Filed Pursuant to Rule 424(b)(3)
A.B. WATLEY GROUP INC.
PROSPECTUS
2,141,786 SHARES OF
COMMON STOCK
Of the shares of common stock being offered, 141,786 are being offered
by the selling stockholders identified on page 27 and are being registered for
resale. We will not receive any proceeds from the sale of the shares by the
selling stockholders. However, we will receive the proceeds upon the exercise
for cash of the stock purchase warrants held by the selling stockholders.
The remaining 2,000,000 shares may be issued through a common stock
purchase agreement with Seacrown Limited, as further described in this
prospectus. The number of shares of common stock which may be issued through the
common stock purchase agreement would constitute approximately 23.7% of our
issued and outstanding common stock as of August 8, 2000. We will receive the
sale price of any common stock that we sell through the common stock purchase
agreement and Seacrown Limited may resell those shares pursuant to this
prospectus.
Seacrown Limited is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with its sales.
Investing in the common stock involves risks. See Risk Factors beginning on page
2.
Our common stock is traded on the Nasdaq National Market under the
symbol ABWG. On September 5, 2000, the closing price of our common stock as
reported on the Nasdaq National Market was $15.94
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is September 6, 2000.
AVAILABLE INFORMATION
We have filed with the SEC the registration statement on form S-3 under
the Securities Act with respect to the common stock offered hereby. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement and the
exhibits filed therewith, certain portions of which have been omitted as
permitted by the rules and regulations of the SEC. For further information with
respect to our company and the securities offered hereby, reference is hereby
made to the registration statement and to the exhibits filed as a part thereof.
Statements contained in this prospectus regarding the content of any contract or
other document referred to are not necessarily complete. In each instance, we
refer you to the copy of such contract or other document filed as an exhibit to
the registration statement, and each such statement is hereby qualified in its
entirety by such reference. The registration statement, including all exhibits
thereto, may be inspected without charge at the principal office of the SEC at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
commission's regional offices located in New York, New York and Chicago,
Illinois. Copies of such materials may also be obtained from the Public
Reference Section of the commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, upon the payment of prescribed fees. Please call the
commission at 1-800-SEC-0330 for further information on the public reference
rooms. In addition, registration statements and certain other filings made with
the commission through its Electronic Data Gathering, Analysis and Retrieval
systems are publicly available through the commission's site on the World Wide
Web located at http://www.sec.gov. The registration statement, including all
exhibits and schedules thereto and amendments thereof, has been filed with the
commission through the Electronic Data Gathering, Analysis and Retrieval system.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The commission allows us to "incorporate by reference" the information
we file with the commission. This permits us to disclose important information
to you by referencing these filed documents. We incorporate by reference in this
prospectus the following documents which have been filed with the commission:
(1) our Annual Report on Form 10-KSB for the year ended September 30,
1999;
(2) our Quarterly Report on Form 10-QSB for the quarter ended December
31, 1999, for the quarter ended March 31, 2000 and for the quarter
ended June 30, 2000; and
(3) the description of the common stock contained in our registration
statement on Form 8-A dated April 14, 2000.
We incorporate by reference all documents filed pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus
and prior to the termination of this offering.
We will promptly provide without charge to you, upon written or oral
request, a copy of any or all of the documents incorporated by reference in this
prospectus, other than exhibits to such documents, unless such exhibits are
specifically incorporated by reference in such documents. Requests should be
directed to A.B. Watley Group Inc., Att: Investor Relations, 40 Wall Street, New
York, New York, telephone number 212-422-1664.
Unless otherwise indicated, references to "we", "us" and "our" refer to
A.B. Watley Group Inc., a Delaware corporation, and its subsidiaries. Our common
stock, par value $.001 per share, is referred to in this prospectus as the
"common stock."
FORWARD LOOKING STATEMENTS
This prospectus contains certain statements that may be deemed
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. All statements, other than statements
of historical facts, that address activities, events or developments that the
company intends, expects, projects, believes or anticipates will or may occur in
the future are forward-looking statements. Such statements are based on certain
assumptions and assessments made by management of the company in light of its
experience and its perception of historical trends, current conditions, expected
future developments and other factors it believes to be appropriate. The
forward-looking statements included in this prospectus are also subject to a
number of material risks and uncertainties, including but not limited to
economic, competitive, governmental and technological factors affecting our
company's operations, markets, services and prices, and other factors discussed
in our company's filings under the Securities Act and the Exchange Act.
Prospective investors are cautioned that such forward-looking statement are not
guarantees of future performance and that actual results, developments and
business decisions may differ from those envisaged by such forward-looking
statements.
RISK FACTORS
Although we are optimistic that we will be able to continue our
substantial growth and strengthen our position in the online and electronic
trading of securities, we also acknowledge that our business and this industry
in general are subject to a number of risks and uncertainties, which could
adversely affect future results. Among these are:
1. Competition In The Online And Electronic Brokerage Business Is
Increasing. Not only are we faced with competing with the traditional electronic
trading firms, such as E*Trade and E-Schwab, as well as smaller sized
competitors, but we are also faced with the entry of new firms, including
traditional brokerage firms such as Merrill Lynch, and the emergence of giants,
such as Goldman Sachs & Co., as a sponsor or joint venturer of e-commerce
brokerage firms and electronic communications networks. We will continue to
compete based upon what we perceive as the excellence of our trading systems,
the skills of our customer service personnel, the breadth of information and
other services provided, attractive pricing of our services and maintenance and
upgrade of our technology. Although added competition has also served to
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increase the overall market for this type of brokerage service, the increased
competition also places more pressure on us in our competitive efforts,
including a need to increase our marketing efforts, which is already underway.
2. We Are Expanding Rapidly And Need To Properly Manage Our Increased
Infrastructure. The expansion of our business has led us to increase our systems
and personnel. These must be managed efficiently and places additional burdens
upon executive management.
3. We Must Maintain Our Access To The Most Improved Technology.
Technological changes continue in the electronic commerce field generally and in
our segment of online brokerage. We must keep pace with these technological
developments by a combination of licensing and developing software, to be able
to continue to provide what we regard as highly efficient and attractive
services and systems for our accounts. Although we have recently commenced
placing some of our clients onto our proprietary direct access trading platform,
we do not have results as to client satisfaction and performance of this
platform. The potential lack of acceptance by our clients poses an additional
risk and could be detrimental to our company.
4. Our Industry Faces Substantial Regulatory Supervision. We, as well
as all members of the U.S. securities brokerage industry, are regulated by the
NASD and SEC. These supervisory bodies have tended to increase the intensity of
their regulatory efforts, particularly with respect to the online trading
industry. Additional regulations have been proposed, from time to time, dealing
with the suitability of online trading and broker supervision of accounts. All
these place a greater burden on the conduct of our electronic and online
brokerage business.
5. Our Proposed Conversion To Self-Clearing Operations Subjects Us To
Additional Risks. Although self-clearing will allow us to theoretically increase
the profitability of our operations, it will also place additional burdens upon
managing our business. We will collect dividends and interest on securities held
in nominee name and make the appropriate credits to our clients' accounts. We
will also facilitate exercise of subscription rights on securities held for our
clients. We will arrange for the transmittal of proxy and tender offer materials
and issuer reports to our clients.
Self-clearing operations, especially where conducted by firms such as
ours, without significant prior experience, involve substantial risk of losses
due to clerical errors related to the handling of client funds and securities.
We have attempted to mitigate this risk by hiring, from a large competitor, as a
senior officer someone who has extensive experience in the senior management of
self-clearing operations and conversions to self-clearing. Errors in the
clearing process also may lead to civil liability for actions in negligence
brought by parties who are financially harmed as a result of these errors.
Clearing operations have accounted for a significant portion of our cost of
services. Our failure to perform self-clearing operations accurately and
cost-effectively could have a material adverse effect on our business, financial
condition and operating results.
6. The Sale of Common Stock Pursuant To The Equity Line Of Credit May
Substantially Dilute The Interests Of Other Security Holders. The shares
issuable to Seacrown Limited pursuant to the equity line of credit will be
issued at a 6% discount to the average daily price of our common stock.
Accordingly, the shares of common stock then outstanding will be diluted.
Depending on the price per share of our common stock during the eighteen month
period of the equity line of credit, we may need to register additional shares
for resale to access
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the full amount of financing available, which could have a further dilutive
effect on the value of our common stock.
7. The Sale Of Material Amounts Of Our Common Stock Could Reduce The
Price Of Our Common Stock And Encourage Short Sales. As we sell shares of our
common stock to Seacrown Limited pursuant to the equity line of credit and then
Seacrown sells the common stock, our common stock price may decrease due to the
additional shares in the market. As the price of our common stock decreases, and
if we decide to draw down on the equity line of credit, we will be required to
issue more shares of our common stock for any given dollar invested by Seacrown,
subject to a designated minimum put price specified by us. This may encourage
short sales, which could place further downward pressure on the price of our
common stock.
