As filed with the Securities and Exchange Commission on October 8, 1998
REGISTRATION NO. 333-53459
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Amendment No. 3
To
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ALL-TECH INVESTMENT GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7372 13-2581640
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
160 SUMMIT AVENUE
MONTVALE, NEW JERSEY 07645
(201) 782-0200
(Address and Telephone Number of Registrant's Principal Executive Offices)
HARVEY I. HOUTKIN
CHIEF EXECUTIVE OFFICER
ALL-TECH INVESTMENT GROUP, INC.
160 SUMMIT AVENUE
MONTVALE, NEW JERSEY 07645
(201) 782-0200
(Name, Address, Telephone Number of Agent for Service)
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Copies to:
RICHARD A. FRIEDMAN, ESQ. LAWRENCE B. FISHER, ESQ.
SICHENZIA, ROSS & FRIEDMAN LLP. ORRICK, HERRINGTON & SUTCLIFFE LLP
135 WEST 50TH STREET 666 FIFTH AVENUE
NEW YORK, NEW YORK 10020 NEW YORK, NEW YORK 10103
Telephone No.: (212) 664-1200 Telephone No.: (212) 506-5000
Facsimile No.: (212) 664-7329 Facsimile No.: (212) 506-5151
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
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If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following
box. / /
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OF DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
AN AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES
ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH
DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.
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CALCULATION OF REGISTRATION FEE
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Class of Amount Maximum Maximum
Securities Title of Each to to be Offering Price Aggregate Registration
be Registered Registered Per Security(1) Offering Price(1) Fee
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Common Stock, $.001 par value
per share (2) ............... 4,485,000 $ 9.00 $40,365,000 $11,907.68
Representative's Warrants (3) 390,000 $ .0001 $ 39 (4)
Common Stock, $.001 par value
(5) ......................... 390,000 $ 10.80 $ 4,212,000 $ 1,242.54
Totals ...................................................... $44,577,039 $13,150.22*
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* previously paid
(1) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(a) of the Securities Act of 1933, as amended.
(2) Includes 585,000 shares of Common Stock (the "Common Stock") subject to
sale upon exercise of the Underwriters' Over-Allotment Option granted to
the Underwriters.
(3) Represents warrants to be issued to the Representatives of the several
Underwriters to purchase 390,000 shares of Common Stock (the
"Representatives' Warrants"). See "Underwriting."
(4) No fee due pursuant to Rule 457(g).
(5) Represents shares of Common Stock issuable upon the exercise of the
Representatives' Warrants, together with such indeterminate number of
securities as may be issuable by reason of anti-dilution provisions
contained therein.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED OCTOBER 8, 1998
PROSPECTUS
[GRAPHIC OMITTED]
ALL-TECH INVESTMENT GROUP, INC.
3,900,000 Shares of Common Stock
Of the 3,900,000 shares of Common Stock $.001 par value (the "Common
Stock") of All-Tech Investment Group, Inc., a Delaware corporation ("All-Tech"
or the "Company") offered hereby (the "Offering"), 3,510,000 shares of Common
Stock are being issued and sold by All-Tech and 390,000 shares of Common Stock
are being sold by the stockholders (the "Selling Stockholders") of All-Tech.
All-Tech will not receive any of the proceeds from the sale of Common Stock by
the Selling Stockholders. See "Use of Proceeds."
Prior to the Offering, there has been no public market for the Common
Stock and there can be no assurance that such a market will develop after the
Offering or, if developed, that it will be sustained. It is currently
anticipated that the initial public offering price of the Common Stock will be
$9.00 per share. The initial public offering price of the Common Stock will be
determined through negotiations among the Company, the Selling Stockholders and
the Underwriters (as defined herein) in accordance with the recommendation of a
"qualified independent underwriter" as required by Rule 2720 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (the "NASD"). See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price of the shares of Common Stock. All-Tech has
applied to include the Common Stock on the Amex under the symbol "ECN."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
IMMEDIATE SUBSTANTIAL DILUTION.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
==================================================================================
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders(3)
- ----------------------------------------------------------------------------------
Per Share ......... $ $ $ $
Total ............. $ $ $ $
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(1) Does not include additional compensation payable to the representatives
(the "Representatives") of the several underwriters (the "Underwriters"),
consisting of (i) a non-accountable expense allowance equal to 1 1/2% of
the gross offering proceeds, or $526,500 ($605,475 if the Underwriters'
over-allotment option is exercised in full), of which $75,000 has been
paid to date, and (ii) warrants ("Representatives' Warrants") to be sold
by the Company to the Representatives for nominal consideration to
purchase up to 390,000 shares of Common Stock at a price of $10.80 per
share of Common Stock, subject to anti-dilution provisions thereof,
exercisable during the four year period commencing one year after the
effective date of this Offering. In addition, see "Underwriting" for
information concerning indemnification and contribution arrangements with
the several Underwriters and other compensation payable to the
Representatives.
(2) After deducting Underwriting discounts and commissions, but before
deducting estimated expenses payable by the Company of $936,500, including
the Representatives' non-accountable expense allowance on the Common Stock
being sold by the Company.
(3) After deducting Underwriting discounts and commissions, but before
deducting the non-accountable expense allowance upon the shares sold by
the Selling Stockholders payable by the Selling Stockholders to the
Representatives.
(4) The Company and the Selling Stockholders have granted the Underwriters an
option (the "Over-Allotment Option") exercisable for a period of 45 days
after the date of this Prospectus to purchase an aggregate of up to an
additional 585,000 shares of Common Stock upon the same terms and
conditions set forth above, solely to cover over-allotments, if any. See
"Underwriting." If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions, Proceeds to Company and
Proceeds to Selling Shareholders will be $ , $ , $ , and
$ , respectively.
The shares of Common Stock are being offered by the Underwriters, subject
to prior sale, when, as and if delivered to and accepted by the Underwriters,
and subject to approval of certain legal matters by their counsel and subject
to certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify this Offering and to reject any order in whole or in part. It
is expected that delivery of the shares of Common Stock offered hereby will be
made against payment at the offices of ISG Solid Capital Markets, LLC, New
York, New York on or about , 1998.
ISG Solid Capital Markets, LLC
Joseph Charles & Associates, Inc.
All-Tech Investment Group, Inc.
The date of this Prospectus is , 1998
ATTAIN(R) is a registered trademark of All-Tech. This Prospectus also contains
trademarks and trade names of other companies.
- --------------------------------------------------------------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE OR MAINTAIN THE PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH
MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET, INCLUDING ENTERING STABILIZING
BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE. SUCH STABILIZING,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
INFORMATION ON THE COMPANY'S WEBSITE SHALL NOT BE DEEMED TO BE PART OF THIS
PROSPECTUS.
------------
The Company intends to mail to all of its stockholders an annual report
containing financial statements audited by its independent accountants for each
fiscal year and shall make available to all of its shareholders quarterly
reports containing unaudited financial information for each of the first three
quarters of each fiscal year.
2
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information, including "Risk Factors"
and the Financial Statements and Notes thereto, appearing elsewhere in this
Prospectus. This Prospectus contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ materially
from the results suggested by the forward-looking statements and from the
results historically experienced. Factors that may cause or contribute to such
differences include, but are not limited to, those discussed under "Risk
Factors" and elsewhere in this Prospectus. Unless otherwise indicated, all
information in this Prospectus gives effect to a 1 for 1.46546 reverse stock
split of the outstanding shares of Common Stock effected in September 1998 and
assumes (i) no exercise of the Underwriters' Over-Allotment Option, (ii) no
exercise of the Representatives' Warrants and (iii) no exercise of any
outstanding options.
The Company
All-Tech Investment Group, Inc. ("All-Tech" or the "Company"), a
registered broker-dealer, through its proprietary ATTAIN(R) trading system
software, provides its customers with real-time computerized access to
comprehensive price information for over-the-counter ("OTC") securities traded
on The Nasdaq Stock Market ("Nasdaq") and securities traded on various national
and regional exchanges, and enables its customers to instantaneously transmit
buy and sell orders for execution. All-Tech also provides its customers with
discounted commissions, electronic reports regarding the customer's orders and
account status, customizable display screens, analytical modeling tools and
news media reports. The Company has also developed and commenced operation of
its ATTAIN(R) ECN (the "ATTAIN ECN"), an electronic communications network
("ECN"). ECNs provide investors an alternative trading system to traditional
Nasdaq trading. Through the ATTAIN(R) trading system, subscribers can directly
place buy and sell orders for Nasdaq traded stocks. Matching orders are paired
off and the trade is executed by the ATTAIN ECN. Additionally, the best bid and
offer in each security which is placed on the ATTAIN ECN will be displayed
automatically and dynamically on a real-time basis on Nasdaq along with market
maker quotations. The ATTAIN trading system permits the customer to eliminate
the need to have the customer's order placed through a market maker, therefore
eliminating the market maker and the costs associated with such market maker.
Substantially all of the Company's revenues are derived from brokerage
commissions and ECN fees, and, accordingly, the Company's revenues are directly
related to and dependent upon the volume of stocks traded and the number of
transactions executed by its customers.
The Company's services are primarily utilized by self-directed "day
traders." Day traders actively engage in the buying and selling of securities,
based on short-term price volatility, many times during the course of a day.
They typically close out all open positions by the end of the day in order to
manage risk when the markets are closed. Frequently, a position may be closed
within minutes of the initial purchase or sale. All-Tech has over 1,500 active
customers, consisting of day traders and active retail customers. The Company's
average aggregate customer transaction volume has ranged between 2,500 and
3,000 trades per trading day for the last 12 months. All-Tech's customers can
access All-Tech's ATTAIN trading system at All-Tech's main office, at one of
its 22 branch offices or in their homes or offices through a computer connected
to the ATTAIN trading system via dedicated telephone lines or the Internet.
Access to the Company's ATTAIN trading system from remote locations requires
the use of the Company's proprietary software, which the Company provides to
its customers free of charge.
All-Tech's objectives are to become the leading provider of electronic
brokerage services to self-directed traders and investors and to expand the
range of services and business activities engaged in by the Company. The
Company's strategy to accomplish its objectives includes (i) enhancing
awareness of the Company's ATTAIN trading system and ATTAIN ECN through
marketing and advertising, (ii) expanding its customer base through an
aggressive marketing campaign, opening additional branch offices and expanding
services to attract less active traders, (iii) analyzing and exploring
opportunities to commence new business activities, including electronic trading
of financial instruments other than stocks and options, underwriting securities
offerings, and other traditional investment banking and merchant banking
activities, (iv) expanding proprietary trading and (v) pursuing opportunities
to offer the Company's services internationally through use of the Internet and
telecommunications systems.
3
All-Tech was incorporated in New York under the name Concord Capital Corp.
in 1981. The Company changed its name to All-State Investment Group, Inc. in
March 1988 and changed its name to All- Tech Investment Group, Inc. in December
1988. In May 1998, the Company reincorporated in the State of Delaware. Its
principal executive offices are located at 160 Summit Avenue, Montvale, New
Jersey 07645. The Company's telephone number is (201) 782-0200; its world-wide
website is located at www. attain.com. Information contained in the Company's
website shall not be deemed to be part of this Prospectus.
The Offering
Securities Offered by the Company ...................... 3,510,000 shares of Common Stock.
Securities Offered by the Selling Stockholders ......... 390,000 shares of Common Stock.
Common Stock Outstanding after the Offering ............ 14,065,559(1)
Use of Proceeds ........................................ For working capital and other general corporate
purposes, development or acquisition of new areas of
brokerage business, marketing and proprietary
trading. The Company will not receive any proceeds
from the sale of shares of Common Stock by the
Selling Stockholders. See "Use of Proceeds."
Proposed Amex Symbol ................................... ECN
- -------------
(1) Excludes (i) 1,000,000 shares of Common Stock issuable upon exercise of
options to be granted on the effective date of this Offering under the
Company's 1998 Stock Option Plan (the "Plan") at an exercise price equal
to the initial public offering price of the Common Stock and (ii) 535,354
shares of Common Stock issuable pursuant to options which may be granted
under the Plan. See "Management--1998 Stock Option Plan."
4
Summary Financial Data
The following summary financial data is qualified by the more detailed
financial statements of the Company and the notes thereto included elsewhere in
this Prospectus and should be read in conjunction with such Financial
Statements and notes thereto and the discussion under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Prospectus.
Year Ended
Years Ended June 30, June 30,
-------------------------------------------------------------------------------- --------------
1994 1995 1996 1997 1998 1998
-------------- ---------------- -------------- -------------- -------------- --------------
(In thousands, except share and per share data) Pro Forma
Unaudited(1)
Statement of
Operations Data:
Total revenues ................ $ 14,738 $ 2,962 $ 11,075 $ 16,064 $ 18,296 $ 18,296
Total costs and
expenses ..................... 14,968 2,973 9,714 14,462 17,592 16,700
Pre-tax income (loss) ......... (230) (11) 1,361 1,602 704 1,596
Net income (loss) ............. (230) (3) 751 937 493 1,034
Basic earnings
(loss) per com-
mon share .................... $ (.02) $ (.00) $ .07 $ .09 $ .05 $ .10
Weighted average
shares outstanding ........... 10,555,559 10,555,559 10,555,559 10,555,559 10,555,559 10,555,559
June 30, 1998(2)
--------------------------
June 30, 1997 Actual As Adjusted(3)
--------------- -------- ---------------
(In thousands)
Balance Sheet Data:
Cash and cash equivalents ......... $ 641 $ 985 $29,646
Total assets ...................... 3,799 4,279 32,717
Stockholders' equity .............. 1,855 2,177 30,672
- -------------
(1) Unaudited pro forma data reflects summary results of operations as if the
executive employment agreements, which were entered into on April 20, 1998
in contemplation of this proposed Offering and commence on the effective
date of the Offering, were in effect as of July 1, 1997 (see Management--
Employment Agreements; Key-Man Insurance and Note 5 to the Financial
Statements). Such employment agreements provide for annual aggregate
compensation of $1,000,000, aggregate additional salaries of 10% of net
earnings before taxes to a maximum of an additional $1,000,000 in the first
two years and $3,000,000 in the third year. Pro forma adjustments include
(i) a net reduction in executive compensation of approximately $879,000 and
(ii) a decrease in payroll taxes of approximately $13,000, which in the
aggregate result in a net increase in pretax income of approximately
$892,000. Additionally, (a) provision for taxes has been increased by
approximately $351,000 due to the increase in pretax income and (b) net
income has been increased by approximately $541,000. Future results may
differ materially from the pro forma data presented.
(2) Excludes the conversion of $572,559 of indebtedness into additional paid-in
capital in July 1998 by Rushmore Financial Services, Inc., ("Rushmore"),
which is wholly-owned by Harvey I. Houtkin and Mark D. Shefts, officers
and directors of the Company.
(3) As adjusted to give effect to the sale of 3,510,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $9.00 per share of Common Stock and the application of the estimated
net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
5
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Words or phrases such as "should result, are expected to, we
anticipate, we estimate, we project" or similar expressions are intended to
identify forward-looking statements. These statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from the Company's historical experience and its present expectations or
projections. Caution should be taken not to place undue reliance on any such
forward-looking statements, since such statements speak only as of the date of
the making of such statements. Actual results could differ materially from
those discussed in the forward-looking statements as a result of certain
factors, including those set forth below and elsewhere in this Prospectus. The
following risk factors should be considered carefully in addition to the other
information contained in this Prospectus before purchasing the Common Stock
offered hereby.
Growth of ECN; Risks of Collection of ECN Accounts Receivable
All-Tech has recently developed and commenced operation of its ATTAIN ECN.
The ATTAIN ECN began to generate revenues in February 1998, and, based upon the
revenues recognized by the Company, the Company's advertising and marketing
plans, and the potential for growth as a result of the use of the Internet as a
medium for communication of trading information, the ATTAIN ECN has become a
significant part of the Company's growth plan and a significant source of
recognized revenues. All-Tech engages in trading for its own account, primarily
utilizing the ATTAIN ECN. Any discontinuance of trading on the ATTAIN ECN by
All-Tech, whether voluntarily or as a result of government regulation, could
have a material adverse effect on the Company's business, financial condition
and operating results. See "--Potential Regulatory Issues Concerning Operation
of the ATTAIN ECN."
Revenues are recognized by the Company with respect to its ATTAIN ECN on a
transaction date basis; users are billed monthly. The Company's accounts
receivable have dramatically increased since the commencement of the operation
of its ATTAIN ECN. For the period from February 1998 (commencement of the ECN)
through June 30, 1998, the Company recognized gross ECN fee revenues of
approximately $1,785,000, of which approximately $434,000, $520,000, $491,000
and $340,000 were recognized as of March 31, 1998, April 30, 1998, May 31, 1998
and June 30, 1998, respectively. In addition, the Company recognized allowances
of approximately $132,000 in June 1998, resulting in net ECN fee revenues of
approximately $1,653,000 as of June 30, 1998. As of June 30, 1998,
approximately $662,000 of such net ECN fees have been paid to the Company and
approximately $991,000 of such net ECN fees were unpaid outstanding accounts
receivable of the Company. In addition, as of June 30, 1998, the Company had
established a doubtful account reserve for ECN receivables in the amount of
approximately $410,000. Through June 30, 1998, approximately 1.5% of the
Company's revenues have been generated by non-affiliated ECN subscribers, while
98.5% has been generated by non-affiliated non-subscribers who access the ECN
through Nasdaq.
The Company is continuously monitoring the ECN fees it charges and such
fees were recently reduced from $.015 to a maximum of $.005 per share as a
result of competitive pressures and to adhere to maximum fees permitted
pursuant to the SEC no-action letter under which the Company operates the
ATTAIN ECN. The reduction in rates has negatively impacted ATTAIN ECN revenues.
The Company currently has twenty-one (21) active ECN subscribers, one of which
is owned and operated by Harry Lefkowitz, a director of the Company. In
addition, the Company has accepted applications and received binding
subscription agreements from an additional seven (7) broker-dealers to become
ECN subscribers, and the Company is currently in the process of arranging for
the necessary communication links which will allow such subscribers to access
the ATTAIN ECN. The ATTAIN ECN subscription agreements shall continue
indefinitely at the discretion of the parties, and the subscribers are granted
a non-exclusive, non-transferable license to use the services. See
"Business--The ATTAIN ECN."
