be no assurance, however,
that we will not need additional financing during that time. Additional
financing could take the form of equity or debt offerings, spin-offs, joint
ventures, or other collaborative relationships that may require us to issue
shares or share revenue. Any such financing strategies would likely impose
operating restrictions on us or be dilutive to holders of our common stock, and
may not be available on attractive terms or at all. Further, any additional
financing entered into by Ashton would be subject to approval by Innovations
pursuant to the rights agreement.
Equity Line of Credit
On July 10, 2001, we entered into an amended equity line arrangement
with Jameson Drive LLC. The equity line is in the form of a securities purchase
agreement and provides for the purchase by Jameson of up to $15 million worth of
shares of Ashton common stock over a 24-month period. We may request a draw on
the equity line by selling common stock to Jameson, and Jameson is obligated to
buy the shares, subject to the terms of the agreement. During the year ended
March 31, 2002, we drew down gross proceeds of $1.8 million on the equity line
by selling 12,132,865 shares of common stock to Jameson.
There are a number of conditions that we must satisfy before Jameson is
obligated to buy our shares under the equity line, including that a registration
statement covering the resale of the shares purchased by Jameson is declared
effective by the SEC and remains effective. We filed a registration statement on
Form S-2 covering the resale of 7,500,000 shares of stock issued under the
equity line. That registration statement was declared effective on August 20,
2001. We have already issued the maximum number of shares covered by that
registration statement. Therefore, we are unable to access the equity line by
issuing any additional shares until another registration statement covering the
resale of such shares is filed by us and declared effective by the SEC. There is
no guarantee that in the future we will be able to meet these or any other
conditions under the securities purchase agreement or
19
the registration rights agreement with Jameson, or that we will be able to make
any additional draws on the equity line. Under the agreement, we must draw a
minimum of $2.5 million over the term of the agreement, and are limited to
drawing a maximum of $15 million. In order for us to fulfill our obligation to
sell a minimum of $2.5 million to Jameson, we would be required to draw an
additional $700,000. Based on the July 31, 2002 closing price of our common
stock of $0.09 per share, we would be required to issue an additional 8,641,975
shares of common stock to satisfy this obligation. We have informed Jameson that
our preference is to terminate this agreement without drawing down additional
funds. We have not concluded discussions with Jameson and there is no certainty
that we will be successful in terminating this agreement on terms acceptable to
both parties.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
Forward-looking statements in this document and those made from time to
time by members of our senior management are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements concerning the expected future financial results or
concerning expected financing, business plans, product development, as well as
other estimates are only estimates, and there can be no assurance that actual
results will not materially differ from our expectations. Factors that could
cause actual results to differ materially from results anticipated in
forward-looking statements include, but are not limited to, the following:
RISKS RELATED TO OUR FINANCIAL CONDITION
IF DEMAND FOR OUR PRODUCTS AND SERVICES FAILS TO GROW, WE MAY NEVER ACHIEVE
PROFITABILITY
We have never realized an operating profit and have reported significant
losses. As of June 30, 2002, we have accumulated losses of approximately $87.5
million.
We were founded in 1994 as a development stage company. We derived all
of our revenues in the three-month period ended June 30, 2002 on a per
transaction basis for VWAP securities trades executed through our subsidiary
Croix. Approximately 90% of the revenues during the three-month period ended
June 30, 2002 were from transactions with a single customer. We can give no
assurance that we will successfully develop additional products or obtain
additional customers, or that the marketplace will accept any new products we
are able to develop. Our future success will depend on continued growth in
demand for VWAP trading and other electronic trade execution services, and our
ability to respond to regulatory and technological changes and customer demands.
If demand for our products and services fails to grow at the rate we anticipate
and we are unable to increase revenues, then our business, financial condition
and operating results will be materially and adversely affected.