THE COMPANY
We are a financial services company which owns A.B. Watley, Inc., a
registered securities broker-dealer and member of the National Association of
Securities Dealers, Inc. We provide real-time online financial brokerage
services and comprehensive information about the securities markets through our
proprietary trading systems, UltimateTrader(R) and WatleyTrader(TM). Watley has
received favorable industry recognition, ranking fourth in Dow Jones Business
Director's recent survey of Internet brokers and eighth in Gomez Advisors'
ranking of Internet brokers. In addition, Watley was ranked sixth in Barron's
annual ranking of online brokers published in March 2000.
Our company was incorporated in May 1996 under the laws of the State of
Delaware. Watley was organized in December 1958 under the laws of the State of
New York. In January 1997, we acquired all of the outstanding capital stock of
Watley.
Industry Overview
Our industry has recently experienced a series of changes, led by
electronic and online commerce, which has created market opportunities for us
and other similarly situated brokerage firms. These favorable market trends
include:
The Emergence of Electronic and Online Commerce.
Internet and online services have provided organizations and
individuals with innovative ways of conducting business. With the emergence of
the Internet as a globally accessible, fully interactive and individually
addressable communications and computing medium, companies that have
traditionally conducted business in person, through the mail or over the
telephone are increasingly utilizing electronic commerce. Increased use of
credit cards, automated teller machines, the incidence of electronic funds
transfers and online banking and bill paying has automated, simplified and
reduced the costs of financial transactions for consumers, businesses and
financial institutions.
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Consumers have shown a strong preference for transacting various types
of business electronically, such as paying bills, buying insurance, booking
airline tickets and trading securities, rather than in person or over the
telephone. These transactions are being streamlined through online commerce and
can now be performed directly by individuals virtually anywhere at any time.
Consumers have accepted and even welcomed self-directed online transactions
because these transactions can be faster, less expensive and more convenient
than transactions conducted through a human intermediary.
The Development of Online Brokerage Services.
In the past, individual investors could access the financial markets
only through a full-commission broker, who would offer investment advice and
place trades. With the deregulation of brokerage commissions in 1975 and the
resulting unbundling of brokerage services, investors began to realize that they
could separate financial advisory services from securities trading. This brought
about the advent of discount brokerage firms, which provide an alternative
investment approach by completing trades at a reduced cost.
With the emergence of electronic brokerage services, investors are
being given the ability to further unbundle the costs associated with the human
interaction required by full-commission and traditional discount brokerage
firms. By requiring personnel to handle each transaction, most traditional
brokerage firms restrict their clients' access to trading and information to the
availability of the person processing the transaction. In addition, although
full-commission and discount brokerage firms are able to offer electronic
trading services, their continued reliance on personnel, branch offices and the
associated infrastructure for a major part of their business prevents them from
reducing their cost structure to the lower price points achievable through
electronic trading.
We believe that the increased presence of automated teller machines,
the growth of discount brokerage firms, increasing utilization of the Internet
to access a wide range of financial services, and a variety of other indicators
evidence a shift in demographics that is fundamentally altering the way
consumers manage their personal financial assets. Based on consumer feedback and
the rapid acceptance by consumers of online transactions, we also believe that
consumers are increasingly taking direct control over their personal financial
affairs, not only because they are now able to do so, but also because they find
it more convenient and less expensive than relying on financial intermediaries.
As investors obtain even more access to investment information, we
believe, based upon our experience in the industry, they will desire greater
control over their financial decisions and seek alternative ways to invest more
conveniently and cost-effectively and with less interaction with brokers and
other financial services professionals. Based upon our experience in the
industry, we believe that this trend has created a growing opportunity to
provide online trading services, such as UltimateTrader and WatleyTrader, that
are easy to access, easy to use, cost-effective and secure.
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The Growing Market for Active Traders, Active Investors and Online Brokerage
Services.
Active trading is dependent upon liquidity, i.e., the ability to buy or
sell stock at any given time. Until recently, liquidity was primarily provided
by Nasdaq, The New York Stock Exchange and an alternative trading system called
Instinet. However, the liquidity on Instinet was available only to institutional
clients and certain brokerage firms.
In 1996, the SEC adopted rules which brought about sweeping changes in
the structure of the over-the-counter market and were very beneficial for us and
our clients, as well as to public companies and their shareholders. These rules,
known as the order handling rules, permitted the creation and operation of
electronic communication networks, open broadcasting systems that allow anyone
with a connection to the network to see all the bids and offers posted into the
system for any Nasdaq traded security. The order handling rules require market
makers to display certain limit orders in their quotations or to send those
orders to an electronic communication network for display. The increased
regulatory emphasis on enforcing compliance with the duty of brokers to obtain
the best execution for their clients has fostered the growing importance of
electronic communication networks, which provide an ever-increasing source of
liquidity in the over-the-counter market.
Based upon our experience in the industry, we believe that this
regulatory environment and the increased availability of information to
individual investors on a real-time basis, together with advances in Internet,
networking and communications technologies, has created investing opportunities
for active traders and active investors and market opportunities for online
brokerage services.
Online trading is the fastest growing segment of the brokerage industry
and is expected to grow significantly. The evolution of the Internet has
fundamentally changed the way in which many investors manage their financial
affairs. The speed, convenience, choice, cost savings and information that the
Internet offers as an investment tool has driven investor assets online. We
anticipate a continuation in this trend as evidenced by research released by
Forrester Research and IDC. These independent research firms project that total
U.S. assets managed online will reach $3.1 trillion in 2003, up from $325
billion at the end of 1998. During that period, the number of online accounts is
estimated to roughly quadruple, to over 20 million. Also, the percentage of all
investors who invest online is expected to grow to 30% from roughly 10% today.
Meanwhile, according to The Industry Standard, within the past four years online
trades as a percent of total trading volume have gone from less than 1% to 14%
of all stock orders and 30% of the volume on Nasdaq and the NYSE. According to
one industry analyst, the online trading volume could represent 50% of all
trades over the next three years.
Strategy
Our strategy, which has been accelerated since our initial public
offering in April 1999, is to capitalize on perceived opportunities arising from
the expanding online trading market by:
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o Targeting active traders and other active investors. We believe that
UltimateTrader is well positioned to satisfy their requirements. We
have established low rates and offer a broad range of supplementary
information and data for these persons.
o Expanding our marketing efforts for our online brokerage service. We
are aggressively marketing UltimateTrader by targeting active traders
through print, online, television, radio and other advertisements. Our
advertising efforts include advertisements in financial publications
and various other regional and national publications that have a
demographic similar to our target market. We are also advertising and
promoting UltimateTrader through Internet website and banner
advertisements and other media. Our marketing campaign has accelerated
throughout fiscal year 2000, especially during the 3rd quarter. Our
continued investment in the content and services provided via our
Internet site and the WatleyTrader service has earned strong rankings
for our company in several major industry surveys such as #8 in the
Gomez Advisors Review and #6 in Barron's. Such rankings have given us
very valuable publicity and strengthened our brand in a very
competitive marketplace.
o Expanding our network infrastructure and client support capabilities.
We are expanding our network infrastructure and client support
capabilities, to better service an increasing client base. Our internal
computing needs require ongoing investments in our network and server
infrastructure. During fiscal year 2001, we also intend to establish
off-site back-up communications centers or hot sites in New York and
Texas to mirror the primary location to ensure continued operations in
the event of a systems failure at our primary location.
o Improving our third-market institutional sales desk. We are
continuously seeking to improve our technical expertise and apply new
technologies to more effectively provide these services. Additionally,
we have hired additional associates to expand the number of
institutions we service and the number of securities we cover for this
market.
In addition, we intend to expand our operations by:
o Converting to self-clearing operations. Based upon an internal
cost/benefit analysis we believe that performing these operations
internally will reduce our operating cost and provide us the
opportunity to receive expanded revenues from margin transactions with
our clients. We have completed this review and are seeking to hire the
appropriate staff to build and manage our own clearing department. We
have hired a new senior officer from a very large competing firm who
has over 12 years of experience in managing self-clearing operations
and conversions to self-clearing. We have identified and are seeking to
obtain, by internal development or third party license, the requisite
software systems and computer hardware to convert to self-clearing
operations in the not too distant future. However, we may decide not to
convert to self-clearing operations and to utilize our resources
elsewhere.
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Offering online services in foreign markets. We have started to provide
electronic execution services for foreign institutions and their clients for
transactions in U.S. securities markets and to arrange for foreign institutions
to provide for these services for our clients in foreign markets. We are
pursuing these relationships in the Far East and Europe, with the goal of an
eventual global securities presence.
Ultimate Trader
We designed UltimateTrader by uniquely integrating third-party market
data and order entry software with our proprietary networking systems to create
a proprietary trading system.
Since UltimateTrader is a client-server application, it is not
restricted by the limitation of HTML, the primary programming language of the
worldwide web. With trading systems which use HTML, displayed data remains
static until a query is repeated. In contrast, UltimateTrader delivers and
automatically updates a continuous, dynamic stream of live market data to the
client's screen.