There has been a great deal of discussion in the industry regarding the
amount of fees non-subscribers are charged to utilize ECNs and the fact that
such fees are charged upon usage and not pursuant to a contract. The Company is
currently denying access to 33 former ATTAIN ECN users because they have either
requested that the Company block their access to the ATTAIN ECN or they have
stated to the Company that they would not pay their ATTAIN ECN bills. The
Company has requested that the U.S. Department of Justice investigate what
6
the Company believes to be misconduct of Nasdaq market making participants in
their refusal to pay the Company's ECN fees. In addition, the Company has
commenced an arbitration against a former significant ATTAIN ECN user to
collect unpaid ECN fees. The Company has been informed by the National
Association of Securities Dealers, Inc. (the "NASD") that, based upon
complaints lodged by two broker-dealers, it is conducting an investigation as
to whether the Company's denial of access to the ATTAIN ECN constituted
"backing away." Although the Company does not believe that there is any merit
to such claims, and it intends to vigorously contest any such charge, there can
be no assurance that such claims will not result in a formal investigation
being commenced, that the Company will not incur substantial fees in contesting
such claims, or that an adverse judgment against the Company will not be
entered by the NASD which could result in the imposition of sanctions or
monetary penalties against the Company. The Company believes that it maintains
adequate reserves to account for the non-collection of its accounts receivable.
However, the Company has only recently commenced billing users of the ATTAIN
ECN and has very limited actual experience on which to base the amount of
doubtful accounts receivable relating to revenues from the ATTAIN ECN. There
can be no assurance that the rate of non-collection of accounts receivable will
not increase as the level of usage of the ATTAIN ECN increases. Such an
increase could materially adversely affect the Company's business, financial
condition and results of operations. Although the Company intends to vigorously
pursue its legal remedies to recover unpaid accounts receivable, there can be
no assurance that such efforts will be successful. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Potential Regulatory Issues Concerning Operation of the ATTAIN ECN
The Company has recently developed and commenced operations of its ATTAIN
ECN. The Company operates the ATTAIN ECN pursuant to a no-action letter
originally issued by the SEC staff in February 1998, which granted no-action
relief through the period ending April 15, 1998. In April 1998, the no-action
relief was extended through the period ending August 17, 1998, and in August
1998 the no-action relief was further extended through the period ending
October 16, 1998. The no-action letter, as extended, is conditioned upon the
continued compliance with the terms expressed in the earlier no-action letters,
which include, but are not limited to, rapid response time to orders by the
ATTAIN ECN, periodic review of the capacity and integrity of the system,
compliance with Year 2000 review and compliance with restrictions on maximum
transaction fees. No assurance can be given that the no-action letter will be
extended beyond October 16, 1998. In the event that the no-action letter is not
extended, the Company would be required to cease operating the ATTAIN ECN,
which could have a material adverse effect on the Company's business, financial
condition and operating results. Further, SEC no-action letters are generally
issued on a specific case-by-case basis and may not apply to other situations.
All ECNs, including the ATTAIN ECN, are subject to an ongoing review of
their operations by the SEC for compliance with the provisions of the no-action
letter and for compliance with securities regulations in general. In this
regard, the operation of the ATTAIN ECN is examined, on an ongoing basis, by
the Division of Market Regulation of the SEC for such compliance. In the course
of its review, the Division of Market Regulation of the SEC has questioned
whether the Company's operation of the ATTAIN ECN is in the manner described in
the Company's letter requesting a no-action position. The Company believes that
it has, at all times, operated the ATTAIN ECN in accordance with the provisions
of the no-action letter. No assurance can be given that a determination will
not be made that the Company's operation of the ATTAIN ECN was not in
accordance with the provisions of the no-action letter or securities laws in
general. In the event that it is determined that the Company is or was not
operating the ATTAIN ECN in accordance with the provisions of the no-action
letter or securities laws in general, the SEC could impose restrictions upon
the Company or its principals, or refuse to extend the no-action relief for the
operation of the ATTAIN ECN. Further, the Company could be required to reduce
or adjust the transaction fees which it charges. Any such actions could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Risks Associated with Securities Business
The Company, like other securities firms, is directly affected by national
and international economic and political conditions, broad trends in business
and finance, the level and volatility of interest rates, legislative and
regulatory changes, tax law changes, currency fluctuations, inflation, flows of
funds into and out of mutual and pension funds, the availability of short-term
and long-term funding and capital and substantial fluctuations in volume of
securities transactions, all of which may negatively affect trading volume
levels generally and by the
7
Company's customers specifically. In recent months, the U.S. securities markets
have established record levels of trading which, the Company believes, has
favorably impacted its business. A general decrease in trading activity on
these markets could adversely affect the level of individual trading activity
by All-Tech's customers, which would materially adversely affect the Company's
operating results because certain expenses, consisting primarily of salaries
and benefits, computer hardware and software costs and occupancy expenses,
remain relatively fixed. Certain of the Company's competitors with more diverse
product and service offerings may be better positioned to withstand decreased
volatility in the securities markets. See "Risk Factors--Competition." Since
1988, the U.S. equity markets have generally risen and have not experienced an
extended bear market. There can be no assurance that volume of trading and
volatility will not substantially diminish, thereby negatively affecting the
Company's commission income.
All-Tech's brokerage business, by its nature, is subject to various other
risks, including customer default, fraud, employees' misconduct and errors,
failures in connection with the processing of securities transactions and
litigation. The Company guarantees all customer transactions to its clearing
broker, which extends margin credit to the Company's customers. To the extent
All-Tech's customers purchase securities on margin, the Company is subject to
risks inherent in the extension of credit, especially during periods of rapidly
declining markets in which the value of the collateral held by the clearing
firm could fall below the amount of a customer's indebtedness. Failure of
customers to maintain cash or collateral deposit levels at all times at least
equal to the value of the related securities could subject All-Tech to risk of
loss, should the parties to the borrowing and lending transactions fail to
honor their commitments. Risk can be increased dramatically during periods of
volatility. Any such losses could have a material adverse effect on the
Company's business, financial condition and operating results.
Concentration of Services
Substantially all of the Company's revenues since inception have been
derived from commissions on the intraday trading activity of the Company's
customers through the Company's electronic brokerage services. The Company
expects that a substantial portion of its future revenues will continue to be
derived from customers' day trading activity. As a result, any factor resulting
in reductions in commissions received by the Company or declines in demand for
the Company's electronic brokerage services would have a material adverse
effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company will continue to be
successful in marketing its electronic brokerage services offered through its
ATTAIN trading system or any new or enhanced versions thereof. Competitive
pressures or other factors in the day trading area of the securities industry
may result in significant declines in the Company's commissions, which would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Policy of Regulating Authorities
"Day trading" involves the buying and selling of securities based upon
short-term volatility in the price of a security and closing out that position
on the same trading day, perhaps within minutes of the initial purchase or
sale. To the extent there is a lack of intra-day volatility, the opportunities
to profit from day trading will be diminished. The Securities and Exchange
Commission ("SEC") and the National Association of Securities Dealers, Inc.
("NASD") generally seek opportunities to adopt rules which tend to decrease
volatility in the securities markets. To the extent that new rules or
regulations or market conditions generally decrease volatility, opportunities
for the Company's customers to profit from day trading will decline.
Additionally, any regulatory change which limits the ability of individual
investors to engage in active day trading or which disadvantages investors who
participate in day trading would materially adversely affect the Company's
business and results of operations.
Lack of liquidity could also affect volatility. A recently adopted SEC
rule which allows market makers to reduce the number of shares they are
obligated to trade from 1,000 to 100 in all Nasdaq quoted stocks could reduce
the liquidity available from market makers to order entry firms such as
All-Tech. Such potential reduction in liquidity could be substantial. A
substantial decrease in overall liquidity in the OTC market could materially
adversely affect All-Tech's customers' ability to obtain execution of their
orders and therefore could result in a decline in the Company's commission
revenues due to the fact that the Company's revenues are directly related to
and dependent upon the volume of stocks traded by its customers. In addition,
any decrease in trading activities of individual investors in equity securities
due to tax law changes, recession, depression, increased interest rates on
fixed income investments or otherwise could have a material adverse effect on
the Company's business, financial condition or results of operations.
8
Management of Growth and Changing Business
Over the past several years, the Company has experienced significant
growth and change in its business activities and operations. Such changes have
involved the Company's brokerage business and have included providing the
Company's customers with computerized access to securities price information
and analysis and enabling the Company's customers to transmit buy and sell
orders for execution via computer, as well as opening branch offices. The
Company also commenced operating the ATTAIN ECN in February 1998. The Company
is still assessing the full demands of the ATTAIN ECN on the Company's
management and the Company's financial and management systems and controls. The
Company's growth has required, and will continue to require, increased
investment in management personnel, financial and management systems and
controls and facilities. The Company's past expansion has placed, and any
future expansion would place, significant demands on the Company's
administrative, operational, financial and other resources. The Company intends
to continue to expand its business and operations, including entry into new
markets, which will place additional strain on the Company's management and
operations. The Company's future operating results will depend, in part, on its
ability to continue to broaden the Company's senior management group and
administrative infrastructure, and its ability to attract, hire and retain
skilled employees. The Company's success will also depend on the ability of its
officers and key employees to continue to implement and improve the Company's
operational and financial control systems and to expand, train and manage its
employee base. In addition, the Company's future operating results will depend
on its ability to expand its sales and marketing capabilities and expand its
customer support operations commensurate with its growth, should such growth
occur. If the Company's revenues do not increase in proportion to its operating
expenses, the Company's management systems do not expand to meet increasing
demands, the Company fails to attract, assimilate and retain qualified
personnel, or the Company's management otherwise fails to manage the Company's
expansion effectively, there would be a material adverse effect on the
Company's business, financial condition and operating results.
Dependence on Third Party Vendors
The Company's viability depends on its ability to obtain for itself and
its customers access to a breadth of quality and comprehensive real-time and
historical financial market data from third party vendors whose products are
technically compatible with the Company's ATTAIN software and its future
products and services. The Company currently depends substantially upon
relationships with third-party data vendors to ensure such access, including PC
Quote, Inc. ("PC Quote"), Dow Jones & Company, Inc., the Nasdaq Stock Market,
Inc., and other trading systems or ECNs, including Datek Securities Corp.'s
Island system and Terra Nova Trading LLC's Archipelago system. Although the
Company has written agreements with each of such third party vendors, if the
Company's access to or use of the data provided by any of these third party
vendors were interrupted or terminated, the Company would have to make
alternative arrangements, either to produce such data itself or with a third
party or to obtain comparable data from a different third party, and in the
case of one significant vendor the Company has already made an alternative
arrangement. It has been publicly reported that PC Quote is experiencing severe
financial difficulties. With respect to obtaining quotation information, which
the Company currently receives from PC Quote, the Company has entered into an
agreement with Standard & Poors Comstock, Inc. in order to have a readily
available alternative source for quotation information. There can be no
assurance, however, that similar arrangements could be accomplished in a timely
and cost effective manner, if at all, or that alternative sources would be
available on commercially reasonable terms, if at all. To the extent the
Company experiences disruptions, its customers will be inconvenienced and may
be adversely affected. As a result, the Company's relationship with such
customers would be adversely affected. There is also the risk that such
contractual relationships will not be renewed on terms favorable to the
Company, if at all. Vendors may also strengthen their alliances with the
Company's competitors, discontinue their relationships with the Company, or
develop strategic initiatives which involve eliminating or limiting
compatibility between the Company's services and the vendor's services. There
can be no assurance that the Company will be able to increase the number of
compatible data vendors available to it or encourage other trading systems to
become compatible with the ATTAIN ECN, or that the Company's existing data
sources will continue to exist or cooperate in maintaining technical
compatibility with the Company's ATTAIN trading system or the ATTAIN ECN. If
the Company were unable to secure additional key data sources and compatibility
with other trading systems, or were to lose access
9
to significant amounts of data or to significant trading systems or ECNs, the
Company's business, financial condition and results of operations would be
materially adversely affected. To the extent third party vendor trading systems
do not timely program their trading systems to be compatible with the ATTAIN
ECN, the Company's business opportunities would be adversely affected. See
"Business--All-Tech's Strategy" and "--Competition."
Lack of Access to Instinet ECN
Instinet Corporation currently operates the largest ECN ("Instinet").
Historically, Instinet has offered and continues to offer its subscribers
access to better stock prices than are available on Nasdaq. Instinet's
customers' orders are not displayed by Instinet on Nasdaq unless the Instinet
subscriber affirmatively requests that its order be displayed on Nasdaq.
Additionally, only the best bid and asked quotations with respect to a specific
Nasdaq traded security and for which Nasdaq display is requested by the
Instinet subscriber are accessible to non-subscribers on Nasdaq. Moreover, the
comprehensive list of bid and ask orders of all Instinet subscribers at any
time may be viewed only by Instinet subscribers. This lack of access results in
better prices for Instinet subscribers and limits the ability of individual
investors, including the Company's customers, to discover trends or the
magnitude of trends. Finally, Instinet subscribers are offered price
improvement, while non-subscribers who access Instinet through Nasdaq do not
receive price improvement. All-Tech has applied to Instinet for subscriber
privileges in order to provide access to Instinet to the Company's customers,
but Instinet has refused to grant privileges to All-Tech, severely limiting
All-Tech's ability to offer these better execution prices to its customers.
All-Tech instituted an arbitration proceeding against Instinet, seeking to
become an Instinet subscriber, as well as monetary damages. However, its claims
were recently dismissed. The order of dismissal requires the Company to pay
Instinet $55,000 in reimbursement of legal fees incurred, as well to pay NASD
Regulation, Inc. $27,750 in hearing fees. The Company has requested that the
matter be resubmitted to the arbitration panel with a request that the
arbitrators state the basis for the award, and it has reserved its right to
seek modification and/or vacatur of the award. The Company believes that it has
a meritorious position, and it currently intends to appeal this dismissal.
Competition
The marketplace for electronic trading brokerage firms is intensely
competitive and rapidly changing. All-Tech believes that due to anticipated
growth of the market for electronic brokerage services, active stock trading
facilities and other factors, competition will substantially increase and
intensify in the future. The Company believes its ability to compete will
depend upon many factors both within and outside its control, including the
timing and market acceptance of new services, products and enhancements
developed by the Company and its competitors, functionality of such services
and products, data availability, ease of use, pricing, reliability, customer
service and support and sales and marketing efforts.
The Company faces direct competition from a number of publicly-traded and
privately-held companies. It competes directly with other firms whose customers
engage in active electronic day trading, other ECN systems, large Wall Street
securities firms, securities subsidiaries of major commercial bank holding
companies, major regional firms and smaller niche players. This competition is
based primarily on the quality of services offered and price. The Company's
principal competitors in providing electronic brokerage services to day traders
currently include such firms as Datek Securities Corp. and Terra Nova Trading,
LLC. The Company's ATTAIN ECN competes principally with market makers,
Instinet, Datek Securities Corp.'s Island ECN, Terra Nova Trading, LLC's
Archipelago ECN, Bloomberg Tradebook LLC's Tradebook System ECN, Spear, Leeds &
Kellogg's REDI ECN and Brass Utility Inc.'s BRUT ECN. The Company also competes
with on-line trading systems available on the Internet, such as Charles Schwab
& Co., Inc., E*Trade Capital Inc. and Accutrade Inc. In addition, the Company
faces competition from data vendors, which offer investment analysis software,
news quotations and other securities industry products.
Many of the Company's existing and potential competitors have longer
operating histories, significantly greater financial, technical and market
resources, greater name recognition and a larger installed customer base than
the Company.
One or more of these competitors may be able to respond more quickly to
new or emerging technologies or changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their services and
products than the Company. There can be no assurance that the Company's
existing or potential competitors will not develop services and products
comparable or superior to those developed by the Company or adapt more quickly
than the Company to new technologies, evolving industry trends or changing
10
customer requirements. Larger competitors are also able to advertise their
products and services on a national or regional basis and may have a greater
number and variety of distribution outlets for their services. On-line discount
brokerage firms market their services through aggressive pricing and
promotional efforts.
The Company's average commission per transaction has fallen from $24.32
for the year ended June 30, 1996 to $23.52 for the year ended June 30, 1998,
due to competitive pressures. In addition, the Company is continuously
monitoring the ECN fees it charges and such fees were recently reduced from
$.015 to a maximum of $.005 per share as a result of competitive pressures and
to adhere to maximum fees permitted pursuant to the SEC no-action letter under
which the Company operates the ATTAIN ECN. The reduction in rates has
negatively impacted ATTAIN ECN revenues. See "Business--The ATTAIN ECN."
Increased competition could result in additional price reductions, reduced
margins or loss of market share, any one of which could materially adversely
affect the Company's business, financial condition and results of operations.
There can be no assurance that the Company will be able to compete successfully
against current or future competitors, or that competitive pressures faced by
the Company will not have a material adverse effect on its business, financial
condition and results of operations.
Competition from commercial banks may increase because of recent
acquisitions of securities firms by commercial banks, as well as internal
expansion by commercial banks into the securities business. In addition, the
Company expects competition from domestic and international banks to increase
as a result of recent and anticipated legislative and regulatory initiatives in
the United States to remove or relieve certain restrictions on commercial
banks. See "Business--Competition."
Competition for Retaining and Recruiting Personnel
The Company's business is dependent on the highly skilled, and often
highly specialized, individuals it employs. Retention of sales, trading,
management and administrative professionals is particularly important to the
Company's prospects. From time to time, other companies in the securities
industry have experienced losses of sales and trading personnel as well as
management and administrative professionals. The level of competition for key
personnel is expected to increase due to the increasing number of companies
offering electronic brokerage services and ECNs. There can be no assurance that
losses of key personnel due to such competition or otherwise will not occur in
the future. The loss of such professionals, particularly a senior professional,
could adversely affect the Company's growth and operating results.
The Company expects further growth in the number of its personnel.
