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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to _____
Commission File Number: 001-11747
THE ASHTON TECHNOLOGY GROUP, INC.
Delaware 22-6650372
(State of incorporation) (I.R.S. ID)
1835 MARKET STREET, SUITE 420
PHILADELPHIA, PENNSYLVANIA 19103
(215) 789-3300
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $0.01 par value OTC Bulletin Board
----------------------------- ------------------
Redeemable Common Stock Purchase Warrants (Name of exchange on which
- ----------------------------------------- registered)
(Title of class)
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
-- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing. (See
definition of affiliate in Rule 405). The approximate aggregate market value of
common stock of the Registrant was $7,532,417 as of June 14, 2002, which
excludes the value of all shares beneficially owned (as defined in Rule 13d-3
under the Securities Exchange Act of 1934) by officers and directors of the
Company (however, this does not constitute a representation or acknowledgment
that any of such individuals is an affiliate of the registrant).
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. As of June 14, 2002, there were
690,999,817 shares of the registrant's common stock, $.01 par value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K into which the document is incorporated: (1) Any annual report
to security holders; (2) any proxy or information statement; and (3) any
prospectus filed pursuant to Rule 424(b) or (e) under the Securities Act of
1933. The listed documents should be clearly described for identification
purposes.
The information required by Part III of this report, to the extent not set forth
herein, is incorporated by reference from the registrant's definitive proxy
statement relating to the 2002 annual meeting of stockholders, to be filed
pursuant to Regulation 14A not later than 120 days after the end of the fiscal
year to which this report relates.
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THE ASHTON TECHNOLOGY GROUP, INC.
FORM 10-K
For the Fiscal Year Ended March 31, 2002
INDEX
Page
PART 1
ITEM 1. BUSINESS...........................................................4
ITEM 2. PROPERTIES.........................................................9
ITEM 3. LEGAL PROCEEDINGS.................................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............10
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........11
ITEM 6. SELECTED FINANCIAL DATA...........................................12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.........26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE...........................................62
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................62
ITEM 11. EXECUTIVE COMPENSATION............................................62
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....62
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................62
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
ON FORM 8-K...................................................63
SIGNATURES....................................................................67
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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 factors referred
to in this Form 10-K.
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.
PART 1
ITEM 1. BUSINESS
In this Form 10-K, the terms "Ashton," "we," "our" and "us" refer to The
Ashton Technology Group, Inc. and its subsidiaries, unless the context suggests
otherwise.
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, NASDAQ 100 and Russell
1000 securities to global institutional investors at a low cost. We offer a
guaranteed fill program as a source of anonymous block liquidity with minimal
market impact.
We conduct our business through the following operating affiliates:
o ATG Trading, LLC
o Universal Trading Technologies Corporation (UTTC) and its
subsidiaries:
- Croix Securities, Inc.
- REB Securities, Inc.
o Ashton Technology Canada, Inc., and
o Kingsway-ATG Asia, Ltd. (KAA)
Through Croix Securities, Inc. (Croix) we provide order execution services
for block trades in an anonymous manner with minimal market impact, and take
orders from our clients to enter volume-weighted average price (VWAP) trades
into our crossing network vis-a-vis eVWAP.
Our electronic volume-weighted average price trading system (eVWAP(R)) 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. During August 1999, we launched eVWAP for selected New York Stock
Exchange-listed U.S. stocks as a facility of the Philadelphia Stock Exchange
(PHLX) through REB Securities, Inc. (REB). We generate revenues on a per
transaction basis for each share traded through eVWAP. We also generate
commission revenue on a per transaction basis for orders executed through Croix.
During the year ended March 31, 2002, Croix commissions accounted for 88% of our
revenues, while eVWAP accounted for 12% of our revenues.
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Our principal executive offices are at 1835 Market Street, Suite 420,
Philadelphia, Pennsylvania 19103. Our telephone number is (215) 789-3300. Our
website is www.ashtontechgroup.com. Information on our website does not
constitute part of this document.
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 at a rate of $0.051583 per share, subject to
customary anti-dilution adjustments, and is currently convertible into
52,870,757 shares of Ashton common stock. The note is secured by a pledge and
security agreement pursuant to which Innovations has received a blanket lien on
Ashton's assets.
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:
o 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 to users who submit
orders.
o Trade secrets and know how relating to VWAP trading.
o An assignment to Ashton of a license for technology for use in a
system for VWAP trading.
o An assignment to Ashton of all rights, duties, and obligations
under a bilateral nondisclosure agreement between the licensor of
the technology described above and Innovations.
o 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.
As of May 7, 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. As long as Innovations owns a majority of our
outstanding common stock, Innovations will be able to elect our entire board of
directors and control the outcome of any other matter submitted to a vote of our
stockholders.
ATG TRADING, LLC
ATG Trading is a broker-dealer engaged in proprietary trading. Since
January 7, 2002, ATG Trading has been inactive, however, we plan to obtain
approval from the Philadelphia Stock Exchange to return ATG Trading to active
status during the fiscal year ending March 31, 2003. On June 19, 2002, ATG
Trading also applied to become a member of the National Association of
Securities Dealers, Inc. (NASD). Once ATG Trading is active, it will operate as
our principal trading entity executing 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 achieving the VWAP on behalf of our clients.
ATG Trading plans to offer its liquidity to Croix at competitive price levels.
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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 PHLX to employ the UTS. The UTS
was later renamed eVWAP, and is operated by REB 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 subsidiaries REB Securities, Inc. and Croix Securities, Inc.
operate our eVWAP and buy-side institutional businesses, respectively.
CROIX SECURITIES, INC.
Croix was formed in February 1999 as a wholly owned subsidiary of UTTC.