UltimateTrader provides our clients access to comprehensive information
on stocks, market, indices, mutual funds, news and options. UltimateTrader
clients are able to access bid and ask prices, charts, research and over 170
other types of information for any listed or Nasdaq traded stock, as well as the
ability to establish and track their securities, cash and margin positions on a
real-time basis. Our clients can arrange the display and configuration of data
on their computer screens using a menu and tool bar, which are generally
utilized in the Windows operating system. Different computer screen arrays or
pages can be built to suit the users personal requirements.
UltimateTrader clients can execute trades with a few simple mouse
clicks or keystrokes. UltimateTrader clients can route trades directly to the
exchanges, the Nasdaq Market Maker System, a specific market maker or an
electronic communication network. As a result, we believe trades can be executed
more quickly than if the trade is routed through a third market firm or an
online brokerage firm's trading desk, as is the case with a number of other
trading systems. The order entry section can be preset for size and type of
order. The client can use a mouse to click the bid or ask price of a security
and either close out an open position or add to an existing one. If the user
clicks the bid or ask price of the security, the order screen will appear
pre-configured to buy or sell.
Once an order is entered, UltimateTrader sends the order to the
exchange selected in less than two seconds from virtually anywhere in the world.
Typical executions for market orders entered via Ultimate Trader range from 2
seconds to 10 seconds depending on market conditions. These significant savings
in time have tremendous value to a client who is trying to trade in markets
characterized by rapidly changing prices.
Speed of order execution is also affected by how an order is routed.
UltimateTrader clients are able to route their orders directly to the exchanges,
such as the New York Stock Exchange, American Stock Exchange, Nasdaq Stock
Market, Inc. and Chicago Board Options
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Exchange. Most other retail online trading systems route orders to a
third-market firm or the online broker's trading subsidiary, which in turn
routes the orders to the market.
Clients can also elect to route trades to our Watley trading desk for
efficient execution. Our Watley trading desk consists of registered
representatives who are available to assist our clients.
UltimateTrader clients may place bids or offers onto an electronic
communication network which will also appear in the Nasdaq Market Maker Level 2
screen with the corresponding price and size of the order. This gives our
clients an advantage in attempting to execute orders in between the bid and
asked prices of Nasdaq securities.
To direct an order to a specific market maker or electronic
communication network, our clients double click on the market maker or ECN and
mark their order entry screen with this preference. The SelectNet preference
button is useful when our clients wish to execute orders for more than 1,000
shares of a security.
UltimateTrader clients can select from two different service levels,
UltimateTrader Free and UltimateTrader Pro. The number of UltimateTrader Free
customers has grown rapidly since this service was introduced approximately nine
months ago.
The following table sets forth the features offered for UltimateTrader
Free and Pro Service Level:
Ultimate Trader Features Free Pro
Dynamic Updating Quotations X X
Unlimited Customized Pages X X
Electronic Execution X X
Buying Power X X
Board View Portfolio Minder X X
Position Minder X X
Scrolling Tickers X
Alarms X
Snap Quotes X
Market Minder X
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Hot Key X X
MultiQuotes X
Charts with Technical Studies X
Nasdaq Level II Data X X
Color Coded Market Maker Screens X
Time and Sales X X
Following is a description of each of the UltimateTrader features we offer:
o Dynamic Updating Quotations - displays real time changes in
prices and markets as they occur.
o Unlimited Customized Pages - allows clients to create computer
screen layouts to their preference with their data and to
scroll freely among these pages.
o Electronic Execution - provides direct electronic access to
various exchanges and markets for rapid routing of execution
of trades.
o Buying Power - allows clients to view current buying power,
the value of the account as of the trading day's business
morning.
o Board View Portfolio Minder - used to create computer windows
with comprehensive price and other data relating to a number
of different securities.
o Position Minder - serves as a portfolio monitor and displays
existing open positions as well as the status of pending
orders.
o Scrolling Tickers - displays price and trading volume
information for the symbols that a client chooses on a live
basis. The quotes will move through the ticker window as the
server receives them.
o Alarms - alerts clients by an audio or visual pop-up when
target criteria have been met for a specified security.
o Snap Quotes - displays detailed information about individual
symbols.
o Market Minder - a fully configurable quote screen that can
display virtually any information about the security selected
by the client.
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o Hot Keys - the ability to execute/cancel trades with a simple
keystroke.
o MultiQuotes - displays prices and fundamentals for any symbol.
o Charts with Technical Studies - allows clients to view live,
dynamically updating, real-time intraday chart data and
historical information for stocks, option or indices.
o Nasdaq Level II Data - continuously updated display of market
maker and electronic communication network current prices and
changes.
o Color Coded Nasdaq Market Maker Screens - designed to visually
display, by a special color on the screen, upward and downward
trends in recent trades in a security.
o Time and Sales - reflects last and cumulative trades, prices
and aggregate daily volume in a security.
Our fee schedule for clients subscribing to UltimateTrader Free is as
follows:
Monthly Fees for
Number of Trades Per Month Transaction Charges Real Time Data
- -------------------------- ------------------- --------------
1-9 trades per month $23.95 free
10-24 trades per month $22.95 free
25-49 trades per month $20.95 free
50-99 trades per month $19.95 free
100-199 trades per month $18.95 free
Our fee schedule for clients subscribing to UltimateTrader Pro is as
follows:
Monthly Fees for
Number of Trades Per Month Transaction Charges Real Time Data
- -------------------------- ------------------- --------------
1-9 trades per month $23.95 $300
10-24 trades per month $22.95 $250
25-49 trades per month $20.95 $200
50-99 trades per month $19.95 free
100-199 trades per month $18.95 free
Dow Jones News Service is an optional service priced at $95.00 per month.
Watley's fee for an exchange listed security in excess of 2,000 shares
or a Nasdaq listed security in excess of 10,000 shares incur a surcharge of $.01
per share and a commission of $.01 per share on the entire order. We also charge
an additional fee for executing on an electronic communication network or
SelectNet, substantially all of which is forwarded to the owner or operator of
that system.
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Optional Services. We offer a vast array of optional services to
UltimateTrader clients. Among these are the Dow Jones News Service and various
charting and market trading services. The Dow Jones News Screen provides
continuously updating real-time news in a scrolling format, including: breaking
news; corporate announcements; interviews; industry news; market reports;
economic and political developments; hot stock alerts; and international events.
With Dow Jones News and a number of other services, we invoice the
client directly as part of their monthly bill and remit the special charges to
the vendor supplying these services, while retaining approximately 15% of the
charge as our fee.
UltimateTrader has accounted for most of our retail customer account
revenues in the past year and we anticipate this to continue in the future.
During our fiscal year ended September 30, 1999, we derived approximately 71% of
our total revenues from UltimateTrader clients.
WatleyTrader
WatleyTrader is our web-based Internet brokerage service which we
designed for active investors who execute trades online and use online services
to gather information about the securities markets. WatleyTrader provides
comprehensive information on stocks, markets, indices, mutual funds, news and
options in a live format for free. WatleyTrader clients can place trades, obtain
quotes, order research and check account balances and portfolio valuations
online or through our automated touch-tone phone system, 24 hours a day. The
electronic order system for the WatleyTrader directs orders to the Watley Desk
for execution. WatleyTrader client orders are entered, processed and confirmed
electronically.
WatleyTrader targets price sensitive investors and competes directly
with E*Trade, Charles Schwab and other online brokerages. The basic fee schedule
for the WatleyTrader is a transaction charge of $9.95 per order with an
additional $14.00 fee for trades made by telephone. Orders of more than 5,000
shares bear a commission of $.01 per share for the entire order.
During our fiscal year ended September 30, 1999, approximately 3% of
our revenues originated from WatleyTrader clients.
Third Market Institutional Sales Desk
Watley's third-market institutional sales desk specializes in
facilitating and/or executing large-block transactions in approximately 500
thinly traded equity securities. These services are provided to clients who
often require that their purchases or sales of large positions remain anonymous.
We match buyers and sellers to execute off-exchange transactions to minimize the
impact on the market and prevent our client's positions from being disclosed to
competing firms. Our third-market institutional sales clients include mutual and
pension funds, insurance
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companies, banks, corporations and independent fund managers. Approximately 22%
of our revenues for our fiscal year ended September 30, 1999 were derived from
the institutional trading desk.
Client Services
Client services for all levels of online service, including trading,
administrative, and technical support, are among our highest priorities. Based
on our experience in the industry and client feedback, we believe that providing
an effective client service team to handle client needs is critical to our
success. Our Client Service department helps clients get online, handles product
and services inquiries and addresses all brokerage and technical questions. The
Client Service department also conducts various surveys to verify the
satisfaction of our clients and to learn more about client preferences and
requirements.
Live client support is available 12 hours a day from 8:00 AM to 8:00 PM
EST Monday through Friday. Our Client Service department operates on a one-stop
shopping basis, meaning that clients do not typically have to be transferred
between departments to receive answers to their inquiries. We currently employ
seventeen Client Service personnel (inclusive of management), all of whom are
registered representatives and are available to accept and execute client
orders, research past trades, discuss account information, and provide detailed
technical support. A separate technical support team helps clients with
particularly serious or persistent technical issues.