Additionally, the Company expects that continuing competition will cause its
compensation costs to increase in the future. There can be no assurance that
the Company will be able to recruit a sufficient number of new employees with
the desired qualifications in a timely manner. The failure to recruit new
employees could materially and adversely affect the Company's future operating
results.
While the Company generally does not have employment agreements with its
employees, it attempts to retain its employees with incentives, such as
bonuses. Additionally the Company intends to issue options to buy Company stock
that vest over a number of years of employment. These incentives, however, may
be insufficient in light of the increasing competition for experienced
professionals in the securities industry, particularly if the value of the
Company's stock declines or fails to appreciate sufficiently to be a
competitive incentive for professional compensation. See "Business--Employees"
and "Management."
Dependence on Key Personnel
The Company is substantially dependent upon the efforts and skills of its
executive officers, particularly Harvey I. Houtkin and Mark D. Shefts, the
Company's Chairman of the Board and Chief Executive Officer, and its President,
Chief Operating Officer and Chief Financial Officer, respectively. The loss of
the services of either of these executive officers would have a material
adverse effect on the Company. The Company has entered into employment
agreements with both Messrs. Houtkin and Shefts and is applying for key man
life insurance on the lives of Messrs. Houtkin and Shefts in the amount of
$1,000,000 each, payable to the Company. The benefits received under these
policies would not be sufficient to compensate the Company for the loss of the
services of Mr. Houtkin or Mr. Shefts should suitable replacements not be
employed. There can be no assurance that key man insurance will be obtained in
such amount, if at all. See "Management--Employment Agreements; Key Man
Insurance."
11
Significant Fluctuations in Quarterly Operating Results
The Company's revenues and operating results may fluctuate from quarter to
quarter and from year to year due to a combination of factors, including access
to public markets, fluctuations in the valuation of securities in which the
Company has invested as a principal, the level of retail and institutional
brokerage transactions, variations in expenditures for personnel, litigation
expenses and expenses of establishing new business units. In addition, the
timing of the Company's recognition of revenue from a significant transaction
can materially affect the Company's quarterly operating results. Due to the
foregoing and other factors, there can be no assurance that the Company will be
able to sustain profitability on a quarterly or annual basis. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Securities Regulation in General
The securities business is subject to extensive regulation under federal
and state laws in the United States and the rules and regulations of self
regulatory organizations ("SROs"), such as the NASD and the various exchanges,
and is also subject to regulation in the foreign countries in which All-Tech
may wish to conduct its activities. One of the most important regulations with
which the Company must continually comply is Rule 15c3-1 under the Securities
Exchange Act of 1934, as amended (the "Net Capital Rule"), which requires the
Company to maintain a minimum amount of net capital, as defined under such
Rule.
Compliance with many of the regulations applicable to the Company involves
a number of risks, particularly in areas where applicable regulations may be
subject to interpretation. In the event of non-compliance with an applicable
regulation, governmental regulators and the NASD may institute administrative
or judicial proceedings that may result in censure, fine, civil penalties
(including treble damages in the case of insider trading violations), issuance
of cease-and-desist orders, deregistration or suspension of the non-compliant
broker-dealer or investment adviser, suspension or disqualification of the
broker-dealer's officers or employees or other adverse consequences. The
imposition of any such penalties or orders on the Company could have a material
adverse effect on the Company's operating results and financial condition.
The Company's ability to engage in business is also regulated by the terms
of its NASD membership agreement. The Company's membership agreement currently
permits the Company to engage in the following business activities: broker or
dealer retailing corporate equity securities over-the-counter; broker or dealer
retailing corporate debt securities; mutual fund retailer; put and call broker
or dealer or option writer; broker or dealer selling tax shelters or limited
partnerships; non-exchange member arranging for transactions in listed
securities by an exchange member; market maker in corporate OTC securities;
municipal securities broker or dealer; underwriter or selling group member in
firm commitment and best efforts offerings; and trading for the Company's
account. Activities which are not currently permitted by the Company's
membership agreement include the following: exchange member engaged in exchange
commission business, other than floor activities; exchange member engaged in
floor activities; mutual fund underwriter or sponsor; U.S. government
securities dealer; broker or dealer selling variable life insurance or
annuities; solicitor of time deposits in a financial institution; real estate
syndicator; broker or dealer selling oil and gas interests; broker or dealer
selling securities of only one issuer or associated issuers; broker or dealer
selling securities of non-profit organizations; investment advisory services;
and broker or dealer selling interests in mortgages or other receivables. To
the extent new business activities are not already permitted under that
agreement, the Company is required to seek modification of the agreement. While
the Company is not currently seeking any modifications to its membership
agreement, there can be no assurance that any modification which may be
requested will be made on a timely basis, if at all. The failure to obtain such
modification would prohibit the Company from engaging in the activity at issue
and could impair the Company's ability to grow or to expand into other areas or
business.
Underwriting commitments, should the Company engage in underwriting and
they be incurred, require a charge against net capital and, accordingly, the
Company's ability to make underwriting commitments in the future, should it
determine to do so, may be limited by the requirement that it must at all times
be in compliance with the applicable net capital regulations. See
"Business--Government Regulation."
The regulatory environment in which the Company operates is subject to
change. The Company may be adversely affected as a result of new or revised
legislation or regulations imposed by the SEC, other United
12
States or foreign governmental regulatory authorities or SROs. The Company also
may be adversely affected by changes in the interpretation or enforcement of
existing laws and rules by these governmental authorities and the NASD.
Furthermore, the Company's businesses may be materially affected not only by
regulations applicable to it as a financial market intermediary, but also by
regulations of general application.
Benefits of the Offering to Current Stockholders
Upon completion of this Offering, the current stockholders of the Company
will realize significant benefits, including, (i) the creation of a public
market for their securities, (ii) assuming the Offering price of the Common
Stock is $9.00 per share, the receipt of approximately $3,211,650 in net
proceeds from the sale of 390,000 shares of Common Stock (and an additional
$2,408,738 in net proceeds, assuming the Over-Allotment Option is exercised in
full, from the sale of an additional 292,500 shares of Common Stock subject to
the Underwriters' Over-Allotment Option), and (iii) an unrealized gain of
approximately $89.4 million with respect to the securities owned by the
Company's parent, Rushmore, which is wholly-owned by Messrs. Mark D. Shefts and
Harvey I. Houtkin, stockholders, officers and directors of the Company. In
addition, the current stockholders will experience an immediate increase in pro
forma book value per share (after giving effect to the conversion of $572,559
of indebtedness into additional paid-in capital in July 1998 by Rushmore) owned
by them from $.23 per share to $2.20 per share, while the purchasers of Common
Stock in this Offering will experience immediate substantial dilution as
described below.
Potential Conflicts of Interest
The Company engages in proprietary trading and acts as a market maker.
Therefore, the Company may be competing with its own customers with respect to
certain trades. In addition, executive officers, directors and employees of the
Company invest in public companies in which the Company acts as a market maker
or in which the Company performs proprietary trading. Accordingly, there are
certain risks that, as a result of such investment or profits interest, a
director, officer or employee may take actions which would conflict with the
best interests of the Company. All-Tech Training Group, Inc. ("ATTG") trains
potential customers of the Company. The Company, if these trainees open
All-Tech accounts, offers them per trade rebates up to, in the aggregate, the
amount a customer paid for his or her training. The aggregate amount of
discounted commissions accorded to students who attend ATTG's electronic day
trading training program was approximately $272,000 and $375,000 for the year
ended June 30, 1997 and the year ended June 30, 1998, respectively. ATTG is
owned by Rushmore, which is wholly owned by Harvey I. Houtkin and Mark D.
Shefts, officers and directors of the Company. Messrs. Houtkin and Shefts
perform duties for other companies directly or indirectly owned by them, such
as ATTG and various real estate companies, as well as trade for accounts owned
or controlled by them. Although neither Mr. Houtkin nor Mr. Shefts spends a
substantial amount of time on such activities at the present time, there can be
no assurance that their duties as directors or officers of such other entities
will not present conflicts of interest with their duties to the Company in the
future. See "Business--Proprietary Trading" and "Certain Transactions."
Risk Associated with Increased Trading
The Company has recently executed a joint back office agreement and a
stock purchase agreement with its clearing firm, which agreements have not yet
been executed by the clearing firm or approved by the New York Stock Exchange.
In the event that the agreements are executed by the clearing firm and are
approved by the New York Stock Exchange, of which no assurance can be given,
such agreements would permit All-Tech to trade the Company's proprietary
account at increased margin levels. Such increased leverage will permit the
Company to greatly increase the amount of proprietary trading it engages in.
Proprietary trading subjects the Company to risk of loss of the capital
invested; trading at such a highly leveraged rate increases the risk of loss
proportionately. Any losses, if significant, would have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Proprietary Trading."
Risks Associated with Entry into Institutional Market
The Company has historically sold its services primarily to individuals
and has little experience in marketing its services directly to institutions.
The Company believes its future success will depend in part on its ability to
move beyond its traditional customer base and market its services to
institutions, including brokerage firms with whom the Company currently
competes. There can be no assurance that the Company's services will be
accepted by institutional investors, which could have a material adverse effect
on the Company's business growth. See "Business--All-Tech's Strategy."
13
Rapid Technological Change and Dependence on New Services
Electronic stock trading is characterized by rapidly changing technology,
evolving industry standards in computer hardware, programming tools,
programming languages, operating systems, database technology and information
delivery systems, changes in customer requirements and frequent new service
introductions and enhancements. The Company's future success will depend upon
its ability to maintain and develop competitive technologies, to continue to
enhance its current services and to develop and introduce new services in a
timely and cost-effective manner that meets changing conditions such as
evolving customer needs, new competitive service offerings, emerging industry
standards and changing technology. Any failure by the Company to anticipate or
to respond quickly to changing market conditions, or any significant delays in
development or introduction of new services, could cause potential customers to
delay or decide against utilizing the Company's services and existing customers
to conduct their trading at competitors of the Company, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--All-Tech's Strategy" and "--Future Growth
and Development."
Risks Associated with Future Reliance on the Internet
The Company believes that future development of its service and customer
base, and the future growth of the Company, particularly outside of the United
States, depends in part upon the utilization of the Internet as a widely used
medium for communication of trading information and the delivery of
high-quality financial market data, orders, account status information and
customer support. The Company currently has a limited number of customers who
communicate with the Company via the Internet. If the number of customers
accessing All-Tech through the Internet increases, the Company will have to
develop additional Internet technical compatibility and adjust its marketing
and customer support approaches accordingly. There can be no assurance that the
Company will accomplish any of such tasks on a timely, cost-effective basis, if
at all. The Internet has experienced, and is expected to continue to
experience, significant growth in the number of users and amount of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by this continued growth. In addition,
the Internet could lose its viability due to delays in the development or
adoption of new standards and protocols to handle increased levels of Internet
activity, or due to governmental regulation. Global commerce and online
exchange of information on the Internet and other similar open wide area
networks are new and evolving; therefore, it is difficult to predict whether
Internet technology developments will keep pace with the demand for Internet
services. If the necessary infrastructure or complementary services do not
continue to be developed, or if the Internet does not continue as a viable
commercial marketplace, or if the Company does not adequately and timely
develop the necessary technical compatibility and adjust its marketing and
customer support approaches accordingly, the Company's business, financial
condition and results of operations could be materially adversely affected. See
"Business--Regulatory Background and Development of Active Electronic Trading"
and "--All-Tech's Strategy."
Risk of Software Defects
As a result of their complexity, all software products, including the
Company's software, may contain errors. Despite testing by the Company and
initial use by customers, when new services and products are introduced or new
versions of services and products are released, there can be no assurance that
errors will not be found and persist after commencement of use, resulting in
loss of revenues, delay in market acceptance or damage to the Company's
reputation, any of which could have a material adverse effect upon the
Company's business, financial condition and results of operations. All software
is inherently limited by the accuracy of the data utilized. The monitoring,
collection, storage and delivery of financial market data by data vendors and
by the Company's software is inherently complex; therefore, it is subject to
delay and to containing errors. The effectiveness of the Company's services is
limited by the accuracy of such data. See "Business--Services--ATTAIN Trading
System."
Risk of Litigation; Lack of Insurance Coverage
There has been substantial litigation in the software industry involving
intellectual property rights. Although the Company does not believe that it is
infringing the intellectual property rights of others, or that others are
14
infringing on its intellectual property rights, there can be no assurance that
infringement claims, if asserted against the Company, would not have a material
adverse effect on the Company's business, financial condition and results of
operations, or that any infringement claim asserted by the Company would be
successfully resolved.
In June 1998, the Company instituted an arbitration against Knight
Securities, Inc. ("Knight") by filing a Statement of Claim with the NASD. The
arbitration seeks compensatory damages in the amount of $97,537.50, punitive
damages in the amount of $500,000, as well as interest, costs, and
disbursements and attorneys fees. The arbitration was commenced as a result of
Knight's refusal to pay the Company's ECN fees arising from Knight's entering
trades involving OTC securities with the ATTAIN ECN. The allegations set forth
in the Statement of Claim include claims based upon breach of contract, quantum
meruit and fraud. The Company is also currently denying access to Knight, as
well as approximately 33 other ATTAIN ECN users, because they have stated to
the Company that they will not pay their ATTAIN ECN bills. The Company intends
to vigorously pursue its legal remedies to recover unpaid accounts receivable.
However, there can be no assurance that such efforts will be successful.
The Company has requested that the U.S. Department of Justice investigate
what the Company believes to be misconduct of the market making participants in
their refusal to pay the Company's ECN fees. In addition, the Company has been
informed by the NASD that, based upon complaints lodged by two broker-dealers,
it is conducting an investigation as to whether the Company's denial of access
to the ATTAIN ECN constituted "backing away." Although the Company does not
believe that there is any merit to such claims, and it intends to vigorously
contest any such charge, there can be no assurance that such claims would not
result in a formal investigation being commenced or that the Company would not
incur substantial fees in contesting such claims.
As the Company's services are designed to enable investors to make
improved investment and trading decisions, an investor who uses the Company's
services and sustains losses or fails to make profits in the securities or
financial markets may allege that the Company's services contributed to or
resulted in such losses or lost profits and that the Company should be held
liable to the investor for such losses. While the Company's account
documentation contains certain warnings and disclaimers, they may not be
effective in certain jurisdictions or under certain circumstances. The Company
currently does not maintain errors and omissions insurance to cover such
liability risks, and there can be no assurance that such insurance would be
available to the Company on reasonable terms, or at all, or, if obtained, that
such insurance would be adequate to cover the amount of such liabilities, if
imposed on the Company, or that such insurance would cover the types of claims
which might be asserted against the Company. While the Company has never had
such a claim successfully asserted against it, there can be no assurance that
such claims will not be asserted and that, if asserted, the results will not
materially adversely affect the Company's business, financial condition and
results of operations. See "Business--Services."
Risks Associated with International Expansion
A component of the Company's strategy is its planned expansion into
international markets. This strategy is dependent, in part, on international
customers having access to the appropriate financial market data and on the
Company's ability to provide such potential customers with brokerage services
under the laws of that jurisdiction. To date, the Company has only limited
experience in marketing, selling and delivering its services internationally.
There can be no assurance that the Company will be able to successfully market,
sell and deliver its services in international markets. In addition, there are
certain risks inherent in doing business on an international level, including
unexpected changes in regulatory requirements, difficulties in staffing and
managing foreign operations, dependence upon strategic partners needed to
succeed in certain countries, difficulties in protecting intellectual property
rights, longer payment cycles, problems in collecting accounts receivable,
political instability, unfamiliarity with local laws and customs, fluctuations
in currency exchange rates, and potentially adverse tax consequences. There can
be no assurance that one or more of such or other factors will not have a
material adverse effect on the Company's ability to expand into international
markets or on the Company's future international operations if any, and,
consequently, on the Company's business, financial condition and results of
operations. There can be no assurance that the Company will expand into
international markets. See "Business--Sales and Marketing."
15
Dependence upon Microsoft's Windows Operating System
The Company's services are currently designed for use on computers using
Microsoft's 32-bit Windows operating system, requiring Windows 95 and Windows
NT. The Company may attempt to modify its software to take advantage of later
versions of the Windows operating system, such as Windows 98, by Microsoft. To
the extent any such later version is not compatible with Windows 95, All-Tech's
customers trading from their own locations ("remote customers") would be
required to purchase such new version. Any factor adversely affecting the
demand for, or the current trends of increasing and expanding use of, the
current Windows operating system could have an impact on demand for the
Company's services, causing a material adverse effect on the Company's
business, financial condition and results of operations. Additionally, changes
to the underlying components of the Windows operating system may require
changes to the Company's ATTAIN trading system and ECN software. If the Company
is not able to successfully develop or implement appropriate modifications to
its ATTAIN trading system and ECN software in a timely fashion, the Company's
business, financial condition and results of operations could be materially
adversely affected. See "Business--Services--The ATTAIN Trading System."
Emerging Market for Electronic Trading
The market for computer-automated investment and trading on personal
computers is relatively new and will be subject to frequent and continuing
changes. Any future growth of this market depends upon continued customer
acceptance of this type of trading as a viable method of implementing trading
strategies. Historically, the Company's policy has been that prospective
customers be educated as to the potential advantages of the Company's services
and be trained in the trading strategies appropriate for this type of trading.
The Company expects that the need for such education will continue for the
foreseeable future. There can be no assurance that the Company will be
successful in obtaining a sufficient number of educated customers or that the
Company will be able to respond effectively to changing customer preferences in
this market. If the size of the market is substantially smaller than the
Company believes, or if the market for electronic trading fails to grow or
grows more slowly than the Company currently anticipates, or if the Company
fails to respond effectively to the evolving requirements of this market, the
Company's business, financial condition and results of operations would be
materially adversely affected. See "Business--Overview."
The education of prospective customers in electronic day trading
strategies is conducted almost wholly by ATTG, a wholly-owned subsidiary of
Rushmore, a company which is wholly owned by Messrs. Harvey Houtkin and Mark
Shefts, Chairman of the Board, Chief Executive Officer and Secretary and
President, Chief Operating Officer, Chief Financial Officer and Treasurer,
respectively, of the Company. Approximately 85% of the Company's day trading
customers have received training from ATTG. Should ATTG determine to
discontinue this business, the Company would have to develop its own
educational capabilities or purchase ATTG's operations. The Company has no
current intention of developing its own training capabilities. See "Certain
Transactions."