Croix is a registered broker-dealer with the PHLX and NASD that focuses on
providing block liquidity for various buy-side institutions. Croix fills orders
by matching its customers' orders with liquidity from various providers in an
anonymous manner, 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
institutions against contra-side buy-side and liquidity provider interest.
On March 30, 2001, Croix filed regulatory documents with the NASD
requesting approval to operate CroixNet, an alternative trading system. Croix
also filed its "Form ATS Initial Operations Report" with the SEC on April 19,
2001. The SEC's filing was effective upon proper notice. On July 31, 2001, the
NASD approved Croix's request. As of March 31, 2002, CroixNet has not yet become
operational.
REB SECURITIES, INC.
REB is a wholly owned subsidiary of UTTC and is a PHLX 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.
eVWAP competes with other electronic trading systems, including Instinet
Corporation's crossing network, Investment Technology Group Inc.'s POSIT system,
Bloomberg, L.P.'s Tradebook, Liquidnet, and other companies that develop
proprietary electronic trading systems. eVWAP also competes with leading
brokerage firms and various national, regional and foreign securities exchanges.
Established systems such as Instinet and ITG's POSIT have taken years to obtain
their current levels of trading activity, which are substantially greater than
those of eVWAP.
We are currently working with the PHLX to determine how to make eVWAP a
more robust and active system than it has been in the past; however, there are
no assurances that we will succeed in reaching a mutually equitable business
arrangement and therefore we, the PHLX or both parties may decide to terminate
our current relationship.
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
6
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.
OTHER AFFILIATES
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.
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. was previously one of our majority-owned subsidiaries. Due to a
private placement by Gomez in December 1999, our equity interest in Gomez
decreased to less than 50%. We then began accounting for our investment in Gomez
under the equity method of accounting, rather than consolidating Gomez's results
of operations within our results. Our revenue for the fiscal year ended March
31, 2000 was $3.9 million, substantially all of which was generated by Gomez. We
currently recognize no revenue from Gomez, and the carrying value of our Gomez
equity investment is zero. Gomez is unrelated to our core trading systems
business.
REGULATION
GOVERNMENT REGULATION
Our broker-dealer entities and our transaction systems are subject to
significant government regulation, under both federal and state laws, as well as
the rules of several self-regulatory organizations, or SROs. The SEC is
primarily responsible for the administration of the federal securities laws,
while SROs are responsible for the day-to-day regulation of their broker-dealer
members. The SEC and SROs are also charged with protecting the interests of the
investing public and the integrity of the securities markets. eVWAP has been
developed as a facility of the PHLX, an SRO, and its operation is subject to
regulatory oversight by the SEC. On March 24, 1999, the SEC granted approval to
the PHLX to operate eVWAP, and we launched the system on August 30, 1999. In
1998, the
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SEC adopted Regulation ATS and amended Rule 19b-4 under the Exchange Act, which
will impact how we may launch new trading systems and products, including
modifications to the eVWAP. Our broker-dealer affiliates, Croix, REB, and ATG
Trading, are subject to regulation by the SEC, the NASD, and/or the PHLX, with
respect to all aspects of the securities business, including sales practices,
record keeping, capital structure, and conduct of directors, officers and
employees. The SEC, SROs and state securities commissions may conduct periodic
examinations of broker-dealers, which can result in censures, fines, orders to
cease and desist, or the suspension of broker-dealers, their officers or
employees. The principal purpose of these regulations is to protect clients of
broker-dealers and the securities markets, rather than to protect the creditors
and stockholders of the broker-dealers.
NET CAPITAL REQUIREMENT AND CREDIT RISK
As registered broker-dealers, Croix, REB, and ATG Trading are subject to
the SEC's uniform net capital rule. The purpose of the net capital rule is to
require broker-dealers to have at all times enough liquid assets to promptly
satisfy the claims of customers if the broker-dealer goes out of business. If
our broker-dealer affiliates fail to maintain the required net capital, the SEC,
PHLX and/or NASD may impose regulatory sanctions which may include suspension or
revocation of our broker-dealer licenses. Also, a change in the net capital
rules, the imposition of new rules or any unusually large charge against any of
our broker-dealer affiliates' net capital could limit our operations,
particularly ATG Trading that will trade on a proprietary basis. A significant
operating loss or any unusually large charge against any of our broker-dealer
affiliates' net capital could adversely affect our ability to expand or even
maintain our present levels of business, which could have a material adverse
effect on our business, financial condition and operating results. Also, these
net capital requirements limit our ability to transfer funds from our
broker-dealer affiliates to Ashton.
Both Croix and REB are required to maintain minimum net capital of $5,000.
As of March 31, 2002, Croix had net capital of $133,089, which exceeded minimum
net capital requirements by $128,089. On May 31, 2002, Ashton's Board authorized
a loan of up to $1 million to UTTC for the express purpose of increasing the
capital of Croix, a wholly-owned subsidiary of UTTC. Thereafter, Ashton made a
$1 million loan to UTTC, and UTTC, in turn, made a subordinated loan to Croix of
$1 million. The NASD approved the form of the Croix loan for net capital
purposes on June 15, 2002. Accordingly, as of June 15, 2002, Croix had net
capital of $1,161,100, which exceeded minimum net capital requirements by
$1,156,100. Croix does not act as a market-maker with respect to any securities
or otherwise as principal in any securities transactions; it acts only on an
agency basis. As of March 31, 2002, REB had net capital of $16,362, which
exceeded minimum net capital requirements by $11,362. Although REB is registered
as a broker-dealer, it does not perform any traditional broker-dealer services;
it acts only as a facilities manager for the eVWAP system. The relatively low
credit risk of these businesses is evidenced by their minimal net capital
requirements.