WE MAY NEED ADDITIONAL FINANCING TO FUND OUR OPERATIONS AND STRATEGIC
INITIATIVES
We believe that without generating any revenues from our operations, the
$10,000,000 gross proceeds we received upon closing of the transactions
contemplated by the purchase agreement with Innovations should be sufficient to
fund our operations through March 31, 2003. There can be no assurance, however,
that we will not need additional financing during that time. Additional
financing may take the form of equity or debt offerings, spin-offs, joint
ventures, or other collaborative relationships that may require us to issue
shares or share revenue. These financing strategies would likely impose
operating restrictions on us or be dilutive to holders of our common stock, and
may not be available on attractive terms or at all. Further, any additional
financing entered into by Ashton would be subject to approval by Innovations
pursuant to the Rights Agreement.
OUR BUSINESS IS HIGHLY VOLATILE AND OUR QUARTERLY RESULTS MAY FLUCTUATE
SIGNIFICANTLY
20
We have experienced an increase in volatility of trading volume executed
through our systems from session to session during the past year. These
fluctuations have a direct impact on our operating results and cause significant
fluctuations in our day-to-day profitability. We cannot be certain that the
volatility in our daily trading volume will not continue. Moreover, the
continued volatility in the securities markets could result in significant
proprietary trading losses. These losses could have a material adverse effect on
our business, financial condition and operating results. If demand for our
current services declines and/or never materializes for our future products and
services, and we are unable to adjust our cost structure on a timely basis, it
could have a material adverse effect on our business, financial condition and
operating results.
Our revenues may fluctuate due to a decline in securities trading
volumes, prices or liquidity. Declines in the volume of securities transactions
and in market liquidity generally result in lower revenues from our trading
activities. Lower price levels of securities also may result in reduced trading
activity and reduce our revenues from electronic brokerage transactions. Any
decline in securities trading volumes, price or market liquidity or other market
variables could have a material adverse effect on our operating results.
WE ARE SUBJECT TO NET CAPITAL REQUIREMENTS THAT COULD LIMIT OUR OPERATIONS
A significant operating loss or any unusually large charge against our
net capital could adversely affect our ability to expand or maintain our present
levels of business, which could have a material adverse effect on our operating
results. The SEC and the NASD have strict rules that require each of our
broker-dealer affiliates to maintain sufficient net capital. If we fail to
maintain the required net capital, the SEC or the NASD may suspend or revoke our
broker-dealer licenses. Also, a change in the net capital rules, the imposition
of new rules or any unusually large charge against our net capital could limit
our operations. These net capital requirements may limit our ability to transfer
funds from our broker-dealer affiliates to ourselves which may affect our
ability to repay our debts or fund our operations.
RISKS RELATED TO YOUR INVESTMENT IN OUR COMMON STOCK
YOU WILL SUFFER DILUTION IN THE FUTURE UPON ISSUANCE OF OUR COMMON STOCK
In connection with our closing under the purchase agreement, we issued
to Innovations a senior secured convertible note in the principal amount of
$2,727,273. The principal amount of the senior secured note is currently
convertible into 52,870,757 shares of Ashton common stock.
We also have recently granted HK Weaver Group Limited an option to
purchase up to 2 million shares of our common stock, and RGC warrants to
purchase 9 million shares of our common stock. The future public sale of our
common stock by Innovations and other stockholders that may control large blocks
of our common stock, and the conversion of our derivative securities and public
sale of the common stock underlying these derivative securities, could dilute
our common stock and depress its market value. These factors could also make it
more difficult for us to raise funds through future offerings of common stock.
THE RISK OF DILUTION MAY CAUSE THIRD PARTIES TO ENGAGE IN SHORT SALES OF OUR
COMMON STOCK
By increasing the number of shares offered for sale, material amounts of
short selling could further contribute to progressive price declines in our
common stock. The perceived risk of dilution may cause our stockholders to sell
their shares, which would contribute to a downward movement in the stock price
of our common stock. Moreover, the perceived risk of dilution and the resulting
downward pressure on our stock price could encourage third parties to engage in
short sales of our common stock. These factors could also make it more difficult
for us to raise funds at an acceptable or stable stock price through future
offerings of common stock.
YOUR COMMON STOCK MAY BE ADVERSELY AFFECTED BY OUR DE-LISTING FROM THE NASDAQ
NATIONAL MARKET
On November 7, 2001, our common stock was delisted from the Nasdaq
National Market and began trading on the OTC Bulletin Board which could have an
adverse effect on the liquidity of our common stock and upon your ability to
obtain an accurate quotation as to the price of our common stock. In addition,
it could be more difficult for us to raise funds through future offerings of
common stock.