Protection of Intellectual Property
The Company's success is heavily dependent upon its proprietary
technology. The Company relies primar-ily on a combination of copyright, trade
secret and trademark laws, non-disclosure and other contractual provisions and
technical measures to protect its proprietary rights. The Company seeks to
protect its software, documentation and other written materials through trade
secret and copyright laws, which provide only limited protection. As part of
its confidentiality procedures, the Company enters into non-disclosure
agreements with its employees, consultants and third party vendors. The Company
uses agreements with its customers and ATTAIN ECN subscribers in order to
protect its copyrights and trade secrets and to prevent such users from
commercially exploiting such copyrights and trade secrets for their own gain.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may copy or otherwise obtain, use or exploit the Company's products or
technology independently. Policing unauthorized use of the Company's products
is difficult, and the Company is unable to determine the extent to which
unauthorized use, if any, of its software products exists. Piracy can be
expected to be a persistent problem, particularly in international markets and
as a result of the growing use of the Internet. In addition, effective
protection of intellectual property rights may be unavailable or limited in
certain countries, including some in which the Company may attempt to expand
its sales efforts. There can be no
16
assurance that the steps taken by the Company to protect its proprietary rights
will be adequate or that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technologies or products, either of which could result in a material
adverse effect on the Company's business, financial condition and results of
operations.
There has been substantial litigation in the software industry involving
intellectual property rights. The Company does not believe that it is
infringing the intellectual property rights of others. There can be no
assurance that infringement claims would not have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, to the extent that the Company acquires or licenses a portion of the
software or data included in its software from third parties, its exposure to
infringement actions may increase because the Company must rely upon such third
parties for information as to the origin and ownership of such acquired or
licensed software or data. In the future, litigation may be necessary to
establish, enforce and protect trade secrets, copyrights, trademarks and other
intellectual property rights of the Company. The Company may also be subject to
litigation to defend against claimed infringement of the rights of others or to
determine the scope and validity of the intellectual property rights of others.
Any such litigation could be costly and divert management's attention, either
of which could have a material adverse effect on the Company's business,
financial condition and results of operations. Adverse determinations in such
litigation could result in the loss of proprietary rights, subject the Company
to significant liabilities, require the Company to seek licenses from third
parties, which could be expensive, or prevent the Company from selling its
services or using its trademarks, any one of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Intellectual Property and Other Proprietary Rights."
Risks Associated with Possible Acquisitions
The Company may acquire businesses, assets, products and technologies that
the Company believes could complement or expand the Company's business. The
Company currently has no specific plan, commitments or agreements with respect
to any acquisitions and there can be no assurance that the Company will be able
to identify any appropriate acquisition candidates. If the Company identifies
an acquisition candidate, there can be no assurance that the Company will be
able to successfully negotiate the terms of any such acquisition, finance such
acquisition or integrate such acquired business, assets, products or
technologies into the Company's existing business. Furthermore, the negotiation
of potential acquisitions as well as the integration of an acquired business
could cause diversion of management's time and resources, and require the
Company to use proceeds from this Offering to consummate a potential
acquisition. See "Business--All-Tech's Strategy."
Possibility of Losses Associated with Principal and Trading Activities
The Company's securities trading and market-making activities as principal
subject the Company's capital to significant risks, including market, credit,
leverage, counter-party and liquidity risks. Sudden sharp declines in market
values of securities can result in illiquid markets and the failure of issuers
and counterparties to perform their obligations, as well as increases in claims
and litigation. In such markets, the Company may incur reduced revenues or
losses in its principal trading activities. These activities often involve the
purchase, sale or short sale of securities as principal in markets that may be
characterized by relative illiquidity or that may be particularly susceptible
to rapid fluctuations in liquidity and price. The Company intends to use a
portion of the net proceeds from this Offering for its proprietary trading
activities. See "Business."
Year 2000
The Company's review of its own operating systems does not indicate any
Year 2000 problems. However, the Company is highly dependent on third party
vendors. Failures and interruptions, if any, resulting from the inability of
certain computing systems of third party vendors, including the Company's
clearing broker, to recognize the Year 2000 could have a material adverse
effect on the Company's results of operations. The Company's clearing broker
has informed the Company that it is not currently Year 2000 compliant. There
can be no assurance that the Year 2000 issue can be resolved by any of such
third parties prior to the upcoming change in the century. Although the Company
may incur substantial costs, particularly costs resulting from increased
charges by its third party service providers, as a result of such third party
service providers correcting Year 2000 issues, such costs are not sufficiently
certain to estimate at this time.
17
Lack of Off-Site Disaster Recovery Facility
The Company's principal disaster recovery system is located at the
Company's principal offices. The Company's principal backup recovery system
includes (i) backup computers which are standing by which have already been
loaded with duplicate software to run the ATTAIN trading system and ATTAIN ECN,
(ii) additional "shadow" T-1 communication lines which will be used in the
event that the primary T-1 communication lines used by the Company's Internet
customers fail, (iii) ISDN communications lines which serve as backup to the
T-1 communication lines which connect the Company to its branch offices, and
(iv) T-1 communication lines which serve as backups to the satellite
transmission feeds from which the Company obtains its quotation information.
Finally, all of the Company's servers, routers and communication equipment is
connected to uninteruptable power supplies for protection in the event of
short-term electrical outages. No off-site disaster recovery system exists at
this time. Recently, the Company experienced certain systems failure resulting
from the malfunctioning of two telecommunications satellites, which resulted in
the Company being unable to obtain listed quotation information at all of its
offices for that trading day and any quotation information at a majority of its
branch offices for the trading day. The Company has since implemented a full
high speed wire back-up system which will allow the Company to obtain
quotations and other information in the event of any future satellite
malfunctions. There can be no assurance that the Company will not suffer any
other systems failure or interruption, including one caused by a fire, other
natural disaster, power or telecommunications failure, act of God, act of war
or otherwise, or that the Company's back-up procedures and capabilities in the
event of any such failure or interruption, in light of the fact that they are
not off-site, will be adequate.
Dependence upon Availability of Capital and Funding
The Company's business is dependent upon the availability of adequate
required capital under applicable regulatory requirements. Historically, the
Company has satisfied these needs from internally generated funds. While the
proceeds of the Offering can be expected to satisfy the Company's funding and
capital needs for the next 12 months, there can be no assurance that any, or
sufficient, funding or regulatory capital will continue to be available to the
Company thereafter on terms that are acceptable to it. The Company's ability to
expand and grow its business in accordance with its current plan, to make
acquisitions and to meet its long-term capital requirements beyond any such
12-month period will depend on many factors, including, but not limited to, the
receipt of the net proceeds of this Offering, the rate, if any, at which the
Company's cash flow increases, the ability and willingness of the Company to
accomplish acquisitions and develop new business areas with its capital stock,
and the availability to the Company of additional public and private
subordinated debt and/or equity financing. No assurance can be given that
additional financing will be available or that, if available, it will be
available on terms favorable to the Company. See "Use of Proceeds,"
"Business--Government Regulation," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Broad Discretion of Management in Use of Proceeds
The Company has not made specific allocations for the use of the net
proceeds from the sale by the Company of the Common Stock and Warrants offered
hereby. Rather, the Company intends to use the net proceeds primarily for
general corporate purposes, including principal investments and working
capital. Accordingly, management will have significant discretion in applying
the net proceeds of the Offering. See "Use of Proceeds."
Control by Insiders
Prior to this Offering, all of the outstanding shares of Common Stock are
held by Harvey I. Houtkin, Chairman, Chief Executive Officer and Secretary of
the Company, Mark D. Shefts, President, Chief Operating Officer, Chief
Financial Officer and Treasurer of the Company, and Rushmore, a company wholly
owned by Messrs. Houtkin and Shefts. Upon completion of the Offering, Messrs.
Houtkin and Shefts will beneficially own in the aggregate 72.2% of the
outstanding Common Stock (and 68.8% of the Common Stock if the Over-Allotment
Option is exercised in full) and therefore will be able to control the outcome
of all corporate actions requiring shareholder approval. Therefore, investors'
ownership of Common Stock will not provide them with any ability to determine
the outcome of matters requiring a shareholder vote, including the election of
directors, and any
18
merger, consolidation or sale of all or substantially all of the Company's
assets. Additionally Messrs. Houtkin and Shefts shall effectively retain
control over the management and affairs of the Company through their
significant stock ownership. Such concentration of ownership may have the
effect of delaying, deferring or preventing a change in control of the Company
or a merger, consolidation, takeover or other business combination involving
the Company or discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of the Company. See "Management" and
"Principal and Selling Stockholders."
Possible Issuance of Preferred Stock; Barriers to Takeover
The Company's Certificate of Incorporation and By-Laws, as well as
Delaware corporate law, contain certain provisions that could have the effect
of making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of the Company. These
provisions could limit the price that certain investors might be willing to pay
in the future for shares of Common Stock. Certain of these provisions impose
various procedural and other requirements that could make it more difficult for
stockholders to effect certain corporate actions. The Company's Certificate of
Incorporation also authorizes the Board of Directors to issue, without
stockholder approval, 5,000,000 shares of Preferred Stock with voting,
conversion and other rights and preferences that could adversely affect the
voting power or other rights of the holders of Common Stock. Following the
Offering, no shares of Preferred Stock of the Company will be outstanding. Any
issuances of Preferred Stock could be used for anti-takeover purposes or to
discourage, delay or prevent a change of control of the Company. See
"Description of Capital Stock."
Absence of Prior Market; Possible Volatility of Price of Common Stock;
Arbitrary Determination of Offering Price
Prior to the Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market will develop
or, if developed, will be sustained following the Offering. The initial public
offering price of the Common Stock will be determined through negotiations
among the Company, the Selling Stockholders and the Underwriters, based upon
several factors although, under Rule 2720 of the NASD Conduct Rules, the
initial public offering price can be no higher than that recommended by a
"qualified independent underwriter" meeting certain standards. Joseph Charles &
Associates, Inc. has agreed to serve in such role. In order to render its
recommendation as to the maximum initial public offering price, Joseph Charles
& Associates, Inc. is required to perform appropriate legal, financial and
business "due diligence" with respect to information contained in the
Prospectus. For a discussion of the factors to be taken into account in
determining the initial public offering price of the Common Stock, see
"Underwriting." Certain factors, such as sales of the Common Stock into the
market by existing shareholders, fluctuations in operating results of the
Company or its competitors, market conditions for similar stocks, and market
conditions generally for other companies in the investment banking industry or
in the financial services or technology industries, could cause the market
price of the Common Stock to fluctuate substantially. In addition, the stock
market has experienced significant price and volume fluctuations that have
particularly affected the market prices of equity securities of companies and
that have often been unrelated to the operating performance of such companies.
Accordingly, the market price of the Common Stock may decline even if the
Company's operating results or prospects have not changed. There can be no
assurance that the Common Stock offered by this Prospectus will trade at market
prices in excess of the initial public offering price. See "Underwriting."
Potential Decreases in the Market Price of Common Stock Resulting from Future
Sales of Common Stock
Sales of a substantial number of shares of Common Stock in the public
market, whether by purchasers in the Offering or other stockholders of the
Company, could adversely affect the prevailing market price of the Common Stock
and could impair the Company's future ability to raise capital through an
offering of its equity securities. Without giving effect to exercise of the
Underwriters' Over-Allotment Option, there will be 14,065,559 shares of Common
Stock outstanding immediately after completion of the Offering, of which
3,900,000 shares of Common Stock will be freely tradeable in the public
markets, subject, if purchased by "affiliates", to the volume and other
limitations set forth in Rule 144 promulgated under the Securities Act of 1933,
as amended (the "Securities Act"). The remaining 10,165,559 shares of Common
Stock outstanding
19
immediately following the Offering will be "restricted" securities, as that
term is defined under Rule 144. Under lock-up agreements (the "Lockup
Agreements") each existing stockholder has agreed that such stockholder will
not directly or indirectly sell, assign or otherwise transfer any shares of
Common Stock for a period of twelve (12) months after the effective date of the
Offering, unless released by the Representatives. Any shares subject to the
Lockup Agreements may be released by the Representatives at any time without
notice to the public. All of such 10,165,559 shares of Common Stock would be
eligible for sale, subject to compliance with the volume limitations of Rule
144 by the holders of these shares commencing upon the later of (i) ninety (90)
days after the effective date of the Offering or (ii) the expiration or waiver
of the Lockup Agreements. See "Shares Eligible for Future Sale" and
"Underwriting."
Immediate and Substantial Dilution
Purchasers of Common Stock in the Offering will experience immediate
substantial dilution of $6.80 per share based on the pro forma net tangible
book value of the Company at June 30, 1998, and on an initial public offering
price of $9.00 per share. See "Dilution."
Lack of Experience of Certain Representatives
ISG Solid Capital Markets, LLC ("ISG") commenced operations in early 1997.
The current president and chief executive officer of ISG has been a principal
of various broker-dealers since 1978; however, prior to this Offering, ISG had
co-managed only two other public securities offerings and had acted as an
underwriter in several other offerings. Prior to this Offering, All-Tech has
not co-managed or acted as an underwriter of any other public offerings. The
principals of All-Tech have been principals of a broker-dealer which co-managed
two public securities offerings and acted as an underwriter in one other
offering. Therefore, except for Joseph Charles & Associates, Inc., each of the
Representatives has limited experience as a manager, co-manager or underwriter
of public offerings of securities. During the five years immediately preceding
the filing of the Registration Statement of which this Prospectus forms a part,
Joseph Charles & Associates, Inc. has managed or co-managed 12 public offerings
of securities.
The Underwriters are required to make an independent investigation
reasonably calculated to reveal all facts pertinent to a prudent investor
regarding the Company and the price of the Common Stock. See "Underwriting."
There can be no assurance that the limited offering experience of certain of
the Representatives will not adversely affect this Offering or the subsequent
development, if any, of a trading market for the Common Stock. See
"Underwriting."
Limited Marketing Capabilities
The Company's operating results will depend to a large extent on its
ability to successfully market the ATTAIN trading system, the ATTAIN ECN and
other services to public customers who are active traders and who require
real-time market information. In addition, the Company also hopes to market its
services to institutions, including brokerage firms. The Company currently has
limited marketing capability. The Company intends to use a portion of the
proceeds of the Offering to hire additional sales and marketing personnel and
conduct additional advertising. There can be no assurance that any marketing
efforts undertaken by the Company will be successful or will result in any
significant increase in usage of the ATTAIN trading system, the ATTAIN ECN or
other services of the Company. See "Business--All-Tech's Strategy."
No Dividends and None Anticipated
Although the Company has paid dividends on the Common Stock in the past,
it is anticipated that income received from operations, if any, will be
retained for the Company's future operations. Accordingly, no dividends are
anticipated in the future. See "Dividend Policy."
Limitation on Liability of Directors
The Company's Certificate of Incorporation limits personal liability of
directors to the fullest extent permitted by the General Corporation Law of the
State of Delaware. In addition, the Company's By-Laws provide for
indemnification of directors, officers, employees or agents of the Company
under certain circumstances. See "Description of Capital Stock."
20
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
3,510,000 of the shares of the Common Stock offered hereby by the Company,
based on an assumed initial public offering price of $9.00 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company, are estimated to be $28,494,850 ($30,903,587
assuming exercise of the Over-Allotment Option in full). The net proceeds will
be used for general corporate purposes, the development or acquisition of new
areas of the brokerage business, advertising and marketing, principal
investments, proprietary trading activities and working capital. The Company
will not receive any of the proceeds from the sale of the shares of Common
Stock by the Selling Stockholders. See "Principal and Selling Stockholders."
DIVIDEND POLICY
The Company has declared and paid cash dividends on its capital stock in
the past. The Company currently intends to retain all of its earnings, if any,
for use in its business and does not anticipate paying any dividends in the
foreseeable future. The payment of any future dividends will be at the
discretion of the Company's Board of Directors and will depend upon a number of
factors, including future earnings, the success of the Company's business
activities, regulatory capital requirements, the general financial condition
and future prospects of the Company, general business conditions and such other
factors as the Board of Directors may deem relevant.
21
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1998
(after giving effect to the conversion of $572,559 of indebtedness owed to
Rushmore into additional paid-in capital in July 1998) was approximately
$2,455,000 or $.23 per share of Common Stock. Pro forma net tangible book value
per share represents the Company's tangible assets less total pro forma
liabilities divided by the number of shares of Common Stock outstanding as of
June 30, 1998. Dilution per share represents the difference between the amount
per share paid by purchasers of shares of Common Stock in the Offering made
hereby and the pro forma net tangible book value per share of Common Stock
immediately after completion of the Offering. Without taking into account any
changes in such pro forma net tangible book value after June 30, 1998, other
than to give effect to the sale of 3,510,000 shares of Common Stock (but not
the Underwriters' Over-Allotment Option) by the Company in this Offering at an
assumed initial public offering price of $9.00 per share and the application of
the estimated net proceeds therefrom (after deducting the underwriting discount
and commissions and estimated Offering expenses), the pro forma as adjusted net
tangible book value of the Company as of June 30, 1998, would have been
approximately $30,950,000, or $2.20 per share. This represents an immediate
increase in pro forma net tangible book value of $1.97 per share to existing
stockholders and an immediate dilution in pro forma as adjusted net tangible
book value of $6.80 per share to new investors. The following table illustrates
this dilution on a per share basis:
Assumed initial public offering price per share ........................................ $ 9.00
Pro forma net tangible book value per share as of June 30, 1998 ............. $ .23
Increase per share attributable to Offering ................................. 1.97
Pro forma as adjusted net tangible book value per share after the Offering ............. 2.20
------
Dilution per share to new investors .................................................... $ 6.80
======
The following table summarizes, through the date of this prospectus, the
difference between the total consideration paid for the number of shares of
Common Stock purchased from the Company and the average price per share paid by
existing stockholders and by new investors purchasing shares of Common Stock
pursuant to this Offering.