Since January 7, 2002, ATG Trading has been inactive, however, we plan to
obtain approval from the Philadelphia Stock Exchange to return ATG Trading to
active status during the fiscal year ending March 31, 2003. We plan to engage in
principal trading activities through ATG Trading. These activities may include
the purchase, sale or short sale of securities and derivative securities. These
activities are subject to a number of risks including price fluctuations and
rapid changes in the liquidity of markets, all of which subjects the capital of
ATG Trading to significant risks. As such, ATG Trading will be required to
maintain minimum net capital of at least $100,000 upon its reactivation. On June
13, 2002, Ashton's Board authorized a subordinated loan of $1 million to ATG
Trading. The PHLX approved the form of the ATG Trading loan for net capital
purposes to be effective July 1, 2002.
COMPETITION
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.
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
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not have sufficient resources to continue to make this investment, while our
competitors may continue to devote significantly more resources to competing
services.
Our products compete with other electronic trading systems, including
Instinet Corporation's crossing network, Investment Technology Group Inc.'s
POSIT system, Bloomberg, L.P.'s Tradebook, Liquidnet, and other companies that
develop proprietary electronic trading systems. Our electronic trade execution
services also compete with services offered by leading brokerage firms offering
various forms of volume-weighted average price trade execution. We also compete
with various national, regional and foreign securities exchanges for trade
execution services.
We believe our services compete on the basis of quality of trade execution,
pricing, and reliability of trade processing and settlement operations. Although
we feel our services offer complete anonymity not offered by any other service,
improved trading performance, flexibility and other benefits, there is no
assurance that our products and services will be accepted by an extended
customer base. Nor can we be sure our products will adequately address all the
competitive criteria in a manner that results in a competitive advantage.
PROPRIETARY RIGHTS
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 patent, 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. While our competitive position may be
adversely affected by the unauthorized use of our proprietary information, we
believe the ability to protect fully our intellectual property is less
significant to our success than other factors, such as the knowledge, ability
and experience of our employees and our ongoing product development and customer
support activities.
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. 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 our already limited resources. Any
infringement claims or other litigation against us could materially impact our
business, operating results, and consolidated financial condition.
eVWAP is licensed to customers on a "right to use" basis pursuant to a
non-transferable license that generally restricts the customer's use to internal
purposes.
EMPLOYEES
As of March 31, 2002, we employed a total of 30 people.
ITEM 2. PROPERTIES
On December 23, 1999, we entered into a ten-year lease for approximately
11,000 square feet of office space at 1835 Market Street, Suite 420,
Philadelphia, Pennsylvania 19103. Our principal executive offices are at this
location.
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We also lease approximately 1,675 square feet of office space at 1900
Market Street, Suite 701, Philadelphia, Pennsylvania 19103, pursuant to a
sublease expiring in May 2005. This is the principal location for our computer
operations.
Effective June 20, 2002, we entered into a three-year sublease for
approximately 6,000 square feet of office space at 1114 Avenue of the Americas,
22nd Floor, New York, New York 10036. This location will serve our New
York-based staff, which include marketing and technology employees.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended March 31, 2002.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The initial public offering of our stock was in May 1996, for 2,472,500
shares at an offering price of $4.50 per share. 2,472,500 redeemable common
stock purchase warrants were also offered at a price of $0.25 per warrant. The
warrants expired on May 2, 2002 in accordance with their original terms. The
common stock and the warrants were traded on the NASDAQ National Market under
the symbols, "ASTN" and "ASTNW," respectively. On November 6, 2001, the NASDAQ
Listing Qualifications Panel notified us of its determination to delist our
common stock from the NASDAQ National Market. On November 7, 2001, our common
stock began trading on the OTC Bulletin Board. The following sets forth, by
calendar quarter, the range of high and low closing prices per share for the
common stock as reported on the NASDAQ National Market through November 6, 2001
and on the OTC Bulletin Board thereafter:
High Low
---- ---
2002
First Quarter $0.40 $0.14
2001
Fourth Quarter $0.32 $0.09
Third Quarter $0.96 $0.31
Second Quarter $1.38 $0.84
First Quarter $2.62 $0.94
2000
Fourth Quarter $2.88 $0.75
Third Quarter $4.88 $2.63
Second Quarter $8.50 $2.50
First Quarter $11.56 $6.50
The following sets forth, by calendar quarter, the range of high and low closing
prices for the warrants as reported on the NASDAQ National Market through
November 6, 2001 and on the OTC Bulletin Board thereafter:
High Low
---- ---
2002
First Quarter $0.07 $0.003
2001
Fourth Quarter $0.14 $0.01
Third Quarter $0.42 $0.10
Second Quarter $0.72 $0.38
First Quarter $1.31 $0.28
2000
Fourth Quarter $1.53 $0.28
Third Quarter $2.81 $1.38
Second Quarter $5.86 $1.63
First Quarter $6.88 $4.63
On June 14, 2002, the closing price of the common stock was $0.14. As of
March 31, 2002, there were approximately 372 holders of record of common stock.
Since our inception in 1994, we issued six classes of convertible preferred
stock (See "Notes to Consolidated Financial Statements - Stockholders'
(Deficiency) Equity").
We have never declared or paid any dividends on our common stock, and the
board of directors has no current plans to declare or pay any dividends on our
common stock in the foreseeable future.
11
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data are derived from our
consolidated financial statements. Goldstein Golub Kessler LLP, our independent
auditors, have audited the financial statements. You should read this data in
conjunction with the consolidated financial statements and related notes,
contained in Item 8., as well as "Management's Discussion and Analysis of
Financial Condition and Results of Operations," contained in Item 7.