WE MAY BE SUBJECT TO CLAIMS THAT COULD SERIOUSLY HARM OUR OPERATING RESULTS AND
FINANCIAL CONDITION.
21
We may be subject to claims as a result of one or more of the matters
described below. Any of these matters could give rise to claims or litigation
that could subject us to liability for damages. We have limited liquidity and
financial resources to satisfy any such claims. Moreover, any lawsuits,
regardless of their merits, could be time-consuming, require us to incur
significant legal expenses and divert management time and attention.
. On April 26, 2002, we received a draft complaint from counsel
for two shareholders of UTTC, one of our subsidiaries, that
named as defendants Ashton, UTTC, Innovations and specified
present and former directors of UTTC. The draft complaint
purports to assert claims arising, among other things, from
purported pledges by Ashton of UTTC's intellectual property and
the creation of joint ventures that are claimed to have used
UTTC's intellectual property, allegedly without compensation to
UTTC or its shareholders. Among other claims, the draft
complaint also purports to state claims for breach of fiduciary
duty arising out of offers, which were not accepted, to acquire
the shares of UTTC from these shareholders at a price that was
allegedly too low. To our knowledge, the draft complaint has
not yet been filed.
. Our publicly traded Warrants expired on May 2, 2002. Under the
Warrant Agreement dated as of May 7, 1996 between Ashton and
North American Transfer Co., as Warrant Agent, Ashton was
required to notify the Warrant Agent and the registered holders
of the Warrants of specified adjustments to the exercise price
of the Warrants and shares deliverable upon exercise of the
Warrants. We failed to provide the Warrant Agent or the
registered holders of the Warrants with required notices of
adjustments to the exercise price that resulted from multiple
issuances or deemed issuances of shares of common stock below
the then current market price (as defined in the Warrant
Agreement). To date, no claims related to the Warrant Agreement
have been asserted
. On May 20, 2002, Finova filed a motion to add Ashton as a
defendant in the case Finova Capital Corporation v. OptiMark
Technologies, Inc., OptiMark, Inc and OptiMark Holdings, Inc.,
Docket No.: HUD-L-3884-01, Superior Court of New Jersey--Hudson
County. Finova asserts claims arising out of an equipment lease
agreement pursuant to which Finova alleges that OptiMark
Technologies, Inc (now known as OptiMark US Equities, Inc.)
agreed to lease certain equipment from Finova. Finova has made
claims in unspecified amounts exceeding $6 million (plus
interest, late charges, litigation costs and expenses) for,
among other things, fraudulent conveyance of certain assets
comprised, at least in part, of the intellectual property and
non-cash assets acquired by Ashton from Innovations pursuant to
the Purchase Agreement. We cannot predict whether Finova will
be successful in its motion to add Ashton as a defendant, nor
can we predict the outcome of the litigation at this time.
Pursuant to an indemnification agreement OptiMark US Equities,
Inc. will indemnify Ashton from any claims relating to the
alleged fraudulent conveyance. If Ashton becomes a defendant in
this litigation, is found liable for damages and OptiMark US
Equities, Inc. is unable to fulfill its obligations under the
indemnification agreement, then such litigation could have a
material adverse impact on our financial condition and results
of operations.
WE DO NOT EXPECT TO PAY COMMON STOCK DIVIDENDS
You will not receive payment of any dividends in the foreseeable future
and the return on your investment may be lower than anticipated. We have never
paid or declared any cash dividends upon our common stock, nor do we intend to.
Our board of directors has discretion to declare cash dividends on our common
stock and on our Series B preferred stock. While there are no contractual
limitations on our ability to pay cash dividends on our common stock, based on
our present financial status and contemplated future financial requirements, we
do not anticipate declaring any cash dividends on the common stock. In
determining whether to pay dividends, our board of directors considers many
factors, including our earnings, capital requirements and financial condition.