In order to provide professional and efficient client support, we have
purchased and implemented client relationship management (CRM) and computer
telephony integration (CTI) software. CRM databases are updated with each client
contact to track Client Service calls. A separate internal database tracks
trading patterns, changes in customer balances and compliance issues. Both
databases are used to generate periodic reports for management. Client Service
associates access the latest product and account information through CRM and
customer account databases.
During the second quarter of fiscal year 1999, we launched online
support and chat services for our clients. This service currently offers an
online, indexed UltimateTrader user manual and chat area. The chat area offers
clients the ability to query and chat with Client Service associates in
real-time. Our goal with respect to the provision of online support and chat
services is to create a sense of virtual community among prospective and
existing clients and between our company and our clients. We also upgraded our
online support capabilities through a recently acquired online chat support
software package.
We plan to create a VIP Client Service team to service our most active
online clients. By providing client support for all issues on an account manager
basis, we intend for the VIP team to offer much more individualized service on a
prioritized basis. We believe that providing highly prioritized, personalized
and professional client support, especially for our niche market high volume
clients, will further differentiate our products and services from those of our
competitors.
13
Operations
Clearing and Order Processing
Watley does not hold any funds or securities of its clients nor does
Watley generally execute and process directly either its own or its clients'
securities transactions. Since October 1996, Watley has cleared all transactions
for its clients, on a fully disclosed basis, with Penson Financial Services,
Inc. for retail accounts and Weiss, Peck & Greer, L.L.C. for institutional
accounts.
Watley's agreement with its clearing brokers provide that the clearing
brokers process all securities transactions for Watley's account and the
accounts of Watley's clients for a fee. Services of the clearing brokers include
billing and credit control and receipt, custody and delivery of securities, for
which we pay a per ticket charge. Watley has agreed to indemnify and hold the
clearing brokers harmless from certain liabilities or claims, including claims
arising from the transactions of its clients, which could be material in amount.
Watley's clearing agreements may be terminated by either party, upon 60 days'
written notice for Penson Financial Services, Inc., and 30 days prior written
notice for Weiss, Peck & Greer, L.L.C. Watley depends on the operational
capacity and the ability of the clearing brokers for the orderly processing of
transactions. By engaging the processing services of clearing brokers, however,
Watley is exempt from certain capital reserve requirements imposed by federal
laws.
Clients' securities transactions are effected on either a cash or
margin basis. In connection with margin transactions, credit is extended to a
client, collateralized by securities and cash in the client's account, for a
portion of the purchase price. The client is charged for margin financing at
interest rates based on the brokers call rate plus an additional amount of up to
1.75%. The brokers call rate is the prevailing interest rate charged by banks on
secured loans to broker-dealers.
Margin lending is subject to the margin rules of the Board of Governors
of the Federal Reserve system. Margin lending subjects us to the risk of a
market decline that would reduce the value of our collateral below the client's
indebtedness before the collateral can be sold. Under applicable rules, in the
event of a decline in the market value of the securities in a margin account,
the client is required to deposit additional securities or cash in the account.
Network Infrastructure
Our network consists of a series of servers, routing and
Internet-networking equipment, workstations, software support cluster, and
firewall management systems. This creates a global connection to our intranet,
so that any computer that can connect to the Internet can connect to our system.
Any individual with a personal computer who has a connection to the
Internet and has Windows compatible software can subscribe to UltimateTrader.
Once an account is opened, the
14
client downloads UltimateTrader software and is given a unique user name and
password. The client then logs onto the UltimateTrader system and is connected
to our market data servers and to one of our order servers.
Our network is accessed by electronic messaging. A message is sent to
Watley's network via the client's Internet service provider. In order to access
Watley's network, this message first passes through a firewall and web shield.
The firewall only allows appropriate Internet traffic into the network. The web
shield prevents virus-infected files or messages from reaching the network. Once
the message has passed through the firewall and web shield, a permission server
qualifies the client. Once the permission server allows the client to establish
a connection to the UltimateTrader system, the connection between the client and
server is maintained until the client requests it be terminated or until the
UltimateTrader system determines that the connection is no longer efficient or
is inoperable.
Our technology is supported by an internal staff of programmers,
developers and operators 24 hours a day, seven days a week. The programming
staff is supplemented by a team of quality control analysts, web page
developers, technical writers and design specialists who ensure the final
product is user-friendly and dependable. In addition to supporting the systems,
the staff continually enhances software and hardware and develops new services.
Software is designed to be versatile and easily adaptable to new and emerging
technologies.
The order servers accept buy/sell or sell short messages from the
client application and qualifies the order according to a number of business
rules. Once an order is qualified, it is sent to the exchange of the client's
choice and messages are sent to update our database. This update offers the
client real-time account positions, buying power and profit and loss
calculations. All transactions for the day are processed for delivery to the
clearing firm.
Account Security
We use a combination of proprietary and industry standard security
measures to protect our clients' assets. Clients are assigned unique account
numbers, user identifications and passwords that must be used each time they log
on to the system. In accordance with standard industry practices, telephone
orders require authentication via personal identification number/password and/or
other personal information. In addition, our trade processing system is designed
to compare the Watley accounts database with the clearing firm's account
information on a daily basis to detect any discrepancies.
We rely on encryption and authentication technology, including public
key cryptography technology licensed from other parties, to provide the security
and authentication necessary to effect the secure exchange of information.
Firewalls and other software limit not only system access to the
authorized users, but also limit the authorized users to specifically approved
applications. This filter-software prevents unauthorized access to critical
areas of the system such as account information. Furthermore,
15
public access servers, such as e-mail, chat services and the file transfer
protocol, are in a network entirely separate from the rest of our systems.
We have implemented special policies relating to the transfer or
withdrawal of funds by clients to prevent unauthorized withdrawals. All requests
for fund withdrawal or transfer require a signed letter from the account holder.
Checks will only be made out in the account holder's name and wire transfers
will only be sent to a bank account in the account holder's name.
Suppliers
We obtain financial information from a number of third-party suppliers
of software and information services, including PC Quote, Inc., Townsend
Analytics, Ltd., Ethos Corporation and S&P ComStock, Inc. We have a number of
alternative sources of supply of these items of software and information
services available to us at comparable cost, on a timely basis to provide
adequate replacements, if arrangements with any of our current suppliers are
abrogated.
Marketing and Advertising
We are marketing UltimateTrader by targeting active traders through
print, online, television, radio and other modes. We have also conducted surveys
of our existing client base to understand their media consuming habits and
demographics profiles to effectively target our advertising campaign. We have
implemented a comprehensive marketing plan to attract potential clients, as well
as build market awareness, educate the investing public and develop brand name
recognition and loyalty within the most active trading segment of the market.
Our advertising efforts include advertisements in financial publications and
various other regional and national publications that have demographics similar
to our target market. In the last six months we have emphasized advertising and
promoting UtimateTrader through television commercials, primarily on CNBC and
have therefore significantly increased our marketing expense. We may seek to
broaden our presence on the Internet through various partnerships, sponsorships
and co-branding efforts such as our recent deal with U-Cool, an Internet
community site that has over 150,000 subscribers and 10 million unique monthly
visitors. Our strong rankings in various industry surveys have provided us with
extremely valuable publicity. We will continue to make investments in our online
services and offerings to maintain and even strengthen these rankings.
Competition
The market for electronic brokerage services is highly competitive and
rapidly changing. We believe that we compete on the basis of speed of order
execution, processing and confirmation, quality of client service, ease of use,
amount and timeliness of information provided, price and reliability of our
trading systems. We expect that our ability to compete will also be affected by
our ability to introduce new services and enhancements to existing services into
the market on a timely basis.
16
We believe our competition consists of large and small brokerage firms
utilizing the Internet to transact retail brokerage business. Among these
competitors are E*Trade Group, Inc.; Charles Schwab & Co., Inc.; Quick & Reilly,
Inc.; Waterhouse Securities, Inc.; Fidelity Brokerage Services, Inc. and Datek
Securities Corp. We also face competition for clients from full commission
brokerage firms, including Merrill Lynch & Co., Inc.; Morgan Stanley Dean Witter
& Co.; PaineWebber Incorporated; and Salomon Smith Barney, as well as financial
institutions and mutual funds.
Securities Regulation
Watley is a broker-dealer registered with the SEC and NASD and is
licensed as a broker-dealer in 49 states.
The securities industry in the United States is subject to extensive
regulation under federal and state laws. In addition, the SEC, NASD, other
self-regulatory organizations, such as the various stock exchanges, and other
regulatory bodies, such as state securities commissions, require strict
compliance with their rules and regulations. As a matter of public policy,
regulatory bodies are charged with safeguarding the integrity of the securities
and other financial markets and with protecting the interests of clients
participating in those markets, and not with protecting the interests of our
stockholders.
Broker-dealers are subject to regulations covering all aspects of the
securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of clients funds and securities, capital
structure, record keeping and the conduct of directors, officers and employees.