(In thousands, except per share amounts)
Year Ended March 31,
-------------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Total revenues $ 2,489 $ 225 $ 3,869 $ 1,434 $ 314
Total expenses 13,611 14,881 19,062 16,032 7,556
Loss from continuing operations (12,421) (15,196) (6,232) (14,276) (8,345)
Income (loss) from discontinued
operations (1) (2,596) -- -- 68
Gain (loss) on disposal of
discontinued operations 667 (3,146) -- -- (386)
Net loss (11,755) (20,938) (6,232) (14,276) (8,675)
Net loss per common share $ (0.29) $(0.79) $(0.32) $(1.80) $(1.46)
Weighted average shares outstanding 45,988 29,395 24,930 10,954 7,520
BALANCE SHEET DATA:
Cash and cash equivalents $ 635 $ 6,029 $ 15,365 $ 2,667 $ 816
Securities available for sale - 1,483 9,906 -- --
Investments in affiliates 225 141 1,091 -- --
Total assets 2,787 13,066 31,024 5,654 2,998
Total stockholders' (deficiency) equity
$ (4,284) $ 2,898 $ 17,163 $ 4,445 $ 1,237
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion of our results of operations and
liquidity and capital resources in conjunction with the consolidated financial
statements and related notes for the years ended March 31, 2002, 2001, and 2000,
contained in Item 8 of this Form 10-K.
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, NASDAQ 100 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:
o ATG Trading, LLC
o Universal Trading Technologies Corporation (UTTC), and its
subsidiaries:
- Croix Securities, Inc.,
- REB Securities, Inc.
o Ashton Technology Canada, Inc.,
o Kingsway-ATG Asia, Ltd. (KAA)
On March 29, 2001, after being unable to find external funding or
consummate a sale of our majority-owned subsidiary Electronic Market Center
(eMC) to a third party, eMC's board of directors voted 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 our
consolidated financial statements.
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 "Factors That May Affect Future
Results.
RESULTS OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 2002 COMPARED TO THE YEAR
ENDED MARCH 31, 2001
We incurred a net loss from continuing operations totaling $12.4 million,
or $0.30 per share, for the year ended March 31, 2002, compared to $15.2
million, or $0.59 per share, last year. The decrease in net loss is primarily a
result of a $2,264,402 increase in revenues, and a $1,269,988 decrease in total
costs and expenses. Non-operating expenses increased by an aggregate of
$759,023.
Revenues totaled $2,489,470 for the year ended March 31, 2002, and $225,068
for the year ended March 31, 2001. The revenues in each period were generated
entirely by the operation of eVWAP and securities commissions on trades executed
through Croix. The increase in revenues is a result of the increase in the
aggregate number of shares executed to 263.8 million during the year ended March
31, 2002 from 35.2 million shares last year. During the year ended March 31,
2002, Croix accounted for 136.7 million and ATG Trading accounted for 20 million
of the total 220.8 million shares executed in the eVWAP system. Croix also
executed an additional 43 million shares away from eVWAP at the volume-weighted
average price. . Salaries and employee benefits decreased 11% to $5,139,312 for
the year ended March 31, 2002 from $5,784,936 for the year ended March 31, 2001.
During the years ended March 31, 2002 and 2001, we employed an average of 44 and
51 employees, respectively. As of March 31, 2002, we had a total of 30
employees.
Professional fees decreased 53% to $1,529,175 from $3,265,768 during the
years ended March 31, 2002 and 2001, respectively. The decrease was primarily a
result of a decrease in consulting and outsourced labor used to
13
develop technology. We paid $901,485 and $2,483,217 for consulting and
outsourced labor during the years ended March 31, 2002 and 2001, respectively.
Brokerage, clearing and exchange fees increased to $2,701,243 for the year
ended March 31, 2002 from $680,960 for the year ended March 31, 2001. This
increase is a result of the costs associated with increased trades executed
through Croix and ATG Trading, including clearing costs and fees paid to
liquidity providers.
Depreciation and amortization expense consists primarily of depreciation of
property and equipment. Depreciation for the year ended March 31, 2002 increased
31% to $914,728 from $700,484 in the year ended March 31, 2001. The increase was
caused by a full year of depreciation recorded during the year ended March 31,
2002 on capital expenditures made throughout the year ended March 31, 2001 for
furniture and fixtures and computer equipment purchased for the development and
operation of our trading systems. Capital expenditures decreased to $111,078 for
the year ended March 31, 2002 compared to $2,043,315 last year.
We recorded a non-cash compensation charge of $40,108 in the year ended
March 31, 2001 for the issuance of stock options to non-employee consultants and
professional advisors. No such charges were incurred in the year ended March 31,
2002.
We recorded losses on proprietary trading activities of $375,480 and
$335,137 during the years ended March 31, 2002 and 2001, respectively. The
trading account was 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. Beginning
in July 2001, we substantially decreased the use of the trading account upon the
introduction of the guaranteed fill program and the use of external liquidity
providers. In January 2002, ATG Trading became inactive, however, we plan to
reactivate it to be a liquidity provider to sell-side firms only during the
fiscal year ending March 31, 2003.
Selling, general and administrative expenses decreased to $2,951,314
from $4,066,386 during the years ended March 31, 2002 and 2001, respectively.
The 27% decrease is primarily a result of lower marketing and travel expenses,
partially offset by higher information processing and communications expenses.
Marketing expenses decreased approximately $537,173 due to marketing activities
during the year ended March 31, 2001 which did not recur in the current year.
Travel expenses were down approximately $318,624 or 53% due to fewer employees
and an effort to reduce such costs in the current year.