RISKS RELATED TO OUR MANAGEMENT
WE ARE UNDERGOING SIGNIFICANT BOARD AND MANAGEMENT CHANGES
Our future success depends upon the experience, skills and working
relationship of our new board and management team. We have experienced a
complete change in the members of our board of directors, except for Fred
Weingard who continues as a director and executive officer of Ashton. We have a
new non-executive Chairman of our board, a new acting Chief Executive Officer, a
new President and Chief Operating Officer, and a new Chief Financial Officer.
The longer-term success of our operations will depend in large part upon the
hiring
22
and retention of key personnel, including the hiring of a permanent Chief
Executive Officer, which may require, among other things, execution of
acceptable employment agreements with these individuals.
SALES OR GRANTS OF STOCK TO OUR EMPLOYEES AND KEY INDIVIDUALS WILL REDUCE YOUR
OWNERSHIP PERCENTAGE
We seek to attract and retain officers, directors, employees and other
key individuals in part by offering them stock options and other rights to
purchase shares of common stock. The exercise of these options, the grant of
additional options, and the exercise thereof, could have a dilutive effect on
our existing stockholders and may adversely affect the market price of our
common stock. The exercise of options granted under our stock option plans will
reduce the percentage ownership in Ashton of the then-existing stockholders. We
have reserved 190,221,115 shares of common stock for issuance pursuant to our
2002 Option Plan, 6,450,000 shares of common stock for issuance pursuant to our
1998 Stock Option Plan, 2,550,000 shares of common stock for issuance pursuant
to our 1999 Stock Option Plan and 3,000,000 shares of common stock for issuance
pursuant to our 2000 Incentive Plan.
OUR PRINCIPAL STOCKHOLDER EXERCISES CONTROL OVER ALL MATTERS SUBMITTED TO A VOTE
OF STOCKHOLDERS
Our principal stockholder, OptiMark Innovations Inc., owns 608,707,567
shares of our common stock and has rights to acquire an additional 52,870,757
upon conversion of a note. Innovations' holdings represent approximately 88% of
our outstanding capital stock, and approximately 89% of our outstanding common
stock assuming conversion of the convertible note. As a result of Innovations'
ownership interest in Ashton, Innovations is able to elect all of our directors
and otherwise control our operations. Furthermore, the disproportionate
percentage of the vote controlled by Innovations could also serve to impede or
prevent a change of control. As a result, potential acquirers may be discouraged
from seeking to acquire control through the purchase of our common stock, which
could have a depressive effect on the price of our securities and will make it
less likely that stockholders receive a premium for their shares as a result of
any such attempt.
RISKS RELATED TO OUR OPERATIONS
OUR GROWTH MAY PLACE STRAINS ON OUR MANAGERIAL, OPERATIONAL AND FINANCIAL
RESOURCES
Our business is characterized by rapid technological change, changing
customer demands and evolving industry standards. Our future success depends, in
part, on how we respond to these demands. These demands will require us to
introduce new products and services, enhance existing products and services and
adapt our technology in a timely fashion. There can be no assurance that we will
be capable of introducing new products and services, enhancing products and
services or adapting our technology.
Our current trading, communications and information systems have been
designed to perform within finite capacity parameters. Although we believe we
can accommodate a substantial increase in activity, our growth may require
implementation of new and improved trading, communications and information
systems. There can be no assurance that a significant increase in trading
volumes or the introduction of new or multiple products will not result in
systems failures or have a material adverse effect on our operating results.
OUR TRADING ACTIVITIES EXPOSE OUR CAPITAL TO POTENTIAL LOSSES
We plan to engage in trading activities, predominantly through our
subsidiary ATG Trading acting as principal. These activities include the
purchase, sale or short sale of securities and derivative securities for our own
account. These activities are subject to a number of risks including price
fluctuations and rapid changes in the liquidity of markets, all of which
subjects our capital to significant risks.
OUR COMPLIANCE AND RISK MANAGEMENT METHODS MIGHT NOT BE FULLY EFFECTIVE IN
REDUCING OUR EXPOSURE TO LOSSES
There can be no assurance that our risk management and compliance
procedures will be adequate or effective to detect and deter compliance systems
failures. Nor can we assure you that we will be able to manage our systems,
technology and regulatory compliance growth successfully. Our inability to do so
could have a material adverse effect on our business and our financial
condition. The scope of procedures for assuring compliance with applicable rules
and regulations has changed as the size and complexity of our business has
increased. We plan to continue to revise formal compliance procedures for the
proprietary trading system we will operate through our subsidiary ATG Trading.