Shares Purchased Total Consideration
------------------------ ------------------------- Average Price
Number Percent Amount Percent Per Share
------------ --------- ------------- --------- --------------
Existing Stockholders ......... 10,555,559 75.0% $ 2,255,154 6.7% $ .21
New Investors ................. 3,510,000 25.0 31,590,000 93.3 $ 9.00
---------- ---- ----------- ----
Total ...................... 14,065,559 100% $33,845,154 100%
========== ==== =========== ====
22
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1998 (i) on a pro forma basis (after giving effect to the conversion
of $572,559 of indebtedness owed to Rushmore into additional paid-in capital in
July 1998) and (ii) as adjusted to reflect the sale by the Company of 3,510,000
shares of Common Stock offered hereby at an assumed initial public offering
price of $9.00 per share, and the receipt of the estimated net proceeds
therefrom, after deducting estimated underwriting discounts and commissions and
offering expenses payable by the Company. This table should be read in
conjunction with the Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Prospectus.
June 30, 1998
------------------------------
Pro forma
Pro forma As Adjusted
------------- --------------
Stockholders' equity: .............................................
Preferred Stock, $.01 par value, 5,000,000 shares authorized, none
outstanding .................................................... $ -- $ --
Common Stock, $.001 par value, 55,000,000 shares authorized,
10,555,559 shares outstanding, actual; and 14,065,559 shares
outstanding, as adjusted(1) .................................... 10,556 14,066
Additional paid-in capital ....................................... 2,125,771 30,617,111
Retained earnings ................................................ 612,812 612,812
---------- -----------
Stockholders' equity ........................................... 2,749,139 31,243,989
---------- -----------
Total capitalization ........................................ $2,749,139 $31,243,989
========== ===========
- ------------
(1) Excludes as of June 30, 1998: 1,535,354 shares of Common Stock reserved for
issuance under the Company's 1998 Stock Option Plan, none of which had
been granted. The Company intends to grant 1,000,000 of such options, such
grant to be effective upon the effective date of this Offering. See
"Management--1998 Stock Option Plan" and Note 11 of Notes to Financial
Statements.
23
SELECTED FINANCIAL DATA
The following table sets forth selected financial information with respect
to the Company as of and for the periods indicated. The financial information
as of and for the years ended June 30, 1994, 1995, 1996, 1997 and 1998, has
been derived from the audited financial statements of the Company. This
selected financial information should be read in conjunction with the Financial
Statements and Notes thereto and the discussion under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Prospectus.
Year Ended
Years Ended June 30, June 30,
----------------------------------------------------------------------------- --------------
1994 1995 1996 1997 1998 1998
------------- ----------- ------------ ------------ -------------- --------------
(in thousands, except share and per share data) Pro Forma
Unaudited(1)
STATEMENTS OF
OPERATIONS DATA:
Revenues:
Brokerage ...................... $ 15,113 $ 2,826 $ 10,704 $ 15,393 $ 16,620 $ 16,620
Trading ........................ (377) 115 64 132 (393) (393)
ECN ............................ -- -- -- -- 1,653 1,653
Other .......................... 2 21 307 539 416 416
----------- ----------- ------------ ------------ ------------ ------------
Total revenues ................ 14,738 2,962 11,075 16,064 18,296 18,296
----------- ----------- ------------ ------------ ------------ ------------
Costs and Expenses:
Clearing charges ............... 5,517 560 2,506 3,689 3,031 3,031
Technology development ......... 38 43 209 366 442 442
Communication costs ............ 709 229 977 2,376 4,044 4.044
Employee compensation and
benefits ...................... 7,568 1,476 4,161 6,057 6,324 5,432
----------- ----------- ------------ ------------ ------------ -------------
Occupancy costs ................ 96 67 106 386 1,077 1,077
Other .......................... 1,040 598 1,755 1,588 2,674 2,674
----------- ----------- ------------ ------------ ------------ -------------
Total costs and expenses ...... 14,968 2,973 9,714 14,462 17,592 16,700
----------- ----------- ------------ ------------ ------------ -------------
Income (loss) before provision
for income taxes ............... (230) (11) 1,361 1,602 704 1,596
Provision (benefit) for income
taxes .......................... (0) (8) 610 665 211 562
-------------- -------------- ------------ ------------ ------------ -------------
Net income (loss) ............... $ (230) $ (3) $ 751 $ 937 $ 493 $ 1,034
============= ============= ============ ============ ============ =============
Basic earnings (loss) per share . $ (.02) $ (.00) $ .07 $ .09 $ .05 $ .10
============= ============= ============ ============ ============ =============
Weighted average shares
outstanding .................... 10,555,559 10,555,559 10,555,559 10,555,559 10,555,559 10,555,559
============= ============= ============ ============ ============ =============
June 30,
----------------------------------------------------
1994 1995 1996 1997 1998(2)
-------- -------- -------- -------- --------
(in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents ......... $ 84 $ 37 $ 177 $ 641 $ 985
Total assets ...................... 1,716 1,657 3,263 3,799 4,279
Total liabilities ................. 197 141 996 1,944 2,102
Stockholders' equity .............. 1,519 1,516 2,267 1,855 2,177
- ------------
(1) Unaudited pro forma data reflects results of operations as if the executive
employment agreements, which were entered into on April 20, 1998 in
contemplation of the proposed Offering and commence on the effective date
of the Offering, were in effect as of July 1, 1997 (see
Management--Employment Agreements; Key-Man Insurance and Note 5 to the
Financial Statements). Such employment agreements provide for annual
aggregate compensation of $1,000,000, aggregate additional salaries of 10%
of net earnings before taxes to a maximum of an additional $1,000,000 in
the first two years and $3,000,000 in the third year. Pro forma
adjustments include (i) a net reduction in executive compensation of
approximately $879,000 and (ii) a decrease in payroll taxes of
approximately $13,000, which in the aggregate result in a net increase in
pretax income of approximately $892,000. Additionally, (a) provision for
taxes has been increased by approximately $351,000 due to the increase in
pretax income and (b) net income has been increased by approximately
$541,000. Future results may differ materially from the pro forma data
presented.
(2) Excludes the conversion of $572,559 of indebtedness owed to Rushmore into
additional paid-in capital in July 1998.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this Prospectus. This
discussion contains forward-looking statements. Words or phrases such as
"should result, are expected to, we anticipate, we estimate, we project" or
similar expressions are intended to identify forward-looking statements. These
statements are subject to certain risks and uncertainties including, but not
limited to, those set forth under "Risk Factors" and elsewhere in this
Prospectus that could cause actual results to differ materially from the
Company's historical experience and its present expectations or projections.
Caution should be taken not to place undue reliance on any such forward-looking
statements, since such statements speak only as of the date of the making of
such statements.
General
The Company is a registered securities broker/dealer which provides its
customers with computerized access to securities price information and enables
its customers to transmit buy and sell orders for execution. The Company also
operates an electronic communications network, the ATTAIN ECN, on which
subscribers may post bids and offers for OTC securities. Substantially all of
the Company's revenues are derived from brokerage commissions and ECN fees,
and, accordingly, the Company's revenues are directly related to and dependent
upon the volume of stocks traded and the number of transactions executed by its
customers.
In fiscal 1995, the Company temporarily substantially discontinued dealing
with retail customers and its principals concentrated on market making
activities in an affiliated registered broker-dealer, Domestic Securities, Inc.
("DSI"), due to regulatory changes. DSI is a wholly-owned subsidiary of
Rushmore, a company which is wholly-owned by Messrs. Harvey I. Houtkin and Mark
D. Shefts, stockholders, officers and directors of the Company. The decision to
discontinue the Company's retail business related to the drop in the amount of
retail business generated by the Company following modifications to the SOES
rules adopted by the NASD. The rule revisions limited the maximum SOES order to
500 shares, down from 1,000 shares and prohibited short selling on SOES. The
principals of the Company assessed that these changes were detrimental to its
operations and were advantageous to market makers. Accordingly, the principals
of the Company determined to focus their efforts on market making activities
through DSI. DSI competed on the basis of price rather than the more
traditional practice of buying order flow. Due to certain price fixing
conventions, the market making business engaged in by the Company's principals
through DSI proved unsuccessful. Subsequently, in 1995, the SOES rules
modifications were rescinded and thereafter, in fiscal 1996, the Company's
principals returned their focus to All-Tech and its brokerage business. The
Company's ATTAIN ECN began to generate revenues in February 1998 and has become
a significant source of revenues.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of revenues represented by the items reflected in the Company's Statement of
Operations.
Years Ended June 30,
------------------------------------
1996 1997 1998
---------- ---------- ----------
Revenues:
Brokerage commissions and fees .................. 96.6% 95.8% 90.8%
Trading gains (losses) .......................... 0.6 0.8 ( 2.1)
ECN fees ........................................ 0.0 0.0 9.0
Other ........................................... 2.8 3.4 2.3
----- ----- -----
Total Revenues ................................... 100.0 100.0 100.0
----- ----- -----
Costs and Expenses:
Clearing charges ................................ 22.6 23.0 16.6
Technology development .......................... 1.9 2.3 2.4
Communication costs ............................. 8.8 14.8 22.1
Employee compensation and benefits .............. 37.6 37.7 34.6
Occupancy costs ................................. 0.9 2.4 5.9
Other ........................................... 15.8 9.9 14.6
----- ----- -----
Total Costs and Expenses ......................... 87.7 90.0 96.2
----- ----- -----
Income before provision for income taxes ......... 12.3 10.0 3.8
Provision for income taxes ....................... 5.5 4.2 1.1
----- ----- -----
Net income ....................................... 6.8% 5.8% 2.7%
===== ===== =====
25
Year Ended June 30, 1998 Compared to Year Ended June 30, 1997
Revenues. Total revenues increased approximately $2.2 million or 14% to
$18.3 million for the year ended June 30, 1998 from $16.1 million for the year
ended June 30, 1997. This increase resulted primarily from an increase in
brokerage commissions and fees of approximately $1.2 million and from ECN fees
of $1.7 million net of allowances of $132,000 from the Company's ATTAIN ECN
which the Company commenced operating on February 17, 1998, offset by trading
losses of approximately $.4 million. The allowance recognized of $132,000 is
related to adjustments in price given to several of the ECN customers. The
Company does not expect to continue making such adjustments. The Company
maintains an allowance for doubtful accounts which represents amounts, in the
judgment of management, that are necessary to adequately absorb losses from
known and inherent risks in ECN receivables from customers. The Company
believes that it has established adequate doubtful account reserves for
non-collection of ECN fees receivable as of June 30, 1998, however there can be
no assurance that such reserve will be sufficient. Brokerage commissions and
fees increased approximately $1.2 million or 8% to $16.6 million for the year
ended June 30, 1998, from $15.4 million for the same period in fiscal 1997. The
increase in brokerage commissions and fees resulted primarily from an increase
in the number of customer transactions processed by the Company. Customer
transactions for the year ended June 30, 1998 were approximately 720,000
compared to 653,000 for the comparable period in fiscal 1997, an increase of
10%. Average commissions per transaction declined from $23.79 for the year
ended June 30, 1997, to $23.52 for the same period in fiscal 1998. Trading
revenue declined approximately $525,000 or 398% from a net gain of $132,000 for
the year ended June 30, 1997 to a net loss of $393,000 for the year ended June
30, 1998. This decline is primarily attributable to difficult market
conditions, coupled with market decline.
Other income decreased by approximately $123,000 or 23% to $416,000 from
$539,000. This decrease is primarily attributable to a decrease in branch
office and remote set-up fees of $152,000 or 31% to $337,000 from $489,000 and
a decrease in book sales of $34,000 or 100%, offset by an increase in interest
income of $18,000 or 113% from $16,000 to $34,000 and a net increase of other
miscellaneous income of $45,000.
Clearing Charges. Clearing charges decreased approximately $.7 million or
19% to $3.0 million for the year ended June 30, 1998 from $3.7 million for the
comparable period in fiscal 1997. Although customer transactions during the
year ended June 30, 1998 increased, the decrease in clearing charges is
primarily attributable to a negotiated reduction in those charges imposed by
the clearing broker.
Technology Development. Technology development costs increased
approximately $76,000 or 21% to $442,000 for the year ended June 30, 1998, from
$366,000 for the comparable period in fiscal 1997. This increase is primarily
attributable to the hiring of additional personnel to enhance, improve and
maintain the Company's extensive data processing activities and the ATTAIN
trading system and ECN software.
Communication Costs. Communication costs increased approximately $1.6
million or 67% to $4.0 million for the year ended June 30, 1998 from $2.4
million for the comparable period in fiscal 1997. This increase is primarily
attributable to increased customer transactions processed by the Company and
the openings of additional branch offices.
Employee Compensation and Benefits. Employee compensation and benefits
increased approximately $.2 million or 3% to $6.3 million for the year ended
June 30, 1998 from $6.1 million for the comparable period in fiscal 1997. This
increase is primarily attributable to (i) an increase in employee compensation
and benefits exclusive of officers' salaries of $1.0 million or 33% and (ii) a
decrease in executive officers' salaries of $.8 million or 27% (of which $1.5
million is attributable to a decrease executive officers' bonuses and $.7
million is attributable to an increase in regular executive salaries). The
increases in employee compensation and benefits exclusive of executive
officers' salaries were primarily the result of the openings of additional
branch offices.
Occupancy Costs. Occupancy costs increased approximately $.7 million or
175% to $1.1 million for the year ended June 30, 1998 from $.4 million for the
comparable period in fiscal 1997. This increase is primarily attributable to
the openings of additional branch offices.
26
Other Costs and Expenses. Other costs and expenses increased approximately
$1.1 million or 69% to $2.7 million for the year ended June 30, 1998 from $1.6
million for the comparable period in fiscal 1997. This increase in other costs
and expenses consisted primarily of increases in data processing costs,
professional fees and other general office and operating expenses which
resulted from the openings of additional branch offices.
Provision for Income Taxes. Provision for income taxes represents the
expense recognized by the Company for federal and state income taxes at an
effective rate of 30% for the year ended June 30, 1998, and 42% for the
comparable period in fiscal 1997. Provision for income taxes decreased
approximately $454,000 or 68% to $211,000 for the year ended June 30, 1998 from
$665,000 for the year ended June 30, 1997. This decrease in fiscal 1998 is
primarily attributable to an $88,000 benefit resulting from a federal income
tax refund recognized, a $71,000 deferred tax benefit and a decrease of
$295,000 in current income tax expense.
Net Income. Net income decreased approximately $.4 million or 44% to $.5
million for the year ended June 30, 1998 from $.9 million for the year ended
June 30, 1997.
Year Ended June 30, 1997 Compared to Year Ended June 30, 1996
Revenues. Total revenues increased approximately $5.0 million or 45% to
$16.1 million for the year ended June 30, 1997 from $11.1 million for the year
ended June 30, 1996. Brokerage commissions and fees increased 44% to $15.4
million for the year ended June 30, 1997 from $10.7 million for fiscal 1996.
The increase in brokerage commissions and fees resulted primarily from an
increase in the number of customer transactions processed by the Company. The
Company processed approximately 653,000 customer transactions for the year
ended June 30, 1997, compared to 444,000 for fiscal 1996, or an increase of
47%. Average commissions per transaction declined from $24.32 for the year
ended June 30, 1996, to $23.79 for fiscal 1997.
Other income increased by approximately $232,000 or 76% to $539,000 from
$307,000. This increase is primarily attributable to an increase in branch
office and remote set-up fees of $264,000 or 122% to $480,000 from $216,000, an
increase in interest income of $9,000 or 150% from $6,000 to $15,000, and an
increase in other miscellaneous income of $8,000, offset by a decrease in book
sales of $49,000 or 59% from $83,000 to $34,000.
Clearing Charges. Clearing charges increased approximately $1.2 million or
48% to $3.7 million for the year ended June 30, 1997 from $2.5 million for
fiscal 1996. The increase in clearing charges is primarily attributable to an
increase in the number of customer transactions processed by the Company.
Technology Development. Technology development costs increased
approximately $157,000 or 75% to $366,000 in fiscal 1997 from $209,000 in
fiscal 1996. This increase is primarily attributable to the hiring of
additional personnel to enhance, improve and maintain the Company's data
processing activities and ATTAIN trading system and ECN software.
Communication Costs. Communication costs increased approximately $1.4
million or 140% to $2.4 million for the year ended June 30, 1997 from $1.0
million for fiscal 1996. This increase is primarily attributable to increased
customer transactions processed by the Company and the openings of additional
branch offices.
Employee Compensation and Benefits. Employee compensation and benefits
increased approximately $1.9 million or 45% to $6.1 million for the year ended
June 30, 1997 from $4.2 million for fiscal 1996. This increase is primarily
attributable to (i) an increase in employee compensation and benefits exclusive
of officers' salaries of $.5 million or 19% and (ii) an increase in executive
officers' salaries of $1.4 million or 93% (of which the entire $1.4 million is
attributable to executive officers' bonuses). The increases in employee
compensation and benefits were primarily the result of the openings of
additional branch offices.
Occupancy Costs. Occupancy costs increased approximately $.3 million or
300% to $.4 million for the year ended June 30, 1997 from $.1 million for
fiscal 1996. This increase is primarily attributable to the openings of
additional branch offices.
Other Costs and Expenses. Other costs and expenses decreased approximately
$.2 million or 11% to $1.6 million for the year ended June 30, 1997 from $1.8
million for fiscal 1996. This decrease in other costs and expenses consisted
primarily of decreases in data processing costs, professional fees and other
general office and operating expenses.
27
Provision for Income Taxes. Provision for income taxes represents the
expense recognized by the Company for federal and state income taxes at an
effective rate of 42% for fiscal 1997 and 45% for fiscal 1996. Provision for
income taxes increased approximately $55,000 or 9.0% to $665,000 for the year
ended June 30, 1997 from $610,000 for the year ended June 30, 1996.
Net Income. Net income increased approximately $186,000 or 25% to $937,000
for fiscal 1997 from $751,000 for fiscal 1996.