Because of the recent increase in the number of complaints by online traders,
the SEC, NASD and other regulatory organizations may adopt more stringent
regulations for online firms and their practices. If we fail to comply with any
laws, rules or regulations we could be censured, fined, issued a
cease-and-desist order or Watley or our officers and employees could be
suspended or expelled.
In addition, significant changes in Watley's current business or
practices, including converting to self-clearing operations, require NASD and
other regulatory approval.
To expand our services internationally, we would have to comply with
regulatory controls of each specific country in which we conduct business. The
brokerage industry in many foreign countries is heavily regulated. The varying
compliance requirements of these different regulatory jurisdictions and other
factors may limit our ability to expand internationally.
We have initiated a comprehensive marketing campaign to bring greater
brand name recognition to our products and services. All marketing activities by
Watley are regulated by the NASD. The NASD can impose penalties, including
censure, fine, suspension of all advertising, the issuance of cease-and-desist
orders or the suspension or expulsion of a broker-dealer and its officers or
employees for violations of the NASD's advertising regulations.
17
Net Capital Requirements
The SEC, NASD and various other regulatory agencies have stringent
rules requiring the maintenance of specific levels of net capital by securities
brokers, including the SEC's uniform net capital rule which governs Watley. Net
capital is defined as assets minus liabilities, plus other allowable credits and
qualifying subordinated borrowings less mandatory deductions that result from
excluding assets that are not readily convertible into cash and from valuing
other assets, such as a firm's positions in securities, conservatively. Among
these deductions are adjustments in the market value of securities to reflect
the possibility of a market decline prior to disposition.
As of June 30, 2000, Watley was required to maintain minimum net
capital, in accordance with SEC rules, of $420,277 and had total net capital of
$1,222,062 or $821,785 in excess of minimum net capital requirements.
If Watley fails to maintain the required net capital Watley may be
subject to suspension or revocation of registration by the SEC and suspension or
expulsion by the NASD and other regulatory bodies, which ultimately could
require Watley's liquidation. In addition, a change in the net capital rules,
the imposition of new rules, a specific operating loss, or any unusually large
charge against net capital could limit those operations of Watley that require
the intensive use of capital and could limit our ability to expand our business.
The net capital rules also could restrict our ability to withdraw capital from
Watley, which could limit our ability to pay dividends, repay debt and
repurchase shares of our outstanding stock.
Intellectual Property Rights
We rely on a combination of copyright, trademark and trade secrets laws
and non-disclosure agreements to protect our proprietary technologies, ideas,
know-how and other proprietary information. We hold a United States trademark
registration for the UltimateTrader name. We have no patents or registered
copyrights. Third parties may copy or otherwise obtain and use our proprietary
technologies, ideas, know-how and other proprietary information without
authorization or independently develop technologies similar or superior to our
technologies. In addition, the confidentiality and non-competition agreements
between us and our key employees, distributors and clients may not provide
meaningful protection of our proprietary technologies or other intellectual
property in the event of unauthorized use or disclosure. Policing unauthorized
use of our technologies and other intellectual property is difficult,
particularly because the global nature of the Internet makes it difficult to
control the ultimate destination or security of software or other data
transmitted.
There has been substantial litigation in the software industry
involving intellectual property rights. We believe that our technologies and
trading systems have been developed independent of others. Third parties may
assert infringement claims against us and our technologies and trading systems
may be determined to infringe on the intellectual property rights of others.
18
Research and Development
During the nine months ended June 30, 2000, we spent approximately
$4,000,000 for software development. We are expecting to incur an additional
$500,000 in software development costs to complete our current projects. We plan
to complete the current projects in late summer to early fall. These development
efforts are related to the creation of proprietary direct access online trading
and market information software. The development efforts will allow our company
to transition our UltimateTrader customers from vendor software to our
proprietary software system which is expected to reduce our company's operating
costs by up to approximately $1,200,000 per month.
Personnel
As of July 27, 2000, we employed a total of 156 persons, of whom 9 are
engaged in executive management, 21 in trading activities, 41 in information
technology, 30 in client service, 21 in sales and marketing, 21 clerical and
back office personnel, as well as 13 other employees. All but one of these
persons are employed on a full-time basis. We believe our relations with our
employees are generally good and we have no collective bargaining agreements
with any labor unions.
Our registered representatives are required to take examinations
administered by the NASD and state authorities to be qualified to transact
business, and are required to enter into agreements with Watley obligating them
to adhere to Watley's supervisory procedures and not to solicit customers in the
event of termination of employment. Watley's agreements with registered
representatives do not obligate these representatives to be associated with
Watley for any length of time.
Our success will depend, in part, on our ability to hire and retain
additional qualified marketing, industry, technical and financial personnel.
Qualified personnel are in high demand. We face considerable competition from
other brokerage and financial service firms and other Internet and online
service companies for these personnel, many of which have significantly greater
resources that we have.
Our principal executive offices are located at 40 Wall Street, New
York, New York, and our telephone number is 212/422-1100.
19
COMMON STOCK PURCHASE AGREEMENT
Overview
We signed a common stock purchase agreement with Seacrown Limited, a
British Virgin Islands corporation, on August 8, 2000, for the future issuance
and purchase of shares of our common stock. The transaction closed on August 9,
2000. The common stock purchase agreement establishes what is sometimes termed
an equity line of credit or an equity drawdown facility.
In general, the drawdown facility operates like this: the investor,
Seacrown Limited, has committed to provide us up to $48 million as we request it
over an 18 month period, in return for common stock we issue to Seacrown. Once
every 22 trading days, we may request a draw of up to $3,000,000 of that money.
The maximum amount we actually can draw down upon each request will be
determined by the volume-weighted average daily price of our common stock for
the 22 trading days prior to our request and the average trading volume for the
45 trading days prior to our request. Each draw down must be for at least
$250,000.
At the end of a 22 day trading period following the drawdown request,
the actual drawdown amount is determined based on the volume-weighted average
stock price during that 22 day period. We then use the formulas in the common
stock purchase agreement to determine the number of shares we will issue to
Seacrown in return for that money. The formulas for determining the actual
drawdown amounts, the number of shares we issue to Seacrown and the price per
share paid by Seacrown are described in detail beginning on page 21. The
aggregate total of all draws cannot exceed $48 million and no single draw can
exceed $3 million. We are under no obligation to request a draw for any period.
The per share dollar amount Seacrown pays for our common stock for each
drawdown includes a 6% discount to the average daily market price of our common
stock for the 22-day period after our drawdown request, weighted by trading
volume. We will receive the amount of the drawdown less an escrow agent fee of
$1,500 and a 5% placement fee payable to the placement agent,
Ladenburg Thalmann & Co. Inc., which introduced Seacrown to us. Ladenburg
Thalmann is not obligated to purchase any of our shares, but as an additional
placement fee, we have issued to Ladenburg Thalmann warrants to purchase 70,893
shares of our common stock at a per share exercise price of $19.47. The common
stock issuable upon exercise of those warrants is included in the registration
statement of which this prospectus is a part.
In lieu of providing Seacrown with a minimum aggregate drawdown
commitment, we have issued to Seacrown a stock purchase warrant to purchase
70,893 shares of our common stock with a per share exercise price of $19.47,
which was 115% of the volume-weighted average share price on August 8, 2000, the
day prior to the closing date. The warrant expires August 9, 2003.
Based on a review of our trading volume and stock price history and the
number of drawdowns we estimate making, we are registering 2,000,000 shares of
common stock for possible issuance under the common stock purchase agreement and
141,786 shares underlying
20
the warrants for common stock delivered to Seacrown and Ladenburg Thalmann & Co.
Inc. Based on the current market price of our common stock, the 2,000,000 shares
covered by this prospectus would not, absent an increase in such price, allow us
to draw down all $48,000,000 of the drawdown facility. If we require the full
amount of the drawdown facility, we would have to register additional shares for
issuance to Seacrown which would cause further dilution of our stockholders'
interests in our company. The listing requirements of The Nasdaq National Market
prohibit us from issuing 20% or more of our issued and outstanding common stock
in a single transaction if the shares may be issued for less than the greater of
market value or book value, unless we get stockholder approval. Based on shares
of common stock issued and outstanding on August 9, 2000, the date of closing of
the common stock purchase agreement, we may not issue more than 1,685,897 shares
under the common stock purchase agreement, the Seacrown warrant and the
Ladenburg warrant, without the approval of our stockholders. Because 141,786 of
these shares are committed to the Seacrown warrant and the Ladenburg warrant, if
we wish to draw amounts under the common stock purchase agreement which would
cause an issuance of more than 1,544,111 shares under the common stock purchase
agreement, we must receive stockholder approval prior to any such drawdown.
In addition, the common stock purchase agreement does not permit us to
draw down funds if the issuance of shares of common stock to Seacrown pursuant
to the drawdown would result in Seacrown owning more than 9.9% of our
outstanding common stock on the drawdown exercise date.