23
OUR BROKERAGE OPERATIONS EXPOSE US TO LIABILITY FOR ERRORS IN HANDLING CUSTOMER
ORDERS
Errors in performing clearing services or execution services, including
clerical and other errors related to the handling customer orders could lead to
civil penalties imposed by applicable authorities as well as losses and
liability in related lawsuits brought by customers and others. We provide
execution services to each of our trading system customers and execute orders on
behalf of each of our broker-dealer affiliates. In conjunction with our clearing
agent partners, we provide clearing services, which include the confirmation,
receipt, settlement and delivery functions, involved in securities transactions.
OUR CLEARING AGENTS MAY FAIL TO PROVIDE US AND OUR CUSTOMERS ACCURATE
INFORMATION ABOUT SECURITIES TRANSACTIONS
We rely on our clearing brokers to discharge their obligations to our
customers and us on a timely basis. If they fail to do so, or experience systems
failure, interruptions or capacity constraints, our operations may suffer. Our
trading and information systems are coordinated with the clearing and
information systems of our clearing agents. They furnish us with the information
necessary to run our business, including transaction summaries, data feeds for
compliance and risk management, execution reports and trade confirmations.
FINANCIAL OR OTHER PROBLEMS EXPERIENCED BY THIRD PARTIES COULD HAVE AN ADVERSE
EFFECT ON OUR BUSINESS AND OUR OPERATING RESULTS
We are exposed to credit risk from third parties that owe us money,
securities, or other obligations. Any failure by these third parties to
discharge adequately their obligations in a timely basis or any event adversely
affecting these third parties could have a material adverse effect on our
financial condition and results of operations. These parties include our
customers, trading counter parties, clearing agents, exchanges and other
financial intermediaries.
CONDITIONS BEYOND OUR CONTROL COULD ADVERSELY AFFECT OUR BUSINESS AND OPERATING
RESULTS
Our business and operating results are very dependent upon equity
trading volumes. Many conditions beyond our control can adversely effect such
trading volumes, including national and international economic, political and
market conditions, investor sentiment, the availability of funding and capital,
the level and volatility of interest rates, legislative and regulatory changes,
inflation, and similar broad trends. With reduced trading volumes, we may expect
to receive fewer transactions with concomitantly reduced transaction fees and
commissions from our broker-dealer operations.
RISKS RELATED TO OUR TECHNOLOGY AND PRODUCTS
WE WILL BE DEPENDENT ON NEW AND EXISTING TRANSACTION PRODUCTS TO GENERATE
REVENUES
Our future revenues will depend primarily on the volume of securities
traded on our systems and generated by our transaction-related products. The
success of these systems and products is heavily dependent upon their acceptance
by broker-dealers, institutional investors and other market participants.
Failure to obtain such acceptance could result in lower volumes and a lack of
liquidity in these systems and products. While we continue to solicit customers
to use our systems and products, there can be no assurance that we will attract
a sufficient number of such customers.
We may receive a substantial portion of our order flow through
electronic communications gateways, including a variety of computer-to-computer
interfaces and the Internet. Our electronic brokerage services involve
alternative forms of order execution. Accordingly, substantial marketing, sales
efforts and strategic relationships may be necessary to educate and acquire
prospective customers regarding our electronic brokerage services and products.
There can be no assurance that our marketing, sales efforts and strategic
initiatives will be successful in educating and attracting new customers.
IF ANY OF OUR COMPUTER AND COMMUNICATIONS SYSTEMS FAIL, OUR BUSINESS WILL BE
ADVERSELY AFFECTED
Any computer or communications system failure or decrease in computer
systems performance that causes interruptions in our operations could have a
material adverse effect on our business, financial condition and
24
operating results. We currently do not provide our customers with backup trading
systems or complete disaster recovery systems.
Our trading systems and proprietary trading activities depend on the
integrity and performance of the computer and communications systems supporting
them. Extraordinary trading volumes or other events could cause our computer
systems to operate at an unacceptably low speed or even fail. We cannot assure
you that our network protections will work. Any significant degradation or
failure of our computer systems or any other systems in the trading process
could cause customers to suffer delays in trading. These delays could cause
substantial losses for customers and could subject us to claims from customers
for losses.