28
Quarterly Results
The following table sets forth certain unaudited quarterly financial data
for the eight quarters ended June 30, 1998. In the opinion of the Company's
management, this unaudited information has been prepared on the same basis as
the audited financial statements contained herein and includes all adjustments
(consisting of normal recurring adjustments) necessary to present fairly the
information set forth therein when read in conjunction with the Financial
Statements and Notes thereto. The operating results for any quarter are not
necessarily indicative of results for any future period.
Three Months Ended
September 30, December 31, March 31,
1996 1996 1997
--------------- -------------- -----------
(In thousands)
Revenues:
Brokerage commissions
and fees .................. $ 3,152 $ 3,946 $ 4,168
Trading gains (losses) ..... 77 204 (142)
ECN fees ................... -- -- --
Other ...................... 79 225 177
-------- -------- -------
Total revenues ............ 3,308 4,375 4,203
-------- -------- -------
Costs and expenses:
Clearing charges ........... 809 950 943
Technology
development ............... 77 78 76
Communication costs ........ 287 572 559
Employee compensation
and benefits .............. 707 1,203 1,669
Occupancy costs ............ 55 105 116
Other ...................... 290 425 627
-------- -------- -------
Total costs and expenses... 2,225 3,333 3,991
-------- -------- -------
Income (loss) before
provision for income
taxes ...................... 1,083 1,042 212
Provision (benefit) for
income taxes ............... 305 305 --
-------- -------- -------
Net income (loss) ........... $ 778 $ 737 $ 212
======== ======== =======
As a Percentage of Total Revenues
----------------------------------------------
Revenues:
Brokerage commissions
and fees .................. 95.3% 90.2% 99.2%
Trading gains (losses) ..... 2.3 4.7 ( 3.4)
ECN fees ................... -- -- --
Other ...................... 2.4 5.1 4.2
----------- -------- -------
Total revenues ............ 100.0 100.0 100.0
----------- -------- -------
Costs and expenses:
Clearing charges ........... 24.4 21.7 22.4
Technology development ..... 2.4 1.8 1.8
Communication costs ........ 8.6 13.1 13.4
Employee compensation
and benefits .............. 21.4 27.5 39.7
Occupancy costs ............ 1.7 2.4 2.8
Other ...................... 8.8 9.7 14.9
----------- -------- -------
Total costs and expenses... 67.3 76.2 95.0
----------- -------- -------
Income (loss) before
provision for income
taxes ...................... 32.7 23.8 5.0
Provision (benefit) for
income taxes ............... 9.2 7.0 --
----------- -------- -------
Net income (loss) ........... 23.5% 16.8% 5.0%
=========== ======== =======
Three Months Ended
June 30, September 30, December 31, March 31, June 30,
1997 1997 1997 1998 1998
------------ --------------- -------------- ----------- ---------
(In thousands)
Revenues:
Brokerage commissions
and fees .................. $ 4,126 $ 4,041 $ 4,518 $ 3,864 $ 4,196
Trading gains (losses) ..... (6) 68 (34) (181) (245)
ECN fees ................... -- -- -- 434 1,219
Other ...................... 57 176 260 3 (23)
---------- -------- ------- -------- -------
Total revenues ............ 4,177 4,285 4,744 4,120 5,147
---------- -------- ------- -------- -------
Costs and expenses:
Clearing charges ........... 986 806 771 697 757
Technology
development ............... 134 121 129 94 98
Communication costs ........ 958 774 749 1,440 1,080
Employee compensation
and benefits .............. 2,478 1,464 1,768 1,473 1,619
Occupancy costs ............ 110 242 289 269 277
Other ...................... 246 543 585 707 841
---------- -------- ------- -------- -------
Total costs and expenses... 4,912 3,950 4,291 4,680 4,672
---------- -------- ------- -------- -------
Income (loss) before
provision for income
taxes ...................... (735) 335 453 (560) 475
Provision (benefit) for
income taxes ............... 55 80 92 (145) 184
---------- -------- ------- -------- -------
Net income (loss) ........... $ (790) $ 255 $ 361 $ (415) $ 291
========== ======== ======= ======== =======
As a Percentage of Total Revenues
--------------------------------------------------------------------
Revenues:
Brokerage commissions
and fees .................. 98.8% 94.3% 95.2% 93.8% 81.2%
Trading gains (losses) ..... ( 0.2) 1.6 ( 0.7) ( 4.4) ( 4.8)
ECN fees ................... -- -- -- 10.5 23.7
Other ...................... 1.4 4.1 5.5 .1 ( .1)
---------- -------- ------- -------- -------
Total revenues ............ 100.0 100.0 100.0 100.0 100.0
---------- -------- ------- -------- -------
Costs and expenses:
Clearing charges ........... 23.7 18.9 16.3 16.9 14.7
Technology development ..... 3.2 2.8 2.7 2.3 1.9
Communication costs ........ 22.9 18.0 15.8 35.0 21.0
Employee compensation
and benefits .............. 59.3 34.2 37.3 35.8 31.5
Occupancy costs ............ 2.6 5.6 6.0 6.5 5.4
Other ...................... 5.9 12.7 12.3 17.1 16.3
---------- -------- ------- -------- -------
Total costs and expenses... 117.6 92.2 90.4 113.6 90.8
---------- -------- ------- -------- -------
Income (loss) before
provision for income
taxes ...................... (17.6) 7.8 9.6 (13.6) 9.2
Provision (benefit) for
income taxes ............... 1.3 1.9 2.0 ( 3.5) 3.6
---------- -------- ------- -------- -------
Net income (loss) ........... (18.9)% 5.9% 7.6% (10.1)% 5.7%
========== ======== ======= ======== =======
29
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors, including, but
not limited to, the timing of introductions of enhancements to financial
services and products offered by the Company or its competitors; market
acceptance of financial services and products; changes in transaction volume on
the securities markets; trends in the securities markets; domestic and
international regulation of the brokerage industry; changes in pricing policies
by the Company or its competitors; changes in strategy; the success of or costs
associated with acquisitions or other strategic relationships; changes in key
personnel; seasonal trends; the extent of expansion; the mix of sales; changes
in the level of operating expenses to support projected growth; and general
economic conditions. Due to the foregoing factors, quarterly revenues and
operating results are difficult to forecast, and the Company believes that
period-to-period comparisons of its operating results will not necessarily be
meaningful and should not be relied upon as an indication of future
performance. It is likely that the Company's future quarterly operating results
from time to time will not meet the expectations of securities analysts or
investors, which may have an adverse effect on the market price of the
Company's Common Stock and the Warrants.
The securities industry is subject to extensive regulation under federal,
state and applicable international laws. As a result, the Company is required
to comply with many complex laws and rules and its ability to do so is
dependent in large part upon the establishment and maintenance of a qualified
compliance system. See "Risk Factors--Securities Regulation in General."
Liquidity and Capital Resources
The Company has financed its activities in the periods discussed above
from cash provided by operations. The Company currently anticipates that its
available cash resources from operations and the net proceeds of this Offering
will be sufficient to meet its presently anticipated working capital and
capital expenditure requirements for at least the next 12 months. The Company
has no lines of credit. During April 1998, the Company borrowed, on an
interest-free basis, an aggregate of $611,000 from its parent, Rushmore, in
order to provide additional funds for the Company's proprietary trading
activities. This amount was reduced by $38,441 which represented an advance by
the Company for a portion of Rushmore's federal tax obligation leaving a
balance due to Rushmore of $572,559 at June 30, 1998. In July 1998, Rushmore
converted this amount of indebtedness into additional paid-in capital of the
Company.
For the period from February 1998 (commencement of the ECN) through June
30, 1998, the Company recognized gross ECN fee revenues of approximately
$1,785,000, of which approximately $434,000, $520,000, $491,000 and $340,000
were recognized as of March 31, 1998, April 30, 1998, May 31, 1998 and June 30,
1998, respectively. In addition, the Company recognized allowances of
approximately $132,000 in June 1998, resulting in net ECN fee revenues of
approximately $1,653,000 as of June 30, 1998. The allowance recognized of
$132,000 is related to adjustments in price given to several of the ECN
customers. The Company does not expect to continue making such adjustments. The
Company maintains an allowance for doubtful accounts which represents amounts,
in the judgment of management, that are necessary to adequately absorb losses
from known and inherent risks in ECN receivables from customers. As of June 30,
1998, approximately $662,000 of such net ECN fees have been paid to the Company
and approximately $991,000 of such net ECN fees were unpaid outstanding
accounts receivable of the Company. In addition, as of June 30, 1998, the
Company had established a doubtful account reserve for ECN receivables in the
amount of approximately $410,000. The Company is continuously monitoring the
fees it charges and such fees were recently reduced from $.015 to a maximum of
$.005 per share as a result of competitive pressures and to adhere to maximum
fees permitted pursuant to the SEC no-action letter under which the Company
operates the ATTAIN ECN. The reduction in rates has negatively impacted and may
continue to negatively impact ATTAIN ECN revenues. See "Business--The ATTAIN
ECN." To the extent that the Company continues to have difficulty in realizing
its ECN receivables, the Company's liquidity and results of operations could be
adversely impacted.
Cash provided by operating activities was $388,000 for the year ended June
30, 1998, compared to $1,312,000 for the year ended June 30, 1997. This
decrease in cash provided by operating activities of $924,000 was primarily
attributable to a decrease in net income of $444,000, a net increase in
operating assets over liabilities of $963,000, an increase in deferred tax
assets of $71,000, and a reduction in loss on abandonment of $44,000, offset by
an increase in depreciation of $188,000 and an increase in allowance for
doubtful ECN
30
accounts of $410,000. Significant fluctuations during fiscal 1998 resulted from
the Company liquidating certain positions of securities owned, resulting in (i)
a decrease of approximately $1,697,000 in securities owned at market value,
(ii) a decrease in payable to clearing broker of approximately $1,027,000, from
$1,027,000 at June 30, 1997 to $0 at June 30, 1998, and (iii) an increase in
due from clearing broker of approximately $976,000 from $65,000 at June 30,
1997 to $1,041,000 at June 30, 1998. During February 1998 the Company commenced
operation of its ATTAIN ECN, resulting in an increase in receivable from
brokers -- ECN fees of approximately $991,000. In addition, the Company has
established an allowance for doubtful accounts of approximately $410,000 at
June 30, 1998.
Income taxes payable were approximately $340,000 at June 30, 1998 compared
to approximately $46,000 at June 30, 1997 or an increase of approximately
$294,000. This increase is primarily attributable to the Company's payment of
the fiscal 1998 tax liability subsequent to year end.
Cash provided by operating activities was $1,312,000 for the year ended
June 30, 1997, compared to $195,000 for the year ended June 30, 1996. This
increase in cash provided by operating activities of $1,117,000 was primarily
attributable to an increase in net income of $187,000, a net decrease in
operating assets over liabilities of $851,000, an increase in depreciation of
$35,000 and a non-cash charge for abandoned equipment of $44,000.
Cash used in investing activities for the years ended June 30, 1998, 1997
and 1996 was $431,000, $381,000 and $43,000, respectively. Cash used in
investing activities is attributable to purchases of property and equipment.
Cash provided by financing activities was $387,000 for the year ended June
30, 1998, compared to cash used of $467,000 for the year ended June 30, 1997.
This increase in cash provided of $854,000 is primarily attributable to a net
repayment of loans with the Company's parent, affiliate and related parties of
$102,000 and an increase in deferred offering costs of $223,000 during fiscal
1998, offset by a reduction in dividends paid of $1,179,000 in 1998.
Cash used in financing activities was $466,000 in fiscal 1997, an increase
from $12,000 in fiscal 1996. This increase is primarily attributable to
dividends paid of $1,350,000 and a net repayment of a loan to the parent in the
amount of $900,000.
The Company will receive net proceeds of this Offering in an amount
estimated to be $28,494,850 ($30,903,587 assuming exercise of the
Over-Allotment Option in full). The Company believes that the net proceeds of
the Offering, coupled with income from operations, will fulfill the Company's
working capital needs for at least the next 12 months. As the Company continues
to grow, bank borrowings, or other debt placements and equity offerings may be
considered, in part, or in combination, as the situation warrants.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value.
The Company has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. Accordingly, compensation cost for stock options is measured
as the excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock.
Since the Company intends to set the exercise price of the Company's employee
stock options to be granted prior to this Offering equal to the market price of
the underlying stock on the date of grant, no compensation expense will be
recognized.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). The
new rules are effective for both interim and annual financial statements for
the periods ending after December 15, 1997. SFAS 128 supersedes APB No. 15 to
conform earnings per share with international standards as well as to simplify
the complexity of the computation under APB No. 15. The previous primary
earnings per share ("EPS") calculation is replaced with a basic EPS
calculation. The basic EPS differs from the primary EPS calculation in that the
basic EPS does not include any potentially dilutive securities. Fully dilutive
EPS is replaced with diluted EPS and should be disclosed regardless of dilutive
impact to basic EPS. Accordingly, the Company has adopted SFAS 128 effective
December 31, 1997.
31
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
statement, which is effective for fiscal years beginning after December 15,
1997, expands or modifies disclosures and should have no impact on the
Company's financial position, results of operations or cash flows.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). This statement, which is
effective for fiscal years beginning after December 15, 1997, establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. This Statements supersedes SFAS 14, "Financial Reporting for
Segments of a Business Enterprise", but retains the requirements to report
information about major customers. It amends SFAS 94, "Consolidation of All
Majority-Owned Subsidiaries", to remove the special disclosure requirements for
previously unconsolidated subsidiaries. Management is currently evaluating what
impact, if any, SFAS 131 would have on the Company's financial position,
results of operations or cash flows.
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits" (SFAS 132). This statement, which is
effective for fiscal years beginning after December 15, 1997, although earlier
application is encouraged, revises employers' disclosures about pension and
other postretirement benefit plans, It does not change the measurement or
recognition of those plans, It standardizes the disclosure requirements for
pension and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer as useful as they were when SFAS 87, "Employers'
Accounting for Pensions, No. 88, Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and
No. 106, Employers' Accounting for Postretirement Benefits Other than
Pensions," were issued. The Statement suggests combined formats for
presentation of pension and other postretirement benefit disclosures.
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). This statement, which is effective for
years beginning after June 15, 1999, establishes accounting and reporting
standards for derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as (a)
a hedge of the exposure of changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transactions. SFAS 133 should have no
impact on the Company's financial position, results of operations or cash
flows.
Year 2000
The Company's review of its own operating systems does not indicate any
Year 2000 problems. However, the Company is highly dependent on third party
vendors. Failures and interruptions, if any, resulting from the inability of
certain computing systems of third party vendors, including the Company's
clearing broker to recognize the Year 2000 could have material adverse effect
on the Company's results of operations. The Company's clearing broker has
informed the Company that it is not currently Year 2000 compliant. There can be
no assurance that the Year 2000 issue can be resolved by any of such third
parties prior to the upcoming change in the century. Although the Company may
incur substantial costs, particularly costs resulting from increased charges by
its third party service providers, as a result of such third party service
providers correcting Year 2000 issues, such costs are not sufficiently certain
to estimate at this time.
Trends
The Company anticipates that its average commission per customer
transaction will continue to decline in order to remain competitive.
32
BUSINESS
The following discussion of the Company's business contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but not
limited to, those set forth under "Risk Factors" and elsewhere in this
Prospectus.
Overview
All-Tech, a registered broker-dealer, through its proprietary ATTAIN
trading system software, provides its customers with real-time computerized
access to comprehensive price information for OTC securities traded on Nasdaq
and securities traded on various national and regional exchanges, and enables
its customers to instantaneously transmit buy and sell orders for execution.
All-Tech also provides its customers with discounted commissions, electronic
reports regarding the customer's orders and account status, customizable
display screens, analytical modeling tools and news media reports. The Company
has also developed and commenced operation of its ATTAIN ECN, an electronic
communications network ("ECN"). ECNs provide investors an alternative trading
system to traditional Nasdaq trading. Through the ATTAIN trading system,
subscribers can directly place buy and sell orders for Nasdaq traded stocks.
Matching orders are paired off and the trade is executed by the ATTAIN ECN.
Additionally, the best bid and offer in each security which is placed on the
ATTAIN ECN will be displayed automatically and dynamically on a real-time basis
on Nasdaq along with market maker quotations. The ATTAIN trading system permits
the customer to eliminate the need to have the customer's order placed through
a market maker, therefore eliminating the market maker and the costs associated
with such market maker. Substantially all of the Company's revenues are derived
from brokerage commissions and ECN fees, and, accordingly, the Company's
revenues are directly related to and dependent upon the volume of stocks traded
and the number of transactions executed by its customers.
The Company's services are primarily utilized by self-directed traders who
engage in "day trading." Day traders engage in the buying and selling of
securities many times during the course of a day based on short-term price
volatility. They typically close out all open positions by the end of the day
in order to manage risk when the markets are closed. Frequently, a position may
be closed within minutes of the initial purchase or sale. All-Tech has over
1,500 active customers, consisting of day traders and active retail customers.
The Company's average aggregate customer transaction volume has ranged between
2,500 and 3,000 trades per trading day for the last 12 months. All-Tech's
customers can access All-Tech's ATTAIN trading system at All-Tech's main
office, at one of its 22 branch offices or in their homes or offices through a
computer connected to the ATTAIN trading system via dedicated telephone lines
or the Internet. Access to the Company's ATTAIN trading system from remote
locations requires the use of the Company's proprietary software, which the
Company provides to its customers free of charge.
All-Tech's objectives are to become the leading provider of electronic
brokerage services to self-directed traders and investors and to expand the
range of services and business activities engaged in by the Company. The
Company's strategy to accomplish its objectives includes (i) enhancing
awareness of the Company's ATTAIN trading system and ATTAIN ECN through
marketing and advertising, (ii) expanding its customer base through an
aggressive marketing campaign, opening additional branch offices and expanding
services to attract less active traders, (iii) analyzing and exploring
opportunities to commence new business activities, including electronic trading
of financial instruments other than stocks and options, underwriting securities
offerings, and other traditional investment banking and merchant banking
activities, and (iv) pursuing opportunities to offer the Company's services
internationally through use of the Internet and telecommunications systems.