The Drawdown Procedure and the Stock Purchases
We may request a drawdown by faxing a drawdown notice to Seacrown,
stating the amount of the drawdown we wish to exercise and the minimum threshold
price, if any, at which we are willing to sell the shares. A pricing committee
consisting of two directors sets the threshold price by determining the price
below which we are unwilling to sell shares of our common stock. The pricing
committee has complete discretion when determining the threshold price.
Amount of the Draw
No draw can exceed the lesser of $3,000,000 and the capped
amount that is derived from the following formula:
o Average daily trading volume for the 45 trading days
immediately prior to the date we give notice of the
drawdown, multiplied by 22;
multiplied by
o The average of the volume-weighted average daily
prices for the 22 trading days immediately prior to
the date we give notice of the drawdown;
multiplied by
o 20%.
21
The lesser of our draw request and the capped amount is
reduced by 1/22 for every day in the 22 trading days after our drawdown
request that the volume-weighted average daily price for a trading day
is below the threshold price set by us in the request. If the daily
price for a day is below the threshold price, we will not issue any
shares and Seacrown will not purchase any shares for that day. Thus, if
our pricing committee sets a threshold price too high and our stock
price does not consistently meet that level during the 22 trading days
after our drawdown request, the amount we can draw and the number of
shares we issue to Seacrown will be reduced. On the other hand, if our
pricing committee sets a threshold price too low and our stock price
falls significantly but stays above the threshold price, we will be
able to draw the lesser of our draw request and the capped amount, but
we will have to issue a greater number of shares to Seacrown at the
reduced price. We cannot make another drawdown request until expiration
of the 22 trading days that follow a drawdown request we have already
made.
Number of Shares
The 22 trading days immediately following the drawdown notice
are also used to determine the number of shares we will issue in return
for the money provided by Seacrown, and thus the price per share
Seacrown will pay for our shares.
To determine the number of shares of common stock we must
issue in connection with a drawdown, take 1/22 of the drawdown amount
determined by the formulas above, and for each of the 22 trading days
immediately following the date we give notice of the drawdown, divide
it by 94% of the volume-weighted average daily trading price of our
common stock for that day. The 94% accounts for Seacrown's 6% discount.
The sum of these 22 daily calculations produces the number of shares of
common stock we will issue, unless the volume-weighted average daily
price for any given trading day is below the threshold amount, in which
case that day is ignored in the calculation. The price per share
Seacrown ultimately pays is determined by dividing the final drawdown
amount by the number of shares we issue Seacrown.
Sample Calculation of Stock Purchases
The following is an example of the calculation of the drawdown amount
and the number of shares we would issue to Seacrown in connection with that
drawdown based on hypothetical assumptions.
Sample drawdown amount calculation.
We provide a drawdown notice to Seacrown that we wish to make
a drawdown. Suppose that our pricing committee of the board of
directors has specified in the notice a threshold price of $18, below
which we will not sell any shares to Seacrown during this drawdown
period.
22
Suppose the average daily trading volume for the 45 trading
days prior to our drawdown notice is 64,000 and that the average of the
volume-weighted average daily prices of our common stock for the 22
trading days prior to the notice is $21. You can apply the formula to
these hypothetical numbers as follows:
o the average trading volume for the 45 trading days
prior to our drawdown notice (64,000) multiplied by
22, equals 1,408,000
multiplied by
o the average of the volume-weighted average daily
prices of our common stock for the 22 trading days
prior to the notice ($21)
multiplied by
o 20%
The maximum amount we can draw down under the formula is
therefore capped at $3,000,000, subject to further adjustments if the
volume-weighted average daily price of our common stock for any of the
22 trading days following the drawdown notice is below the threshold
price we set of $18. For example, if the volume-weighted average daily
price of our common stock is below $18 on two of those 22 days, the
$3,000,000 would be reduced by 1/22 for each of those days and our
drawdown amount would be 20/22 of $3,000,000, or $2,727,273.
Sample Calculation of Number of Shares
Assume that we have made a drawdown request with a threshold
price of $18. Assume the maximum amount we can draw down is capped at
$3,000,000 based on the formula above. Also, assume that the
volume-weighted average daily price for our common stock is as set
forth in the table on the next page.
The number of shares to be issued based on any trading day
during the drawdown period is calculated from the formula:
o 1/22 of the drawdown amount or $136,363
divided by
o 94% of the volume-weighted average daily price.
For example, for the first trading day in the example in the
table below, the calculation is as follows: 1/22 of $3,000,000 is
$136,363. Divide $136,363 by 94% of the volume-weighted average daily
price for that day of $18 per share, to get 8,059 shares. Perform this
calculation for each of the 22 measuring days, excluding any days on
which the volume-weighted average daily price is below the $18
threshold price, and add the results to determine the number of shares
to be issued. In the table below, there are two days which must be
excluded: days 2 and 3.
After excluding the days that are below the threshold price,
the amount of our drawdown in this example would be $2,727,273 and the
total number of shares we would issue to Seacrown for this drawdown
request would be 137,357, so long as those shares
23
would not cause Seacrown to beneficially own more than 9.9% of our then
outstanding common stock. Seacrown would pay $19.85 per share for these
shares.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Number of Shares of Common
Volume-Weighted Average 1/22 of Requested Draw Stock to be Issued for the
Trading Day Daily Stock Price* Down Amount Trading Day
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
1 $ 18 $ 136,363 8,059
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
2 17 136,363 **
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
3 17 136,363 **
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
4 18 136,363 8,059
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
5 18 136,363 8,059
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
6 18 136,363 8,059
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
7 19 136,363 7,635
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
8 20 136,363 7,253
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
9 20 136,363 7,253
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
10 21 136,363 6,908
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
11 21 136,363 6,908
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
12 20 136,363 7,253
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
13 20 136,363 7,253
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
14 21 136,363 6,903
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
15 22 136,363 6,594
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
16 23 136,363 6,307
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
17 24 136,363 6,044
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
18 24 136,363 6,044
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
19 25 136,363 5,803
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
20 26 136,363 5,580
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
21 26 136,363 5,580
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
22 25 136,363 5,803
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Total $ 3,000,000 137,357
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- -------------
* The share prices are illustrative only and should not be interpreted as a
forecast of share prices or the expected or historical volatility of the share
prices of our common stock.
** Excluded because the volume-weighted average daily price is below the
threshold specified in our hypothetical draw down notice.
We would receive the amount of our drawdown ($2,727,273) less a 5% cash
fee paid to the placement agent of $136,364, less a $1,500.00 escrow fee, for
net proceeds to us of $2,589,409. The delivery of the requisite number of shares
and payment of the draw will take place through an escrow agent, Epstein, Becker
& Green, P.C. of New York. The escrow agent
24
pays 95% of the draw to us - after subtracting its escrow fee - and 5% to
Ladenburg Thalmann & Co. Inc., our placement agent, in satisfaction of placement
agent fees.
Necessary Conditions Before Seacrown is Obligated to Purchase our Shares
The following conditions must be satisfied before Seacrown is obligated
to purchase the shares of common stock that we wish to sell from time to time:
o A registration statement for the shares must be declared
effective by the Securities and Exchange Commission and must
remain effective and available as of the drawdown settlement
date for making resales of the common stock purchased by
Seacrown;
o There can be no material adverse change in our business,
operations, properties, prospects or financial condition;
o We must not have merged or consolidated with or into another
company or transferred all or substantially all of our assets
to another company, unless the acquiring company has agreed to
honor the common stock purchase agreement;
o No statute, rule, regulation, executive order, decree, ruling
or injunction may be in effect which prohibits consummation of
the transactions contemplated by the common stock purchase
agreement;
o No litigation or proceeding nor any investigation by any
governmental authority can be pending or threatened against us
or Seacrown seeking to restrain, prevent or change the
transactions contemplated by the common stock purchase
agreement or seeking damages in connection with such
transactions; and
o Trading in our common stock must not have been suspended by
the Securities and Exchange Commission or The Nasdaq National
Market, nor shall minimum prices have been established on
securities whose trades are reported by The Nasdaq National
Market.
On each drawdown settlement date for the sale of common stock, we must
deliver an opinion from our counsel about certain of these matters.
A further condition is that Seacrown may not purchase more than 19.9%
of our common stock issued and outstanding on August 9, 2000, the closing date
under the common stock purchase agreement, without us first obtaining approval
from our stockholders for such excess issuance.
25
Restrictions on Future Financings
The common stock purchase agreement limits our ability to raise money
by selling our securities for cash at a discount to the market price until the
earlier of 18 months from the effective date of the registration statement of
which this prospectus is a part or the date which is 60 days after Seacrown has
purchased the maximum of $48,000,000 worth of common stock from us under the
common stock purchase agreement.
There are exceptions to this limitation for securities sold in the
following situations:
o in a registered public offering which is underwritten by one
or more established investment banks;
o in one or more private placements where the purchasers do not
have registration rights;
o pursuant to any presently existing or future employee benefit
plan which plan has been or is approved by our stockholders;
o pursuant to any compensatory plan for a full-time employee or
key consultant;
o in connection with a strategic partnership or other business
transaction, the principal purpose of which is not simply to
raise money; and
o a transaction to which Seacrown gives its written approval.