SOFTWARE "BUGS," ERRORS AND MALFUNCTIONS MAY EXPOSE US TO LOSSES
Complex software such as ours often contains undetected errors, defects
or imperfections. These bugs could result in service interruptions or other
problems for us and our customers. Despite rigorous testing, the software used
in our products could still be subject to various risks associated with systems
errors, malfunctions and employee errors. In addition, because our products
often work with software developed by others, including vendors and customers,
bugs in others' software could damage the marketability and reputation of our
products. Given the competitive environment for electronic equity trading
execution, investors could elect to use our competitors' products on a temporary
or permanent basis to complete their trades. Prolonged service interruptions
resulting from natural disasters could also result in decreased trading volumes
and the loss of customers. Problems regarding our VWAP trading algorithms, which
we will use to provide proprietary trading commitments, could result in material
tracking errors and in significant proprietary trading losses.
OUR NETWORKS MAY BE VULNERABLE TO SECURITY BREACHES
Our networks may be vulnerable to unauthorized access, computer viruses
and other security problems. Persons who circumvent security measures could
wrongfully use our confidential information or our customers' confidential
information or cause interruptions or malfunctions in our operations. The secure
transmission of confidential information over public networks is a critical
element of our operations. We have not in the past experienced network security
problems. We may be required to expend significant additional resources to
protect against the threat of security breaches or to alleviate problems caused
by any breaches. Although our current security measures have never been
breached, we can provide no assurance that our current or future security
measures will protect against all security risks in the future.
WE MAY NOT RECEIVE ACCURATE AND TIMELY FINANCIAL DATA FROM OUR THIRD-PARTY
SUPPLIERS, WHICH MAY CAUSE US TO LOSE CUSTOMERS AND BE SUBJECT TO LITIGATION
We depend upon third-party information suppliers to accurately provide
and format financial data, in many cases on a real-time basis. If these
suppliers fail to supply accurate or timely information, our customers may
develop an adverse perception of our trading systems and cease doing business
with us. We may also be subject to claims for negligence or other theories based
on the nature and content of information we provide our customers. Any liability
arising from third party supplied data could have a material adverse effect on
our financial condition and operating results.
We receive consolidated New York Stock Exchange listed trading
information, including real-time quotes, last sale reporting, volume and price
information and error reports from a number of third parties, including the New
York Stock Exchange, the Consolidated Tape Association and the Securities
Industry Automation Corporation. We then calculate the volume weighted average
price information for the listed securities traded on our system and distribute
this information to our customers, primarily through our web site. We also use
this information for pricing matched orders executed on our system.
OUR COMPETITIVE POSITION MAY BE ADVERSELY AFFECTED BY OTHERS' UNAUTHORIZED USE
OF OUR INTELLECTUAL PROPERTY
Although we believe our services and products do not infringe on the
intellectual property rights of others, there can be no assurance that third
parties will not assert infringement claims against us in the future. Our
competitive position may also be adversely affected by the unauthorized use of
our proprietary information. Any such assertions by third parties could result
in costly litigation, in which we may not prevail. Also, in such event, we may
be unable to license any patents or other intellectual property rights from
third parties on commercially reasonable terms, if at all. Litigation,
regardless of its outcome, could also result in substantial cost and diversion
of
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our already limited resources. Any infringement claims or other litigation
against us could materially impact our operating results and financial
condition.
We regard our products and the research and development that went into
developing them as our property. Unauthorized third parties could copy or
reverse engineer certain portions of our products or obtain or use information
that we regard as proprietary. In addition, our trade secrets could become known
to or be independently developed by our competitors. We rely primarily on a
combination of trademark and trade secret protection, employee and third party
confidentiality and non-disclosure agreements, license agreements, and other
intellectual property protection methods to protect these property rights.
However, we have not received any patent awards, nor have we filed for federal
copyright protection relating to current product lines.