Regulatory Background and Development of Active Electronic Trading
The National Association of Securities Dealers Automated Quotations System
was developed by Harris Corporation and commenced operating in the early 1970s.
For the first time there was a uniform public display of over-the-counter
securities prices. This ability to discover prices is called transparency.
Several years later the NASD purchased this system from Harris. Today, Nasdaq
provides a dynamic display of quotes from both market makers (broker/dealers
which agree to continuously buy and sell securities at their posted prices) and
ECNs (electronic trading systems which display bids to buy and offers to sell
Nasdaq securities received from subscribers of the ECN and which match bids and
offers for the same security at the same price).
33
In 1984, Nasdaq developed the Small Order Execution System ("SOES"). SOES
is a computerized, order execution system which automatically executes small
retail orders to buy or sell securities against market makers quoting the best
price available. Each market maker is required to execute orders received, up
to the size of its quotation, while that quotation is outstanding (the "Firm
Quote Rule", a violation of which is called "backing away"). During the market
break of October 1987, many Nasdaq market makers informally withdrew from their
markets by refusing to answer the telephone. In the illiquid Nasdaq market
which resulted, prices then declined precipitously as customers were left with
no way to obtain execution of their orders.
Following a number of governmental studies of the problem, the NASD
required market maker participation in SOES. Market makers could no longer back
away because they would receive up to five automatic executions of up to 1,000
shares each. At about the same time All-Tech began to utilize SOES to execute
customer orders. The sudden receipt by market makers of these executed orders
upset them because they could no longer engage in backing away. The market
makers pressured the NASD to eliminate SOES trading, and for several years the
Company and other firms utilizing SOES in this manner were subjected to the
highest level of scrutiny by the NASD. As a result, the NASD found that the
Company had violated certain SOES rules and imposed fines and the NASD
suspended the Company from utilizing SOES for seven months in 1988.
Additionally, as a result of market maker pressure, the NASD adopted rules
designed to severely curtail active trading on SOES. These rules negatively
impacted the Company's earnings in the fiscal years ended June 30, 1992 through
1994 by causing the Company to incur significant legal expenditures in
connection with its legal battles with the NASD and in the fiscal year ended
June 30, 1995, by substantially reducing the number of shares which could be
traded via SOES.
The Company and its principals opposed entrenched industry interests and
undertook to enhance the Company's business outlook by bringing pressure to
bear to level the playing field for public investors, which the Company
believed would encourage them to risk becoming active traders. In 1996, the
United States Department of Justice ("DOJ") and the SEC entered into agreements
with 24 major market makers and with the NASD, respectively. The DOJ and SEC
concluded that these market makers had colluded to fix prices and maintain
artificially wide spreads in the over-the-counter market and found that the
NASD had, at the urging of market makers, subjected firms such as the Company
to disparate treatment, to their detriment.
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 the
Company and its customers, 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 (ECNs). The Order
Handling Rules require market makers to display certain limit orders in their
quotations or to send those orders to an ECN for display. The increased
regulatory emphasis on enforcing compliance with the duty of brokers to obtain
the best execution for their customers has fostered the growing importance of
ECNs, which provide an ever-increasing source of liquidity (having a ready
market to buy or sell stock) in the over-the-counter market. See "--Government
Regulation."
The growth in importance of the ECNs reduces the reliance of the market on
quotes from market makers, who continue to lobby the NASD, the SEC and the
Congress for ways to reduce their Firm Quote Rule obligations.
Applicable Nasdaq Rules
Active trading is dependent upon liquidity -- the ability to buy or sell
stock at any given time. Until recently, this liquidity was primarily provided
by Nasdaq and an alternative trading system called Instinet. Both systems
display quoted bid and ask prices for stock and have automatic execution
capacity. However, the liquidity on Instinet is available only to institutional
customers and certain brokerage firms. In addition, until recently, liquidity
on Nasdaq was defined by certain SOES rules, and was either 1,000, 500 or 200
shares, depending on the trading characteristics of each particular stock.
Thus, active electronic traders generally traded the most highly capitalized
stocks with high trading volume, the Nasdaq 100, trading at least 1,000 shares
at a time (the maximum permitted by applicable SOES rules). When active
electronic trading was first popularized, each market maker was obligated for
five trades of 1,000 shares each at its posted bid or ask quote (the number
regulatory officials thought necessary after the 1987 market break). As a
result of pressure by market makers, that number of trades has been brought
down to 100 shares at their posted quote before being given 17 seconds to
change that quote. Since the adoption of the Order Handling Rules, ECNs have
provided an increasing share of liquidity to the public, lessening, to a
certain extent, dependence on market maker quotations.
34
Services
The Company's services are offered to its customers through its
proprietary trading system, ATTAIN, which was designed to serve the person
actively trading his or her own account. Customers can trade securities at All-
Tech's main office, at one of its 21 nationwide branch offices, or from their
home or office "remotely."
The ATTAIN Trading System
Trading. The Company's proprietary ATTAIN trading system is a fully
automated system by which a customer can transmit an order for exchange listed
or OTC stocks and for equity and index options to the Company for execution.
Through the ATTAIN trading system, the customer can place a long or short,
market or limit order (good til canceled, day or limited time period). The
Company then, through the ATTAIN trading system, instantaneously reviews the
order for compliance with regulatory, margin and risk management guidelines,
transmits the order to the customer selected marketplace for execution and
immediately and dynamically notifies the customer of the status of that order,
as well as of the customer's account generally.
With just three mouse clicks a customer can place an order to buy or sell
a security. In a fraction of a second the order is sent to the marketplace
chosen by the customer--a Nasdaq electronic trading system, an ECN such as
ATTAIN or a stock exchange. Because All-Tech's customers generally choose a
marketplace with automatic execution capacity, the execution frequently takes
place within several seconds. The customer electronically receives immediate
confirmation of the trade execution.
Executions through the ATTAIN trading system always take place at the
price and on the market the customer, not the Company, deems best. The Company
does not participate in payment for order flow arrangements. Broker/dealers
that participate in payment for order flow arrangements receive a per share fee
for all orders sent to a particular market maker. The Company believes that the
sale of its customers' orders for a fee would represent a conflict of interest
and influence the choice of where these orders are sent, perhaps not in the
customer's best interest. All-Tech's customers therefore frequently receive
price improvement (executions at better than the National Best Bid/Offer
("NBBO" or "inside price")).
The ATTAIN trading system was developed for the active, self-directed
trader. However, the Company intends to adapt the ATTAIN trading system for use
by less active investors who wish to avail themselves of a point and click
system for their occasional trades. All-Tech can provide an easy to use
graphical interface used via the Internet. Although active traders generally
purchase dedicated telecommunications service for the communication of their
orders, the service is available through the Internet as well.
All-Tech continually makes improvements to its ATTAIN trading system,
adding features and additional instruments to trade, such as exchange traded
index options, and additional information to assist them with their trading
decisions. All-Tech's goal is to enable investors everywhere to trade any
instrument traded on any marketplace in the world and to make the financial
markets readily accessible anywhere, anytime they are open.
Market Information. The Company currently purchases quotation information
and news through PC Quote and other vendors. All on-site customers receive,
free of charge, real-time, dynamically updated information regarding the inside
prices for all securities. Some of the Company's well-known on-line competitors
require the customer to wait until an order is placed to receive such
information. All-Tech believes the customer cannot intelligently place an order
without this information. Customers who trade at All-Tech's main office or one
of its branch offices receive at no charge, on ATTAIN's easy to use point and
click system, detailed real-time, dynamically updated information regarding all
quotations of all market makers in OTC securities, as well as trade data, a
ticker of trades effected by All-Tech for its customers, all bid and offer
quotations in the ATTAIN ECN, news, and real-time analytic charts and graphs.
Remote customers must pay $250 monthly for such service plus an additional
charge for news, but high volume traders have their monthly fees waived.
Account Information. Through the ATTAIN trading system, each All-Tech
customer can receive, on a continuous basis, account information setting forth
all open positions and, on an intra-day basis, realized and unrealized profit
and loss. In addition to screen displays of account activity and profit and
loss, active customers receive a daily printout of trade confirmations and
buying power, and receive detailed monthly statements.
Account Security. All-Tech utilizes a combination of proprietary and
industry standard security measures to protect customers assets. Customers are
assigned unique account numbers and user identifications and select
35
their own passwords that must be used each time they log on to the ATTAIN
trading system. The Company relies on encryption and authentication technology,
including technology licensed from Check Point Software Technologies Ltd., to
provide the security and authentication necessary to effect the secure exchange
of information. In addition, the Company uses secure socket layer technology
for data encryption (the system will permit communications only from recognized
account sources) to protect the ATTAIN trading system. A second level of
password protection must be used prior to order placement. Telephone
transactions are secured through a personal identification number.
The ATTAIN ECN
All-Tech's proprietary ATTAIN ECN is a system by which subscribers
(broker/dealers) can post bids and offers expressing their customer's trading
interest in a particular over-the-counter security. The best bid and offer for
each security is posted on Nasdaq. Customers frequently utilize the ATTAIN ECN
to post a new "inside" buy or sell order (at a price better than the current
NBBO) on Nasdaq and thereby attract any party interested in buying or selling
at that price. All-Tech attracts customers by offering its ATTAIN ECN service
free of charge to All-Tech accounts.
The Company operates the ATTAIN ECN pursuant to a no-action letter
originally issued by the SEC staff in February 1998, which letter, by its
terms, limited the no-action relief to the period ending April 15, 1998. In
April 1998, the SEC extended the no-action relief granted in the original
no-action letter to the period ending August 17, 1998, and in August 1998, the
SEC further extended the no-action relief to the period ending October 16,
1998. Pursuant to the no-action letter issued by the SEC to the Company, the
Company is permitted to charge NASD members who execute against the ATTAIN ECN
order displayed in Nasdaq no more than the fee the Company charges a
substantial portion of its broker-dealer subscribers, and in any event, no more
than $.015 per share. Accordingly, subscribers of the ATTAIN ECN are charged
from $1.00 per transaction up to $.005 per share for using the ATTAIN ECN and
non-subscribers who access the ATTAIN ECN through Nasdaq are charged up to
$.005 per share for each executed order. In light of the requirements of the
SEC no-action letter and competitive pressures, the Company is continuously
monitoring the fees it charges. All-Tech has recognized approximately
$1,653,000 in revenues through June 30, 1998, from the operation of the ATTAIN
ECN since it commenced operating in February 1998. Of such revenues,
approximately 1.5% has been generated by non-affiliated ECN subscribers, while
98.5% has been generated by non-affiliated non-subscribers who access the ECN
through Nasdaq.
The Company has recently reduced its fee to non-subscribers from $.015 to
a maximum of $.005 per share as a result of competitive pressures and the SEC's
no-action position. The reduction in rates has negatively impacted ATTAIN ECN
revenues. The Company currently has twenty-one (21) active ECN subscribers, one
of which is owned and operated by Harry Lefkowitz, a director of the Company.
In addition, the Company has accepted applications and received binding
subscription agreements from an additional seven (7) broker-dealers to become
ECN subscribers, and the Company is currently in the process of arranging for
the necessary communication links which will allow such subscribers to access
the ATTAIN ECN.
Controversy as well as competitive pressures exist regarding the fees
charged by various ECNs to non-subscribers. The Company has experienced some
resistance and delay in collecting these fees. See "Business--
Legal Proceedings." For the period from February 1998 (commencement of the ECN)
through June 30, 1998, the Company recognized gross ECN fee revenues of
approximately $1,785,000, of which approximately $434,000, $520,000, $491,000
and $340,000 were recognized as of March 31, 1998, April 30, 1998, May 31, 1998
and June 30, 1998, respectively. In addition the Company recognized allowances
of approximately $132,000 in June 1998, resulting in net ECN fee revenues of
approximately $1,653,000 as of June 30, 1998. As of June 30, 1998,
approximately $662,000 of such net ECN fees have been paid to the Company and
approximately $991,000 of such net ECN fees were unpaid outstanding accounts
receivable of the Company. In addition, as of June 30, 1998, the Company had
established a doubtful account reserve for ECN receivables in the amount of
approximately $410,000. The resistance to paying the ECN fees has been
primarily generated by non-subscriber, broker-dealers, especially marker
makers, who feel that they should not be required to pay for access to ECN's.
All-Tech is pursuing vigorously its legal remedies to enforce such collection.
Additionally, Nasdaq itself has proposed that it be permitted to operate a
limit order book (essentially an ECN). Should this proposal be adopted and
Nasdaq offer a low-cost alternative to privately operated ECNs on which
substantial numbers of limit orders were reflected, this could have a negative
competitive impact on the ATTAIN ECN. There can be no assurance whether such
proposal will be approved and, if approved, when Nasdaq's ECN might
36
become operational. This proposal is vigorously opposed by a number of industry
participants, including All-Tech, as potentially anti-competitive. There can be
no assurance as to when, if at all, such proposal will be approved by the SEC.
See "--Government Regulation."
Branch Offices
The Company conducts retail business at its 22 branch offices located
throughout the United States, one of which is located in property owned by Mark
D. Shefts, President, Chief Operating Officer, Chief Financial Officer and
Treasurer of the Company, and is not as active as the other 21 branch offices.
Each branch office is managed by one or more branch managers, who are employees
of the Company. In general, branch managers pay a one-time, non-refundable,
negotiated fee for the opportunity to manage a branch. All operational policies
and procedures of the branch offices are controlled by the Company.
The branch offices and branch office managers operate pursuant to a
standard branch office management agreement, which agreement is for a three (3)
year term, and is automatically renewed for two additional three year terms
unless terminated earlier. All orders received by or generated from any of the
Company's branch offices are transmitted to the Company's main office for
execution. The branch office manager bears complete financial responsibility
for opening and operating the branch office, including entering into a lease
agreement, as the lessee, for the space in which the branch office is located.
The Company, in turn, subleases the branch office from the manager pursuant to
an oral agreement. In addition, the branch office may be required to maintain
an error account fund which fund is established by the Company withholding a
fee on each transaction effected by the branch office until the fund reaches
the required amount. Upon termination of the branch office agreement, the fund
may be used to offset any amounts owed by the branch office under the
agreement. The Company also may charge the branch office a ticket charge for
each ticket for national advertising, marketing and public relations. In
consideration of agreeing to operate the branch office, the branch office
manager receives all of the "monthly gross revenue" (which includes all
commission revenue generated during a month through the efforts of the branch
office personnel and received by the Company prior to the 20th day of the
immediately succeeding month) generated by the branch office less the branch
expenses for the monthly gross revenues generated in the immediately preceding
month. Finally, the branch office management agreement subjects the branch
office manager to certain non-compete and confidentiality provisions.
Proprietary Trading
All-Tech engages in trading for its own account, primarily utilizing the
ATTAIN ECN. All-Tech has recently executed a joint back office agreement and a
stock purchase agreement with Southwest Securities, Inc. ("Southwest"), its
clearing firm, which agreements are subject to execution by Southwest and
review and approval by the New York Stock Exchange. No assurance can be given
as to when, or if, the joint back office arrangement will be executed by
Southwest or approved by the New York Stock Exchange. Pursuant to the proposed
joint back office arrangement All-Tech would become a shareholder of Southwest.
As a result, All-Tech would no longer be deemed a customer of Southwest, and
would qualify for an exemption available under Regulation T promulgated by the
Board of Governors of the Federal Reserve System, which exemption would allow
the Company to trade its proprietary account at increased margin levels.
All-Tech also acts as a market maker in a limited number of securities.
All-Tech's Strategy
The Company's objective is to maintain a leadership position in the
electronic trading industry and to increase the range of the Company's business
activities. The key elements of the Company's strategy to accomplish this
objective include:
(1) Enhancing awareness of the Company's identity and its ATTAIN trading
system and ATTAIN ECN services through a significant advertising and
marketing campaign;
(2) Expanding the customer base through an aggressive marketing campaign,
the opening of additional branch offices and attracting less active
traders through aggressive promotion of the Company as an electronic
trading company which provides many additional profit enhancing
features for average investors;
37
(3) Broadening the range of the Company's activities. The Company is
analyzing a number of business options which it could pursue, such as
underwriting, investment banking, merchant banking, entering additional
domestic and foreign markets and promoting electronic trading on
exchanges and in instruments other than stocks, general retail
business, market data vending and market making; and
(4) Expanding internationally by obtaining permission to offer brokerage
services around the world, utilizing Internet or private
telecommunications systems.
The Company's strategy will require substantial investment of time and
money by the Company. The Company's ability to engage in business is regulated
by the terms of its NASD membership agreement. There can be no assurance that
the Company will obtain any necessary NASD, SEC or other regulatory approvals
to engage in new activities or undertake any new activities or that any new
activities can be accomplished or will be successful.
Strategic Relationships
The Company has a number of relationships with third party vendors which
are essential to the operation of its business. All-Tech clears on a fully
disclosed basis through Southwest, a large regional brokerage firm, pursuant to
a written clearing agreement. The Company enjoys a good relationship with
Southwest, which also offers its correspondents connection to All-Tech's ATTAIN
ECN. While alternative clearing firms are available at competitive rates, there
can be no assurance that All-Tech would achieve the same level of credit
availability, financial security or service with another firm.
The Company obtains quotation information from PC Quote, which in turn
obtains its quotations from exchanges and Nasdaq. While the Company is
satisfied with its service from PC Quote, it has been publicly reported that PC
Quote has been experiencing severe financing difficulties. Any interruption in
quotation service would materially adversely affect the Company. There can be
no assurance that PC Quote will not continue to experience such difficulties or
that they will continue to offer their quotation service. The Company has
arranged back-up quotation service from Standard & Poor's Comstock, and is
developing its own back-up service directly from Nasdaq.
The Company utilizes the news service of Dow Jones & Company, Inc. ("Dow
Jones"), which recently has been offered for sale by its current owner. If Dow
Jones is sold there can be no assurance that service prices and/or reliability
will remain the same for service currently provided by Dow Jones. The Company
also utilizes the services of Nasdaq. Nasdaq has experienced operating problems
in the past and there can be no assurance that such problems will not worsen or
that rates will not be increased. The Company's success also depends on its
ability to obtain for itself and its customers access to a breadth of quality
and comprehensive real-time and historical financial market data from vendors
whose products are technically compatible with the Company's ATTAIN trading
system software and its future products and services. The Company believes that
satisfactory alternative arrangements are available from other firms, but there
can be no assurance that the terms or level of service would be as
satisfactory.