Costs of Closing the Transaction
At the closing of the transaction on August 9, 2000, we delivered the
requisite opinion of counsel to Seacrown and paid the escrow agent, Epstein
Becker & Green P.C., $35,000 for Seacrown's legal, administrative and escrow
costs. We paid Ladenburg Thalmann & Co. Inc. an additional $35,000 for its
expenses. Ladenburg Thalmann also received warrants for a total of 70,893 shares
of our common stock with an exercise price equal to 115% of the volume-weighted
average price of our common stock as reported on The Nasdaq National Market on
August 8, 2000 or $19.47 per share. Ladenburg Thalmann is not obligated to
purchase any of our shares pursuant to the warrant.
Indemnification of Seacrown
Seacrown is entitled to customary indemnification from us for any
losses or liabilities suffered by it based upon material misstatements or
omissions from the registration statement and the prospectus, except as they
relate to information supplied by Seacrown to us for inclusion in the
registration statement and prospectus.
26
SELLING STOCKHOLDERS
Overview
The number of shares we are registering is based in part on our good
faith estimate of the maximum number of shares we will issue to Seacrown under
the common stock purchase agreement. Accordingly, the number of shares we are
registering for issuance under the common stock purchase agreement may be higher
than the number we actually issue under the common stock purchase agreement.
Seacrown Limited
Seacrown is engaged in the business of investing in publicly traded
equity securities for its own account. Seacrown's principal offices are located
at Vaduz, Liechtenstein. Investment decisions for Seacrown are made by its board
of directors. Other than the warrants we issued to Seacrown in connection with
closing the common stock purchase agreement, Seacrown does not currently own any
of our securities as of the date of this prospectus. Other than its obligation
to purchase common stock under the common stock purchase agreement, it has no
other commitments or arrangements to purchase or sell any of our securities.
There are no business relationships between Seacrown and us other than the
common stock purchase agreement.
Ladenburg Thalmann & Co. Inc.
Ladenburg Thalmann & Co. Inc. has acted as placement agent in
connection with the common stock purchase agreement. Ladenburg Thalmann
introduced us to Seacrown and assisted us with structuring the equity line of
credit with Seacrown. Ladenburg Thalmann's duties as placement agent were
undertaken on a reasonable best efforts basis only. It made no commitment to
purchase shares from us and did not ensure us of the successful placement of any
securities.
This prospectus covers 70,893 shares of common stock issuable upon
exercise of warrants we have issued to Ladenburg Thalmann as a placement fee for
introducing us to Seacrown. Those warrants are exercisable at $19.47 per share
and expire August 9, 2003. The decision to exercise any warrants issued, and the
decision to sell the common stock issued pursuant to the warrants, will be made
by Ladenburg Thalmann's officers and board of directors. Other than the
warrants, Ladenburg Thalmann does not currently own any of our securities as of
the date of this prospectus. Our agreement with Ladenburg Thalmann provides
Ladenburg Thalmann with a right of first refusal for one year after completion
of the offering under the common stock purchase agreement, as underwriter or
placement agent, on all of our financing arrangements at terms no less favorable
than we could obtain in the market.
27
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of shares by
Seacrown that it has obtained under the common stock purchase agreement. We also
will not receive any of the proceeds from the sale of shares by Ladenburg
Thalmann. However, we will receive the sale price of any common stock we sell to
Seacrown under the common stock purchase agreement described in this prospectus
and upon the exercise of warrants held by Seacrown and Ladenburg Thalmann when
paying the exercise price in cash. We expect to use the proceeds of any such
sales for general working capital purposes.
PLAN OF DISTRIBUTION
General
Seacrown is offering the shares of common stock for its account as
statutory underwriter, and not for our account. We will not receive any proceeds
from the sale of shares of common stock by Seacrown. Seacrown may be offering
for sale up to 2,000,000 shares of common stock acquired by it pursuant to the
terms of the common stock purchase agreement more fully described under the
section above entitled "The Common Stock Purchase Agreement" and the warrants we
issued to it in connection with the transaction. Seacrown has agreed to be named
as a statutory underwriter within the meaning of the Securities Act of 1933 in
connection with such sales of common stock and will be acting as an underwriter
in its resales of the shares of common stock under this prospectus. Seacrown
has, prior to any sales, agreed not to effect any offers or sales of the shares
of common stock in any manner other than as specified in the prospectus and not
to purchase or induce others to purchase shares of the common stock in violation
of any applicable state and federal securities laws, rules and regulations and
the rules and regulations of The Nasdaq National Market.
On August 8, 2000, we had 8,429,487 shares of common stock outstanding.
The following table shows the number of shares we would issue to Seacrown and
the price it would pay for those shares given the hypothetical variables shown
in the table, if
o we requested drawdowns of the maximum amounts under the common
stock purchase agreement;
o we set a threshold price of $18;
o the volume-weighted average daily price in the table is the
volume-weighted average daily price of our common stock for
the 22 trading days before each drawdown request under the
common stock purchase agreement and the 22 trading days after
each drawdown request;
o the average trading volume in the table is the average trading
volume for the 45 trading days before each drawdown request;
and
28
o we do not issue more shares to Seacrown under the common stock
purchase agreement than we are currently registering for
resale of the shares issued under the common stock purchase
agreement.
- ------------------------------- -------------------------- ------------------------------ ----------------------------
Number of Shares Issued
Volume-Weighted Average Daily Seacrown under Common Stock Price per share paid by
Price Average Trading Volume Purchase Agreement(g) Seacrown
- ------------------------------- -------------------------- ------------------------------ ----------------------------
$1.0000(a) 31,156(d) 834,519 $ 0.94
- ------------------------------- -------------------------- ------------------------------ ----------------------------
$20.350(b) 62,311(e) 2,000,000(h) $19.00
- ------------------------------- -------------------------- ------------------------------ ----------------------------
$30.525(c) 93,467(f) 2,000,000(h) $29.00
- ------------------------------- -------------------------- ------------------------------ ----------------------------
- -----------
(a) Represents the lowest price at which our shares can remain listed on
The Nasdaq National Market.
(b) Represents the average closing price of our common stock for the 22
trading days before August 9, 2000.
(c) Represents 150% of the average closing price of our common stock for
the 22 trading days before August 9, 2000.
(d) Represents 50% of the average trading volume of our common stock for
the 45 trading days preceding August 9, 2000.
(e) Represents the average trading volume of our common stock for the 45
trading days preceding August 9, 2000.
(f) Represents 150% of the average trading volume of our common stock for
the 45 trading days preceding August 9, 2000.
(g) The number of shares we would issue could be limited by a provision of
the common stock purchase agreement that prevents us from issuing
shares to Seacrown to the extent Seacrown would beneficially own more
than 9.9% of our then outstanding common stock.
(h) Represents all 2,000,000 shares we are registering under the common
stock purchase agreement.
To permit Seacrown to resell the common stock issued to it under the
common stock purchase agreement, we agreed to register those shares and to
maintain that registration. To that end, we have agreed with Seacrown that we
will prepare and file such amendments and supplements to the registration
statement and the prospectus as may be necessary in accordance with the
Securities Act of 1933 and the rules and regulations promulgated thereunder, to
keep it effective until the earliest of any of the following dates:
o the date after which all of the common stock held by Seacrown
or its transferees that are covered by the registration
statement of which this prospectus is a part has been sold
under the provisions of Rule 144 under the Securities Act of
1933;
o the date after which all of the common stock held by Seacrown
or its transferees that are covered by the registration
statement has been transferred to persons who may trade such
shares without restriction under the Securities Act of 1933
29
and we have delivered new certificates or other evidences of
ownership of such common stock without any restrictive legend;
o the date after which all of the common stock held by Seacrown
or its transferees that are covered by the registration
statement has been sold by Seacrown or its transferees
pursuant to such registration statement;
o the date after which all of the common stock held by Seacrown
or its transferees that is covered by the registration
statement may be sold, in the opinion of our counsel, under
Rule 144 under the Securities Act of 1933 irrespective of any
applicable volume limitations;
o the date after which all of the common stock held by Seacrown
or its transferees that is covered by the registration
statement may be sold, in the opinion of our counsel, without
any time, volume or manner limitations under Rule 144(k) or
similar provision then in effect under the Securities Act of
1933; or
o the date after which none of the common stock held by Seacrown
that is covered by the registration statement is or may become
issued and outstanding.
Shares of common stock offered through this prospectus may be sold from
time to time by Seacrown and Ladenburg Thalmann or by pledgees, donees,
transferees or other successors in interest to such selling stockholders. We
will supplement this prospectus to disclose the names of any pledgees, donees,
transferees or other successors in interest that intend to offer common stock
through this prospectus.
Sales may be made on The Nasdaq National Market, on the
over-the-counter market or otherwise at prices and at terms then prevailing or
at prices related to the then current market price, or in negotiated private
transactions, or in a combination of these methods. The selling stockholders
will act independently of us in making decisions with respect to the form,
timing, manner and size of each sale. We have been informed by the selling
stockholders that there are no existing arrangements between any selling
stockholder and any other stockholder, broker, dealer, underwriter or agent
relating to the sale or distribution of shares of common stock which may be sold
by selling stockholders through this prospectus. Ladenburg Thalmann may be
deemed an underwriter in connection with resales of its shares.