RISKS RELATED TO OUR INDUSTRY
WE ARE SUBJECT TO RISKS ASSOCIATED WITH THE SECURITIES INDUSTRY GENERALLY
The securities business is subject to various risks, including customer
default, employees' misconduct, errors and omissions by traders and order
takers, and litigation. These risks are often difficult to detect beforehand or
to deter. Losses associated with these risks could have a material adverse
effect on our business, financial condition and operating results.
We derive most of our revenue from trading in existing equity
securities, which we are about to expand to include most of the securities
included in the S&P 500, Russell 1000, and Nasdaq 100 indices. Any reduction in
revenues resulting from a decline in the secondary market trading volume for
these equity securities could have a material adverse effect on our business,
financial condition and operating results. Additionally, a decline in cash flows
into the U.S. equity markets or a slowdown in equity trading activity by
broker-dealers and other institutional investors may have an adverse effect on
the securities markets generally and could result in lower revenues from our
trading system activities.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY EXTENSIVE GOVERNMENT REGULATION
The regulatory environment in which we operate is subject to change. New
or revised legislation or regulations imposed by the SEC, other United States or
foreign governmental regulatory authorities, self-regulatory organizations or
the NASD could have a material adverse effect on our business. Changes in the
interpretation or enforcement of existing laws and rules by these governmental
authorities, self-regulatory organizations and the NASD could also have a
material adverse effect on our business, financial condition and operating
results. The SEC, the NASD, other self-regulatory organizations and state
securities commissions require strict compliance with their rules and
regulations.
Failure to comply with any of these laws, rules or regulations could
result in adverse consequences. An adverse ruling against us and/or our officers
and other employees could result in us and/or our officers and other employees
being required to pay a substantial fine or settlement and could result in
suspension or expulsion. This could have a material adverse effect on our
business and results of operations.
Additional regulation, changes in existing laws and rules, or changes in
interpretations or enforcement of existing laws and rules often directly affect
securities firms. We cannot predict what effect any such changes might have. Our
business, financial condition and operating results may be materially affected
by both regulations that are directly applicable to us and regulations of
general application. Our levels of trading system activity and proprietary
trading can be affected not only by such legislation or regulations of general
applicability, but also by industry-specific legislation or regulations.
OUR INDUSTRY IS HIGHLY COMPETITIVE
The SEC's regulations governing alternative trading systems have lowered
the barriers to entering the securities trading markets. We face competition
from traditional securities exchanges, which could establish similar trading
systems in an attempt to retain their transaction volumes. We also face
competition from other alternative trading systems and leading brokerage firms
offering similar trade execution services.
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Croix's guaranteed liquidity at a guaranteed price competes with
offerings from traditional broker-dealers, proprietary trading firms like
Susquehanna, Timberhill/ Interactive Brokers, and alternative trading systems
from companies including Investment Technology Group, Instinet and Bloomberg.
Many of our competitors have substantially greater financial, research,
development, sales, marketing and other resources than we do and many of their
products have substantial operating histories. While we believe our products
offer certain competitive advantages, our ability to maintain these advantages
will require continued investment in the development of our products, and
additional marketing and customer support activities. We may not have sufficient
resources to continue to make this investment, while our competitors may
continue to devote significantly more resources to competing services, nor can
we be sure our products will adequately address all the competitive criteria in
a manner that results in a competitive advantage.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Ashton uses various management tools to monitor its exposure to market
risks. Our exposure to market risk has not changed materially from our exposure
described in Ashton's Annual Report on Form 10-K, as amended, for the fiscal
year ended March 31, 2002. For a further discussion of Ashton's market risks and
risk management policy, refer to Item 7A Quantitative and Qualitative Disclosure
About Market Risk of Ashton's Annual Report on Form 10-K, as amended, for the
fiscal year ended March 31, 2002.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 20, 2002, Finova filed a motion to add Ashton as a defendant in