Interest income decreased to $105,514 in the year ended March 31, 2002 from
$1,135,078 in the year ended March 31, 2001, as a result of the lower average
cash and cash equivalents balances. Interest expense of $626,790 for the year
ended March 31, 2002 was comprised of $304,209 related to the secured
convertible note that we executed with RGC International Investors, LDC in
exchange for the outstanding shares of series F convertible preferred stock on
July 13, 2001, and $322,581 on the short-term note with HK Weaver (see "Notes to
Consolidated Financial Statements").
Other expense for the year ended March 31, 2002 includes a charge of
$316,000 related to the final settlement of the arbitration award in favor of
the former president of eMC. The award was granted by the American Arbitration
Association on January 14, 2002 related to the arbitration proceedings between
Ashton and eMC's former president regarding his employment contract. The expense
includes $200,000 in cash payments and a charge of $116,000 for 400,000 shares
of Ashton common stock we agreed to issue pursuant to the settlement agreement.
Other expense for the year ended March 31, 2002 also includes a loss of $36,215
on the note receivable from CSI, a $91,900 loss on the sale of one of our
memberships on the Philadelphia Stock Exchange, and a $500,000 loss on the
exchange of our investment in JAGfn for the outstanding shares of UTTC series TK
convertible preferred stock, 200,000 series T warrants, 309,500 of the 500,000
outstanding series K warrants, and an additional 39,000 shares of the class B
common stock of Ashton Canada.
Other income for the year ended March 31, 2001 includes a charge of
$106,875 for 30,000 shares of Ashton common stock we issued to acquire Hudson
Knights Securities LLC (renamed ATG Trading LLC) in July 2000, and income of
$413,980 for the reimbursement of legal costs by Fredric W. Rittereiser, our
former chairman and chief executive officer, and the Dover Group, of which Mr.
Rittereiser is the sole stockholder, director and officer. In November 2000, we
accepted 216,805 shares of Gomez common stock owned by Dover equal in value to
14
the amounts owed to us under a loan and an agreement to pay legal costs, or
$884,564, as full and complete satisfaction of those debts. Both the loan and
the agreement to pay legal costs were made in connection with a lawsuit that we
settled in 1998, filed by David Rosensaft, a founder of UTTC. Although we valued
the Gomez stock at $884,564, since we account for our investment in Gomez using
the equity method of accounting, we recorded a corresponding loss in affiliates
for the entire amount. We recorded the loss to reduce the carrying amount of the
investment in Gomez by our share of Gomez's net losses to the extent of our
investment balance, as required under the equity method of accounting. The loss
in affiliates offsets the $413,980 of other income and the $470,584 reduction of
the note receivable and related accrued interest.
Equity in income (loss) of affiliates for the year ended March 31, 2002 and
2001 totaled $172,373 and ($1,963,976), respectively. For the year ended March
31, 2002, this amount includes our share of the income from our joint venture,
KAA. For the year ended March 31, 2001, this amount includes ($1,079,412), which
is our share of the losses from KAA, and the ($884,564) loss on our investment
in Gomez, described above. The results of KAA are primarily a result of
unrealized gains and losses on its trading portfolio.
RESULTS OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 2001 COMPARED TO THE YEAR
ENDED MARCH 31, 2000
We incurred a net loss from continuing operations totaling $15.2 million,
or $0.59 per share, for the year ended March 31, 2001, compared to $6.2 million,
or $0.32 per share, for the year ended March 31, 2000. The increase is primarily
a result of a $5,568,475 gain recorded in the year ended March 31, 2000 due to
the change in accounting for our Gomez investment to the equity method, and a
$2,550,000 gain on the redemption of part of our Gomez series A preferred stock.
The loss from operations for the year ended March 31, 2001 decreased 3.5%
to $14.7 million from $15.2 million for the year ended March 31, 2000. The loss
from operations for the year ended March 31, 2000 is comprised of $9.8 million
from the trading systems business and $5.4 million from Gomez's results of
operations; the loss from operations in the year ended March 31, 2001 was
generated entirely by the trading systems business. Gomez's results of
operations are included in our consolidated financial statements only through
December 31, 1999, when we began accounting for our Gomez investment using the
equity method. Excluding Gomez, our loss from operations increased approximately
$5.1 million, or 50% from last year, due primarily to increases in salaries and
benefits, brokerage, clearing and exchange fees, losses from trading activities,
and depreciation.
Revenues totaled $225,068 for the year ended March 31, 2001, and $3.9
million for the year ended March 31, 2000. The revenues in the year ended March
31, 2001 were generated entirely by our trading systems business through the
operation of eVWAP and securities commissions on trades executed through Croix.
In the year ended March 31, 2000, we earned $32,135 from the operation of eVWAP,
and Gomez generated the balance of the revenues. The increase in trading system
revenues was a result of the increase in the number of shares traded.
The costs of revenues for the year ended March 31, 2000 represent salaries
associated with the delivery of Gomez's consulting and advisory services, and
amounts paid in connection with Gomez's transaction-based revenues.
Excluding Gomez, our salaries and benefits totaled approximately $5,784,936
for the year ended March 31, 2001, compared to $3,735,926 in the year ended
March 31, 2000, as staff increased from 43 to 56 employees with the hiring of a
full-service sales and coverage team to support our products.
Professional fees, excluding Gomez, increased to $3,265,768 for the year
ended March 31, 2001 from $2,549,543 for the year ended March 31, 2000,
primarily as a result of an increase in outsourced labor working on the
development of our trading systems. We paid $1.6 million and $0.3 million for
outsourced labor in the years ended March 31, 2001 and 2000, respectively
Brokerage, clearing and exchange fees increased to $680,960 for the year
ended March 31, 2001 from $18,192 for the year ended March 31, 2000. This
increase is a result of the costs associated with increased trades executed
through Croix, including clearing costs and fees paid to liquidity providers.