The shares of common stock may be sold in one or more of the following
manners:
o a block trade in which the broker or dealer so engaged will
attempt to sell the shares as agent, but may position and
resell a portion of the block as principal to facilitate the
transaction;
o purchases by a broker or dealer for its account under this
prospectus; or
o ordinary brokerage transactions and transactions in which the
broker solicits purchases.
30
In effecting sales, brokers or dealers engaged by the selling
stockholders may arrange for other brokers or dealers to participate. Except as
disclosed in a supplement to this prospectus, no broker-dealer will be paid more
than a customary brokerage commission in connection with any sale of shares of
the common stock by the selling stockholders. Brokers or dealers may receive
commissions, discounts or other concessions from the selling stockholders in
amounts to be negotiated immediately prior to the sale. The compensation to a
particular broker-dealer may be in excess of customary commissions. Profits on
any resale of the common stock as a principal by such broker-dealers and any
commissions received by such broker-dealers may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933. Any broker-dealer
participating in such transactions as agent may receive commissions from the
selling stockholders (and, if they act as agent for the purchaser of such common
stock, from such purchaser).
Broker-dealers may agree with the selling stockholders to sell a
specified number of shares of common stock at a stipulated price per share, and,
to the extent a broker-dealer is unable to do so acting as agent for the selling
stockholders, to purchase as principal any unsold shares of common stock at a
price required to fulfill the broker-dealer commitment to the selling
stockholders. Broker-dealers who acquire shares of common stock as principal may
thereafter resell such common stock from time to time in transactions (which may
involve crosses and block transactions and which may involve sales to and
through other broker-dealers, including transactions of the nature described
above) in the over-the-counter market, in negotiated transactions or otherwise
at market prices prevailing at the time of sale or at negotiated prices, and in
connection with such resales may pay to or receive from the purchasers of such
common stock commissions computed as described above. Brokers or dealers who
acquire shares of common stock as principal and any other participating brokers
or dealers may be deemed to be underwriters in connection with resales of the
common stock.
In addition, any shares of common stock covered by this prospectus
which qualify for sale pursuant to Rule 144 may be sold under Rule 144 rather
than pursuant to this prospectus. We will not receive any of the proceeds from
the sale of these shares of common stock, although we have paid the expenses of
preparing this prospectus and the related registration statement of which it is
a part, and have reimbursed Seacrown $35,000 for its legal, administrative and
escrow costs.
Seacrown is subject to the applicable provisions of the Exchange Act,
including without limitation, Rule 10b-5 thereunder. Under applicable rules and
regulations under the Exchange Act, any person engaged in a distribution of the
common stock may not simultaneously engage in market making activities with
respect to such securities for a period beginning when such person becomes a
distribution participant and ending upon such person's completion of
participation in a distribution, including stabilization activities in the
common stock to effect covering transactions, to impose penalty bids or to
effect passive market making bids. In addition, in connection with the
transactions in the common stock, Seacrown and we will be subject to applicable
provisions of the Exchange Act and the rules and regulations under that Act,
including, without limitation, the rules set forth above. These restrictions may
affect the marketability of the shares of common stock.
31
The selling stockholders will pay all commissions and their own
expenses, if any, associated with the sale of the shares of common stock, other
than the expenses associated with preparing this prospectus and the registration
statement of which it is a part.
The price at which we will issue the shares of common stock to Seacrown
under the common stock purchase agreement will be 94% of the volume-weighted
average daily price traded on The Nasdaq National Market, for each day in the
pricing period with respect to each drawdown request. Assuming we use the entire
$48 million of financing available under the common stock purchase agreement
using 16 drawdowns, and assuming we issue all 2,000,000 shares registered for
issuance under the common stock purchase agreement, we will pay underwriting
compensation to and expenses for Seacrown, and other offering expenses, as
follows:
Underwriting Compensation and Expenses
Per Share Total
Discount to Seacrown (6%) (a) $1.44 $2,880,000
Expenses payable on behalf of Seacrown:
Escrow Fees 0.00 24,000
Legal fees of Seacrown 0.00 35,000
Estimated offering expenses:
Placement agent fees (b) 1.20 2,400,000
SEC filing fee 0.00 9,441
Accountants' fees and expenses 0.00 5,000
Legal fees and expenses 0.00 50,000
Total $2.64 $5,403,441
===== ==========
- -----------
(a) We also issued to Seacrown a warrant to purchase 70,893 shares of our common
stock at $19.47 per share as consideration for entering into the common stock
purchase agreement. Our common stock price on August 16, 2000 was $16.50. The
warrant expires August 9, 2003.
(b) We also issued to the placement agent a warrant to purchase 70,893 shares of
our common stock at $19.47 per share as consideration for placement services.
Our common stock price on August 16, 2000 was $16.50. The warrant expires August
9, 2003.
Limited Grant of Registration Rights
We granted registration rights to Seacrown to enable it to sell the
common stock it purchases under the common stock purchase agreement. In
connection with any such registration, we will have no obligation:
o to assist or cooperate with Seacrown in the offering or
disposition of such shares;
32
o to indemnify or hold harmless the holders of any such shares
(other than Seacrown) or any underwriter designated by such
holders;
o to obtain a commitment from an underwriter relative to the
sale of any such shares; or
o to include such shares within any underwritten offering we do.
We will assume no obligation or responsibility whatsoever to determine
a method of disposition for such shares or to otherwise include such shares
within the confines of any registered offering other than the registration
statement of which this prospectus is a part.
We will use our best efforts to file, during any period during which we
are required to do so under our registration rights agreement with Seacrown, one
or more post-effective amendments to the registration statement of which this
prospectus is a part to describe any material information with respect to the
plan of distribution not previously disclosed in this prospectus or any material
change to such information in this prospectus. This obligation may include, to
the extent required under the Securities Act of 1933, that a supplemental
prospectus be filed, disclosing
o the name of any broker-dealers;
o the amount of common stock involved;
o the price at which the common stock is to be sold;
o the commissions paid or discounts or concessions allowed to
broker-dealers, where applicable;
o that broker-dealers did not conduct any investigation to
verify the information set out or incorporated by reference in
this prospectus, as supplemented; and
o any other facts material to the transaction.
Our registration rights agreement with Seacrown permits us to restrict
the resale of the shares Seacrown has purchased from us under the common stock
purchase agreement for a period of time sufficient to permit us to amend or
supplement this prospectus to include material information. If we restrict
Seacrown for more than 30 consecutive days and our stock price declines during
the restriction period, we are required to pay to Seacrown cash to compensate
Seacrown for its inability to sell shares during the restriction period. The
amount we would be required to pay would be the difference between our stock
price on the first day of the restriction period and the last day of the
restriction period, for each share held by Seacrown during the restriction
period that has been purchased under the common stock purchase agreement.
33
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Certificate of Incorporation and Bylaws include provisions that (i)
eliminate the personal liability of our directors for monetary damages resulting
from breaches of their fiduciary duty to the extent permitted by the General
Corporation Law of the State of Delaware and (ii) indemnify our directors and
officers to the fullest extent permitted by the Delaware General Corporation
Law, including circumstances in which indemnification is otherwise
discretionary.
We maintain a directors and officers' liability policy insuring any
person who is or was our director or officer against any liability incurred by
such person in any such capacity or arising out of such person's status as such.
The policy contains various reporting requirements and is subject to certain
exclusions and limitations.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers, and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
LEGAL MATTERS
The validity of the shares of common stock being offered hereby will be
passed upon for us by Hartman & Craven LLP, 460 Park Avenue, New York, New York
10022.
EXPERTS
The consolidated financial statements of A.B. Watley Group Inc.
appearing in A.B. Watley Group Inc.'s Annual Report (Form 10-KSB) for the year
ended September 30, 1999, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon included therein and incorporated
herein by reference. Such consolidated financial statements are incorporated
herein by reference in reliance upon such report given on the authority of such
firm as experts in accounting and auditing.
34
---------------------------- -----------------------------
We have not authorized any dealer, 2,141,786 Shares
salesperson or any other person to give any
information or to represent anything not A.B. WATLEY GROUP INC.
contained in this prospectus. You must not
rely on any unauthorized information. This Common Stock
prospectus does not offer to sell or buy any
shares in any jurisdiction where it is unlawful. -----------------------------
PROSPECTUS
---------------------------- -----------------------------
September 6, 2000
-----------------------------
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TABLE OF CONTENTS
Available Information...................... 1
Incorporation of Certain Documents
By Reference............................. 1
Forward-Looking Statements................. 2
Risk Factors............................... 2
The Company................................ 4
Common Stock Purchase Agreement............ 20
Selling Stockholders....................... 27
Use of Proceeds............................ 28
Plan of Distribution....................... 28
Indemnification of Directors and Officers . 34
Legal Matters.............................. 34
Experts.................................... 34
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