the case Finova Capital Corporation v. OptiMark Technologies, Inc., OptiMark,
Inc and OptiMark Holdings, Inc., Docket No.: HUD-L-3884-01, Superior Court of
New Jersey--Hudson County. Finova asserts claims arising out of an equipment
lease agreement pursuant to which Finova alleges that OptiMark Technologies, Inc
(now known as OptiMark US Equities, Inc.) agreed to lease certain equipment from
Finova. Finova has made claims in unspecified amounts exceeding $6 million (plus
interest, late charges, litigation costs and expenses) for, among other things,
fraudulent conveyance of certain assets comprised, at least in part, of the
intellectual property and non-cash assets acquired by Ashton from Innovations
pursuant to the Purchase Agreement. We cannot predict whether Finova will be
successful in its motion to add Ashton as a defendant, nor can we predict the
outcome of the litigation at this time. Pursuant to an indemnification agreement
OptiMark US Equities, Inc. will indemnify Ashton from any claims relating to the
alleged fraudulent conveyance. If Ashton becomes a defendant in this litigation,
is found liable for damages and OptiMark US Equities, Inc. is unable to fulfill
its obligations under the indemnification agreement, then such litigation could
have a material adverse impact on our financial condition and results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 7, 2002, Ashton issued 608,707,567 shares of Ashton common stock
to OptiMark Innovations. In consideration for the shares, Innovations paid us
$7,272,727 in cash and transferred intellectual property and other non-cash
assets to Ashton in a private placement pursuant to Section 4(2) of the
Securities Act of 1933. The proceeds from this transaction will be used to fund
our operations. For more information on this transaction, please see note (2)
RECENT DEVELOPMENTS and the discussion under the heading "Liquidity and Capital
Resources."
On May 7, 2002, HK Weaver converted its $500,000 note into 10 million
shares of Ashton common stock in an exchange pursuant to Section 3(a)(9) of the
Securities Act of 1933. The proceeds from the note have been used to fund our
operations. For additional information on this transaction please see note (2)
RECENT DEVELOPMENTS.
On May 11, 2002, Ashton issued 4,000,000 shares of common stock to
Fredric W. Rittereiser in connection with a separation agreement dated April 15,
2002. Additionally, Ashton issued 10,000 shares of Ashton common stock to Mr.
Rittereiser in exchange for his 250,001 shares of UTTC common stock. These
issuances were made pursuant to Section 4(2) of the Securities Act of 1933.
Ashton received no proceeds for the issuance of these shares.
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On June 27, 2002, Ashton issued 275,000 shares of common stock to Arthur
J. Bacci in connection with his consulting services provided to Ashton. This
issuance was made pursuant to Section 4(2) of the Securities Act of 1933. Ashton
received no proceeds for the issuance of these shares
On May 7, 2002, Ashton issued 400,000 shares of common stock to Matthew
Saltzman in connection with the April 30, 2002 final settlement of his
arbitration award. This issuance was made pursuant to Section 4(2) of the
Securities Act of 1933. Ashton received no proceeds for the issuance of these
shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special meeting of stockholders held on April 18, 2002, our
stockholders approved proposals to (i) amend the Ashton certificate of
incorporation to increase our authorized common stock from 100 million shares to
one billion shares and (ii) amend the Ashton certificate of incorporation to
clarify the circumstances under which certain business opportunities that may be
brought to the attention of Innovations, OptiMark Holdings, Inc. ("Holdings") or
an officer or director of Ashton, who simultaneously serves as an officer or
director of Innovations or Holdings, shall be deemed to be opportunities of
Ashton, Innovations and Holdings. The number of votes cast for, against or
withheld, as well as the number of abstentions was as follows:
(i) Increase in authorized common stock:
For Against Abstain
--- ------- -------
41,368,772 1,191,303 185,084
(ii) Define our interest and expectancy in specified business
opportunities:
For Against Abstain
--- ------- -------
39,983,247 2,333,799 244,133
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
None.
(B) Reports on Form 8-K
Current Report on Form 8-K filed on May 22, 2002, as amended by Current Report
on Form 8-K filed on May 23, 2002, reporting the change in control of Ashton and
the acquisition of certain assets as a result of the closing of the transaction
with Innovations on May 7, 2002. In addition, Ashton reported the exchange note
with RGC and the settlement of the final arbitration award with Mr. Saltzman.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
The Ashton Technology Group, Inc.
---------------------------------
(Registrant)
Date: August 14, 2002 By: /s/ James S. Pak
--------------------- ---------------------------------
James S. Pak
Chief Financial Officer
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