15
>
During the years ended March 31, 2001 and 2000, we amortized system
development costs totaling $7,461 and $95,354, respectively. The amortization
expense in the year ended March 31, 2000 was related to system development costs
for eVWAP, which we capitalized through the second quarter of fiscal 1999, when
the technological feasibility of the eVWAP was obtained. The capitalized system
development costs related to eVWAP were fully amortized by March 31, 2000.
During the year ended March 31, 2001, we capitalized $19,897 in costs for
financial software developed for internal use, which we amortized over two
years.
Depreciation and amortization expense is primarily depreciation of property
and equipment. Depreciation and amortization for the year ended March 31, 2001
decreased 2% to $700,484 from $715,956 in the year ended March 31, 2000.
Included in the results for the year ended March 31, 2000 is $334,171 of
depreciation related to Gomez. Excluding Gomez, our depreciation increased
approximately 83% in the year ended March 31, 2001 to $700,484 from $381,785.
The increase is due to $2,043,315 in purchases of furniture and fixtures and of
computer equipment for the development and operation of our trading systems.
We recorded non-cash compensation charges of $40,108 and $66,161 in the
years ended March 31, 2001 and 2000, respectively, for the issuance of stock
options to non-employee consultants and professional advisors. In the year ended
March 31, 2000, we recorded non-cash compensation charges of $285,208 for the
amortization of deferred consulting expenses.
During the year ended March 31, 2001, we began proprietary trading through
ATG Trading to provide liquidity for participants in eVWAP, and to provide our
management with real-time experience with volume weighted average price trading
and risk management techniques. We recorded a loss on proprietary trading
activities for the year ended March 31, 2001 of $335,137.
Selling, general and administrative expenses decreased to $4,066,386 in the
year ended March 31, 2001 from $7,324,862 in the year ended March 31, 2000.
Excluding Gomez's $4,359,644 in selling, general and administrative expenses in
the year ended March 31, 2000, our selling, general and administrative expenses
increased approximately 37% to $4,066,386 during the year ended March 31, 2001
from $2,965,218 during the year ended March 31, 2000. The increase in selling,
general and administrative expenses in the year ended March 31, 2001 was
primarily a result of additional occupancy costs related to the addition of new
facilities for our corporate offices and the opening of sales offices in New
York and London, as well as increased communications costs related to those
facilities. Further, marketing and advertising expenses increased $561,889
during the year ended March 31, 2001 related to the promotion of our trading
systems.
Interest income decreased slightly to $1,135,078 in the year ended March
31, 2001 from $1,169,910 in the previous year. Excluding Gomez, interest income
increased $60,781 or approximately 5% in the year ended March 31, 2001 as a
result of higher average cash and cash equivalents and securities balances
during the year, in connection with the $20 million series F preferred private
placement in August 1999.
Other income for the year ended March 31, 2001 includes $413,980 for the
reimbursement of legal costs related to Ashton's acceptance of shares of Gomez
stock from Mr. Rittereiser as described previously, and a charge of $106,875 for
30,000 shares of Ashton common stock issued in connection with the acquisition
of Hudson Knights Securities, LLC (renamed ATG Trading LLC) in July 2000.
Other expense for the year ended March 31, 2000 of $416,632 reflects the
charge for the value of UTTC common stock we issued to one of our former
directors to satisfy the terms of a separation agreement we executed with him on
June 29, 1999.
Equity in income (loss) of affiliates totaled ($1,963,976) and $90,508 for
the years ended March 31, 2001 and 2000, respectively. This loss in the year
ended March 31, 2001 included ($1,079,412), which is our share of the losses
from our joint venture, KAA, and the ($884,564) loss on our investment in Gomez,
described above. The losses from KAA were primarily a result of unrealized
losses on its trading portfolio. The income for the year ended March 31, 2000
was related solely to KAA and was primarily a result of unrealized gains on its
trading portfolio.
16
DISCONTINUED OPERATIONS
We formed eMC as a wholly owned subsidiary in June 1998 to develop, operate
and market a global electronic distribution channel for financial products and
services. On April 18, 2000, eMC acquired 100% of the stock of E-Trustco.com
Inc., a business-to-business electronic trust services company. As part of that
transaction, Ashton's board of directors agreed to fund eMC's initial
development efforts. E-Trustco's plan was to offer and outsource objective
financial advisory services in the form of multi-manager wrap accounts through a
state-chartered trust company using eMC's electronic distribution channel.
During the year ended March 31, 2001, eMC was developing a private label
and rebrandable global electronic network for financial services and products
geared primarily to the needs of small and midsize financial intermediaries.
eMC's approach was to select distribution partners with existing brands and
business models and to provide them a technology platform they could leverage to
expand their existing client relationships and attract new clients. In the
fourth quarter of fiscal year 2001, eMC completed its initial development phase.
After being unable to find external 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.
We recorded losses from discontinued operations totaling $1,161 and
$2,596,006 for the year ended March 31, 2002 and 2001, respectively, related to
eMC. The loss for the year ended March 31, 2001 was primarily comprised of
salaries and benefits, and consulting fees for the people hired to develop the
technology platform. During the year ended March 31, 2001, we recorded a loss on
the disposal of eMC, amounting to $3.1 million, consisting primarily of
write-offs of eMC's assets. The write-offs include $2.0 million related to eMC's
investment in TeamVest, approximately $0.8 million in system development costs,
and approximately $0.3 million related to software, computer equipment,
prepayments and other assets. During the year ended March 31, 2002, we recorded
a gain on the disposal of eMC of $667,137 related to the settlement of certain
of its outstanding liabilities.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, our principal source of liquidity consisted of cash and
cash equivalents of $635,087, compared to cash and cash equivalents of
$6,028,883 and securities available for sale of $1,483,350 at March 31, 2001.
The decrease in cash and cash equivalents and securities available for sale is
primarily a result of the net loss for the year ended March 31, 2002 of
$11,755,074, partially offset by $1,800,000 in proceeds from the sale of our
common stock in connection with an equity line agreement, and $500,000 in
short-term funding. Included in the March 31, 2002 cash and cash equivalents
balance was approximately $10,000 required to meet the minimum net capital
requirements of Ashton's broker/dealer subsidiaries, and $450,000 set aside to
collateralize a letter of credit. On January 16, 2002, the Company announced an
employee furlough program, which temporarily reduced employee work schedules
with concomitant payroll reductions. The program continued until the closing of
the transactions with OptiMark 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 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 at rate of
$0.051583 per share, subject to customary anti-dilution adjustments and is
currently convertible into 52,870,757 shares of Ashton common stock. The note is
secured by a pledge and security agreement pursuant to which Innovations has
received a blanket lien on Ashton's assets.
On April 30, 2002, OptiMark Innovations Inc. 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
17
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. Each of the notes accrued interest at a rate of 10%, and was
satisfied on May 7, 2002 at the closing of the securities purchase agreement
with Innovations.
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 OptiMark 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.
Short-term Notes
On January 30, 2002, HK Weaver Group, 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 loan was secured by 47 million shares of the common stock of KAA
owned by Ashton. We drew down the entire $500,000 on the bridge loan with HK
Weaver during February 2002. On May 7, 2002, we issued 10 million shares of
common stock in full satisfaction of the note. The bridge loan with HK Weaver
provided us sufficient working capital through March 31, 2002.
On April 11, 2002, RGC International Investors, LDC agreed to lend Ashton
up to $250,000, repayable upon the closing of the securities purchase agreement
with OptiMark 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, which it repaid on May 7, 2002. The
loan with RGC provided us sufficient working capital from March 31, 2002 through
the closing of the transactions with OptiMark Innovations on May 7, 2002.
Equity Line of Credit
As further described in the notes to the consolidated financial statements
in Item 8 herein, 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 the registration rights
agreement with Jameson, or that we will be able to make any additional draws on
the equity line. We are committed to drawing 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 June
14, 2002 closing price of our common stock of $0.14 per share, we would be
required to issue an additional 5,555,555 shares of common stock to satisfy this
obligation. We have informed Jameson that our preference is to terminate this
agreement without drawing down
18
additional funds. We have not concluded discussions with Jameson and there is no
certainty that we will be successful in terminating this agreement.
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 March 31, 2002, we have accumulated losses of approximately $84.4
million.
We were founded in 1994 as a development stage company. We currently derive
all of our revenues on a per transaction basis for VWAP securities trades and
orders executed through our subsidiary Croix Securities, Inc. We expect to
generate future revenues from other trading segment products being developed
that will offer pricing at a variety of VWAP intervals during the day. We can
give no assurance, however, that we will successfully develop new products or
that any new products we do develop will be accepted by the marketplace. 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 OptiMark 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
We have experienced an increase in volatility of trading volume of trades
executed through our trading 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
19
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
OptiMark 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 warrants to purchase 9 million
shares of our common stock to RGC International Investors, LDC. 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 DELISTING 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.
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.
o Following the sale of shares of our common stock by certain
selling stockholders pursuant to an effective registration
statement, we became aware that the financial statements included
in the registration statement did not satisfy the requirements of
Regulation S-X. Because the registration
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statement incorporated by reference our Annual Report on Form
10-K for the year ended March 31, 2000, rather than for the year
ended March 31, 2001, as it should have, the registration
statement did not meet the applicable form requirements of a
registration statement on Form S-3. Thus, claims may be made that
the prospectus did not meet the requirements of, and that the
sale of the shares was not properly registered pursuant to, the
Securities Act of 1933. If such claims are upheld, then the sale
of the shares of common stock by these selling stockholders may
have constituted a violation of the Securities Act of 1933. In
this case, the purchasers of the common stock from the selling
stockholders could have the right, for a period of one year from
the dates of their respective purchases, to recover (i) the
purchase price paid for their shares, plus interest, upon tender
of their shares to us or (ii) their losses measured by the
difference (plus interest) between their respective purchase
prices and either the value of their shares at the time they sue
us or, if they have sold their shares at a loss, the sale price
of their shares. Alternatively, the purchasers of the common
stock could have a right to seek redress from the selling
stockholders, in which case we may have third party liability to
the selling stockholders. We believe that these refunds or
damages could total up to approximately $2.1 million, plus
interest, in the event the purchasers of the shares suffer a
total loss of their investment during this period and seek
refunds or damages.
o 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.
o 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.
o 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
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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, and new interim 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 and retention of key personnel, 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 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.
We intend to create a new option plan for 2002 for the purpose of retaining
and compensating employees, officers and Board members.
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 acquirors 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.
22
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
new proprietary trading system we will operate through our subsidiary ATG
Trading .
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
23
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
eVWAP and 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 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
24
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 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
25
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.
Our products compete with other electronic trading systems, including
Instinet Corporation's crossing network, Investment Technology Group Inc.'s
POSIT system, Bloomberg, L.P.'s Tradebook, Liquidnet, and other companies that
develop proprietary electronic trading systems. Our electronic trade execution
services also compete with services offered by leading brokerage firms offering
various forms of volume-weighted average price trade execution. We also compete
with various national, regional and foreign securities exchanges for trade
execution services.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET PRICE RISK
Our cash management strategy seeks to optimize excess liquid assets by
preserving principal, maintaining liquidity to satisfy working capital and
regulatory requirements, and minimizing risk while maximizing return. For
26
working capital purposes, we invest primarily in money market instruments. Cash
that is not needed for normal operations is invested in instruments with
appropriate maturities and levels of risk to correspond to expected liquidity
needs. We do not use derivative financial instruments in our investment
portfolio. As of March 31, 2002, the cash and cash equivalents balance of
$635,087 was comprised of balances in our interest-bearing demand checking and
savings accounts and a certificate of deposit.
Although Croix and REB are registered as broker-dealers, REB generally does
not perform any traditional broker-dealer services, and Croix does not act as
market-maker with respect to any securities or otherwise as principal in any
securities transactions; it acts only on an agency basis. The relatively low
credit risk of these businesses is evidenced by their minimal net capital
requirements.
We have been engaged in trading activities with ATG Trading acting as a
principal, including 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 risks of price fluctuations and rapid changes in the
liquidity of markets, all of which may subject our capital to significant risks.
Although on January 7, 2002, we inactivated ATG Trading as a broker-dealer,
thereby reducing its minimum net capital requirement, we plan to reactivate it
during the fiscal year ending March 31, 2003.
We will from time to time, make investments that are considered strategic.
These investments require approval of executive management and the board of
directors. This component of our cash management strategy is reevaluated
periodically. As of March 31, 2002, there were no such investments.
INTEREST RATE RISK
Our exposure to interest rate risk relates primarily to the
interest-bearing portion of our cash and cash equivalents balances. As of March
31, 2002, the cash and cash equivalents balance of $635,087 was comprised of
balances in our interest-bearing demand checking and savings accounts and a
certificate of deposit. Due to the conservative nature of these accounts and
their limited balances, a sudden change in interest rates would not have a
material effect on our financial condition.
FOREIGN CURRENCY RISK
Ashton has joint ventures in Canada and in Hong Kong, which were formed to
develop, market and operate our trading systems for seamless use by U.S.,
Canadian and Asian financial intermediaries. Our investments in these joint
ventures expose us to currency exchange fluctuations between the U.S. Dollar and
the Canadian Dollar, and between the U.S. Dollar and the Hong Kong Dollar. To
the extent our international activities recorded in their local currencies
increase in the future, the exposure to fluctuations in currency exchange rates
will correspondingly increase. We have not engaged in any foreign currency
hedging activities because our foreign currency cash balances are generally kept
at levels necessary to meet current operating and capitalization needs of these
foreign joint ventures.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's Report 29
Consolidated Balance Sheets at March 31, 2002
and 2001 30
Consolidated Statements of Operations for the
years ended March 31, 2002, 2001, and 2000 31
Consolidated Statements of Cash Flows for the years
ended March 31, 2002, 2001, and 2000 32
Consolidated Statements of Stockholders' (Deficiency) Equity
and Comprehensive Loss for the years ended March 31, 2002,
2001, and 2000 34
Notes to Consolidated Financial Statements 37
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INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
The Ashton Technology Group, Inc.
We have audited the accompanying consolidated balance sheets of The Ashton
Technology Group, Inc. and Subsidiaries as of March 31, 2002 and 2001 and the
related consolidated statements of operations, stockholders' (deficiency) equity
and comprehensive loss, and cash flows for each of the three years in the period
ended March 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Ashton
Technology Group, Inc. and Subsidiaries as of March 31, 2002 and 2001 and the
results of their operations and their cash flows for each of the three years in
the period ended March 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Goldstein Golub Kessler LLP
- -------------------------------
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
June 6, 2002
29
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
2002 2001
ASSETS
Cash and cash equivalents $ 635,087 $ 6,028,883
Securities available for sale - 1,483,350
Accounts receivable 4,798 66,695
Current portion of notes receivable - 131,700
Prepaid expenses and other current assets 144,025 787,640
----------------- -------------------
Total current assets 783,910 8,498,268
Notes receivable, net of current portion - 94,012
Property and equipment, net of accumulated depreciation 1,515,430 2,319,080
Exchange memberships 159,752 356,652
Investments in and advances to affiliates 224,757 141,144
Other investments - 1,500,000
Other assets 102,782 156,622
----------------- -------------------
Total assets $ 2,786,631 $ 13,065,778
================= ===================
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
Accounts payable and accrued expenses $ 1,935,926 $ 979,504
Short-term note, net of discount 322,581 -
Net liabilities of discontinued operations 59,956 806,030
----------------- -------------------
Total current liabilities 2,318,463 1,785,534
Secured convertible note 4,711,400 -
Other liabilities 41,044 18,438
----------------- -------------------
Total liabilities 7,070,907 1,803,972
Minority interest - 4,000,000
Commitments and contingencies
Series F redeemable convertible preferred stock $.01 par - 4,363,717
value - shares authorized: 20,000; shares issued and
outstanding: none and 4,364
Preferred stock - shares authorized: 3,000,000 - -
250,000 shares designated as Series A; shares issued
and outstanding: none
590,000 shares designated as Series B - (liquidation 240,000 442,000
preference equals $240,000 and $442,000);
shares issued and outstanding: 24,000 and 44,200
Common stock - par value: $.01; shares authorized: 682,823 332,288
100,000,000 and 60,000,000; shares issued and outstanding:
68,282,250 and 33,228,830
Additional paid-in capital 79,217,625 73,358,849
Accumulated deficit (84,414,829) (71,186,197)
Accumulated other comprehensive loss (9,895) (48,851)
------------------ ------------------
Total stockholders' (deficiency) equity (4,284,276) 2,898,089
------------------ ------------------
Total liabilities and stockholders'(deficiency) equity $ 2,786,631 $ 13,065,778