The Company subscribes to the Island and Archipelago ECNs. Instinet, the
largest ECN, does not permit the Company to subscribe to its services. Instinet
executions can be more economically advantageous to its subscribers than to
non-subscribers who access Instinet through Nasdaq's SelectNet system. The
Company's business has been negatively affected by the inability to offer
Instinet to its subscribers. The Company commenced, together with an affiliated
company, an arbitration against Instinet for wrongful denial of service in
violation of federal and state law and NASD rules, but its claims were recently
dismissed. The failure to obtain such service will continue to have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company may appeal the dismissal.
Risk Management
The Company has established various policies and procedures to manage its
exposure to risk. The Company closely monitors its core business, which
consists of servicing active day traders and operating its ATTAIN ECN.
Specifically, the Company requires each day trading customer to open his or her
day trading account with
38
a minimum balance of $50,000. In addition, the Company monitors each of its
customers via computer analysis to assess the risk of each trade and the
customer's overall account position. The Company takes appropriate steps with
respect to customers who appear to hold overly concentrated or risky positions,
including limiting or rejecting undercapitalized trades or requiring a customer
to close out a position or, if required, liquidate securities.
Although the Company has established certain risk policies and procedures,
there can be no assurance that such procedures will prevent or substantially
limit all losses to the Company. In addition, if the Company diversifies its
activities following completion of the Offering, as it intends to do, the
Company will become subject to new risk management concerns. The Company may be
required to incur substantial expenditures and to implement significant
management controls to address such new risk management concerns.
Similar to other broker/dealers, the Company faces operating, principal
and credit risks. Operating risk arises out of the daily conduct of the
Company's business and relates to the possibility that one or more of the
Company's personnel could cause the Company to engage in imprudent business
activities. Principal risk relates to the fact that the Company holds
securities that are subject to changes in value and could result in the Company
incurring material losses. Credit risk occurs because the Company guarantees
credit extended through its clearing broker to various of its customers in the
form of margin loans, activities which constitute normal industry practice.
All-Tech also engages in trading for its own account, primarily utilizing
the ATTAIN ECN. Pursuant to a proposed joint back office arrangement with the
Company's clearing firm, the Company would be permitted to trade its
proprietary account at increased margin levels. The monetary risks associated
with proprietary trading are managed through real-time monitoring of the amount
and types of securities held from time to time by the Company and limiting the
exposure to any one investment or type of investment. These risks are monitored
both by the Company's own operations personnel and by the Company's clearing
broker. See "Business--Proprietary Trading."
Sales and Marketing
The Company markets its services directly, through its own sales
personnel, and on its Website at www.attain.com. All-Tech advertises in
national and regional print and radio and television media. The Company intends
to increase its sales and marketing expenditures and efforts following the
completion of the Offering.
The most significant source of customers for the Company has been the
All-Tech Training Group, Inc. ("ATTG") day trading training program. ATTG is an
affiliate of the Company and a wholly-owned subsidiary of Rushmore. Rushmore, a
principal shareholder of the Company and a Selling Shareholder in this
Offering, is owned by Harvey I. Houtkin, the Chairman, Chief Executive Officer
and Secretary of the Company, and Mark D. Shefts, the President, Chief
Operating Officer, Chief Financial Officer and Treasurer of the Company. See
"Certain Transactions" and "Principal and Selling Stockholders." ATTG students
are not required to become customers of All-Tech, but the majority of them do
so. All-Tech offers ATTG students a discounted commission equal, in the
aggregate, up to the amount of their tuition. All-Tech strongly encourages all
of its customers to take training at ATTG or elsewhere if they are not
experienced traders, but no training is required. ATTG attracts its students
through national and local advertising. ATTG offers an intensive three week
training course in electronic day trading on All-Tech's ATTAIN trading system
and the ATTAIN ECN adjacent to the Company's offices in Montvale, New Jersey
and Seattle, Washington. ATTG also offers two-day weekend courses from time to
time at each of the Company's branch office locations. ATTG does not charge
All-Tech for offering its training course at All-Tech's facilities and All-Tech
does not charge ATTG for use of its facilities. There can be no assurance that
ATTG and the Company will continue these arrangements, or that ATTG will
continue to train people who wish to become active day traders. Although the
Company could commence its own training program, it has no plan to do so at
this time.
Competition
The marketplace for electronic trading firms is intensely competitive and
rapidly changing. All-Tech believes that due to the anticipated growth of the
market for electronic brokerage services, active stock trading
39
facilities, and other factors, competition will increase in the future, even if
there is a consolidation among electronic trading firms. The Company believes
its ability to compete will depend upon many factors, both within and outside
its control, including the timing and market acceptance of new services and
enhancements developed by the Company and its competitors, functionality of
such services, data availability, ease of use, customer service and support,
pricing, reliability, and sales and marketing efforts.
All-Tech faces direct competition from a number of publicly-traded and
privately-held companies. It competes directly with other firms whose customers
engage in active day trading, other ECN systems, large Wall Street securities
firms, securities subsidiaries of major commercial bank holding companies and
major regional firms. The Company's principal competitors in providing
electronic brokerage services currently include such firms as Datek Securities
Corp., Terra Nova Trading, LLC and Instinet Corporation, a division of Reuters.
The Company's ATTAIN ECN competes principally with Nasdaq market makers,
Instinet, Datek Securities Corp.'s Island ECN, Terra Nova Trading, LLC's
Archipelago ECN, Bloomberg Tradebook LLC's System ECN and Spear, Leeds &
Kellogg's REDI ECN. The Company also competes with on-line trading systems
available on the Internet, such as Charles Schwab & Co. Inc., E*Trade Capital
Inc. and Accutrade Inc. In addition, the Company faces competition from data
vendors which offer investment analysis software, news, quotations and other
securities industry products.
All-Tech seeks to offer its customers low prices, quality services and
continuous innovation. Although All-Tech offers competitively discounted
commissions, it does not seek to offer the very lowest commission rates, which
at some firms can be as low as $7.50 per trade. Such low rates are generally
offered by firms that also earn revenues from directing order flow to another
broker/dealer for execution in exchange for a per share fee. The ATTAIN trading
system permits the Company's customers to decide where their orders are
displayed and executed. The Company does not direct order flow because it
believes that the practice of directing order flow interferes with the broker's
fiduciary duty to its customer to obtain the best available price for the
customer.
The general financial success of companies engaging in electronic day
trading within the securities industry over the past several years has
strengthened existing competitors and has led to the entrance into this field
of many existing and newly established brokerage firms. Management believes
that such success will continue to attract new competitors. Additionally, it is
possible that new alliances among competitors may also emerge, with such
alliances acquiring significant market share.
Many of the Company's existing and potential competitors have longer
operating histories, significantly greater financial, technical and market
resources, greater name recognition and a larger installed customer base than
the Company. One or more of these competitors may be able to respond more
quickly to new or emerging technologies or changes in customer requirements, or
to devote greater resources to the development, promotion and sale of their
services and products than the Company. Larger and better capitalized
competitors are able to more aggressively advertise their products and services
on a national basis and many have a greater number and variety of distribution
outlets for their services. So-called on-line discount brokerage firms market
their services through aggressive pricing and promotional efforts.
The average commission per transaction earned by the Company has declined
from $24.32 for the year ended June 30, 1996 to $23.52 for the year ended June
30, 1998, due to competitive factors. The Company is continuously monitoring
the fees it charges and such fees were recently reduced from $.015 to a maximum
of $.005 per share as a result of competitive pressures and to adhere to
maximum fees permitted pursuant to the SEC no-action letter under which the
Company operates the ATTAIN ECN. The reduction in rates has negatively impacted
ATTAIN ECN revenues. See "Business--The ATTAIN ECN." Increased competition
could result in additional price reductions, reduced margins or loss of market
share, any of which could materially adversely affect the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will be able to compete successfully against current or future
competitors, or that competitive pressures faced by the Company will not have a
material adverse effect on its business, financial condition and results of
operations or the Company's ability to attract and retain highly skilled
individuals.
40
Intellectual Property and Other Proprietary Rights
The Company's success depends to a significant extent on its proprietary
technology. The Company relies primarily on copyright, trade secret and
trademark law to protect its technology. The Company has no patents. The
Company has registered its ATTAIN trademark in the United States, but has not
yet registered it in any foreign countries. There can be no guarantee of
effective trademark protection available for the Company's trademarks, trade
names or service marks. The Company's name has not been registered except with
the SEC and the NASD. The possible inability of the Company to effectively
protect its trade name and trademarks outside the United States could have an
adverse effect on the Company but at this time such effect is not expected to
be material.
The source code for the Company's proprietary software is protected both
as a trade secret and as a copyrighted work. The Company enters into
confidentiality and/or assignment agreements with its employees, associates,
consultants and vendors with access to the Company's proprietary information to
control access to, and distribution of, its software, documentation and other
proprietary information. Notwithstanding the precautions taken by the Company,
it may be possible for a third party to copy or otherwise obtain and use the
Company's software or other proprietary information without authorization or to
develop similar software independently. The laws of other countries may afford
the Company little or no effective protection of its intellectual property. The
inability of the Company to protect its intellectual property rights could have
a material adverse effect on the Company's business, financial condition and
operating results.
The Company may, in the future, receive notices of claims of infringement
of other parties' proprietary rights. Any such claims, with or without merit,
could be time consuming to defend, result in costly litigation, divert
management's attention and resources or require the Company to enter into
royalty or licensing agreements. There can be no assurance that such licenses
would be available on reasonable terms, if at all, and the assertion or
prosecution of any such claims could have a material adverse effect on the
Company's business, financial condition and operating results.
Government Regulation
Securities Industry Regulation:
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. The SEC is the federal agency
responsible for the administration of the federal securities laws. All-Tech is
registered with the SEC as a broker/dealer. Most of the regulation of
broker/dealers has been delegated by the SEC to self-regulatory organizations
("SROs"), principally the NASD, which is the Company's primary regulator. These
SROs adopt rules (subject to SEC approval) that govern the industry. They
conduct periodic examinations of all the operations of all broker/dealers.
Pursuant to a membership agreement, the NASD sets forth activities a member
firm is permitted to engage in. Some of the new activities the Company may wish
to engage in may require modification of the Company's membership agreement,
the obtaining of a modification, if required, cannot be assured. Broker/dealers
are also subject to extensive regulation by the states and the District of
Columbia. The Company also is or will be subject to regulation by any foreign
jurisdiction or subdivision thereof where it seeks to conduct business. See
"Risk Factors--Securities Regulation in General."
The Company is licensed as a broker/dealer to conduct business in 47
states and the District of Columbia. The Company, as a foreign broker/dealer,
may not be granted a license to conduct business in certain foreign
jurisdictions.
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 customers funds and securities, capital
structure, record-keeping and the conduct of officers, directors and employees.
The Company is required to comply with many complex and evolving laws and
rules, including rules relating to electronic trading. All-Tech's operation of
the ATTAIN trading system and the ATTAIN ECN, for example, subjects the Company
to Rule 17a-23 of the Exchange Act, which regulates certain communications
carried by on-line trading systems, requiring the Company to conduct certain
record keeping and reporting activities.
Additional legislation, changes in rules promulgated by the SEC, the NASD,
other SROs or one or more states, or changes in the enforcement of existing
laws and rules, may directly affect the mode of operation and
41
profitability of broker/dealers in general, and electronic trading firms such
as All-Tech in particular. The SEC, the NASD, other SROs and state securities
commissions may conduct administrative proceedings, which can result in
censure, fine, the issuance of cease-and-desist orders or the suspension or
expulsion of a broker/dealer or any of its officers or employees. The Company's
ability to comply with all applicable laws and rules is dependent in large part
upon the maintenance of a compliance system reasonably designed to ensure such
compliance. The principal purpose of regulation and discipline of
broker/dealers is the protection of customers and the securities markets,
rather than protection of creditors and shareholders of broker/dealers.
The Company anticipates that it may be subject to additional regulation as
the market for online commerce evolves. Currently, the ATTAIN ECN does not
subject All-Tech to regulation as an exchange. The SEC has proposed and
published for comment a new regulatory framework for alternative trading
systems. There can be no assurance as to the effect, if any, of any rules which
may be adopted based on such proposal. However, due to operation of the ATTAIN
ECN, the Company may have to choose to register as broker-dealer with certain
additional requirements or alternatively, as an exchange. The SEC has drafted
this proposal to address certain regulatory gaps created by the growth of ECNs.
Any changes to the current regulatory structure could impose additional
compliance costs on the Company and could adversely affect the Company's
competitive position.
In addition, Congress has also held hearings on whether to regulate
providers of services and transactions in the electronic commerce market, and
federal or state authorities could enact laws, rules or regulations affecting
the Company's business or operations. The Company may be subject to federal,
state and foreign money transmitter laws and state and foreign sales and use
tax laws. If enacted or deemed applicable to the Company, such laws, rules or
regulations could be imposed on the Company's activities or its business.
Due to the increasing popularity of the Internet, it is possible that laws
and regulations may be enacted with respect to the Internet, covering issues
such as user privacy, pricing, content and quality of products and services.
The Telecommunications Act of 1996 (the "Telecommunications Act"), which was
enacted in January 1996, prohibits the transmission over the Internet of
certain types of information and content. Although certain of these
prohibitions have been held unconstitutional, the increased attention focused
upon these liability issues as a result of the Telecommunications Act could
adversely affect the growth of the Internet, private network use and electronic
trading.
All-Tech is a member of Securities Investor Protection Corporation
("SIPC"), which provides, in the event of the liquidation of a broker/dealer,
protection for customers accounts held by such broker/dealer of up to $500,000
for each customer account, subject to a limitation of $100,000 for claims for
cash balances. Additionally, the Company's clearing firm, Southwest, which
carries customer funds and securities for All-Tech, has obtained additional
insurance, in the amount of $24.5 million for each customer account, in the
form of an excess securities bond from American International Group.
The Company plans to institute an aggressive marketing campaign following
the closing of this Offering. All advertising materials are subject to NASD
review and prior to use must be reviewed by All-Tech's compliance officer to
ensure that they comply with applicable rules.
The Company currently does not solicit orders from its customers or make
investment recommendations. However, if the Company were to engage in such
activities, it would become subject to additional rules and regulations
governing, among other things, the suitability of recommendations to customers
and sales practices.
The Company intends to expand its business internationally. In order to
expand globally, the Company will be required to comply with regulations of
each specific country in which it does business. Such regulations may limit the
Company's rate of international expansion.
Net Capital Requirements:
As a registered broker/dealer and member of the NASD, All-Tech is subject
to net capital rules, which specify minimum net capital requirements for
broker/dealers and are designed to measure the general financial integrity and
liquidity of a broker/dealer. Such rules require that at least a minimum part
of its assets be kept in relatively liquid form.
As of June 30, 1998, All-Tech is required to maintain minimum net capital,
as defined in the Net Capital Rule, equal to the greater of (i) $100,000 or
(ii) $2,500 for each stock the Company posts a quote in that trades
42
above $5.00 per share and $1,000 for each stock the Company posts a quote in
that trades $5.00 or less per share, up to $1,000,000. Failure to maintain the
required net capital may subject a firm to suspension or revocation of
registration by the SEC and/or suspension or expulsion by the NASD and other
regulatory bodies and ultimately could require a firm's liquidation. The Net
Capital Rule prohibits payments of dividends, redemption of stock, the
prepayment of subordinated indebtedness, and the making of any unsecured
advance or loan to a shareholder, employee or affiliate, if aggregate debit
items (i.e. assets that have, as their source, transactions with customers
(primarily margin loans)) rise beyond 5% of net capital. The Net Capital Rule
also provides that the SEC may restrict, for up to 20 business days, any
withdrawal of equity capital, or unsecured loans or advances to shareholders,
employees or affiliates ("capital withdrawal") if such capital withdrawal,
together with all other net capital withdrawals during a 30-day period, exceeds
30% of excess net capital and the SEC concludes that the capital withdrawal may
be detrimental to the financial integrity of the broker/dealer.
Net capital is essentially defined as net worth (assets minus liabilities)
plus qualifying subordinated borrowing and certain discretionary liabilities,
less certain mandatory deductions that result from excluding assets that are
not readily convertible into cash and from valuing conservatively certain other
assets. Among these deductions are adjustments (called "haircuts") which
reflect the possibility of a decline in the market value of an asset prior to
its disposition.
A change in the Net Capital Rule, the imposition of new rules or any
unusually large charge against net capital could limit those operations of the
Company that require the intensive use of capital, such as underwriting,
trading activities and the financing of customer account balances, and also
could restrict the Company's ability to pay dividends, repay debt and redeem or
purchase shares of its outstanding stock.
The Company believes that at all times it has been in compliance with the
applicable minimum net capital rules of the SEC and the NASD. As of June 30,
1998, the Company had net capital of approximately $552,000, or approximately
$227,000 in excess of the minimum amount required.
The failure of a broker/dealer to maintain its minimum required net
capital would require it to cease executing customer transactions until it came
back into compliance, and could cause it to lose its NASD membership, its
registration with the SEC, or require its liquidation. Further, the decline in
a broker/dealer's net capital below certain "early warning levels," even though
above minimum net capital requirements, could cause material adverse
consequences to the broker/dealer.
Employees
As of August 19, 1998, the Company had a total of 114 employees. Of the
total, 39 were in management (including branch management), nine were in
technology development and service and 66 were in administration and
operations. None of the Company's employees are represented by a labor union or
are subject to a collective bargaining agreement. The Company has not
experienced any work stoppages and considers its relations with its employees
to be good. Additionally, many of the Company's employees, including the
Company's proprietary traders, employees who deal with customers or with the
execution of customer orders, and all persons who supervise the activities of
the previously mentioned employees, are required to be registered with the
NASD. The registration process for such employees includes passing certain
examinations and obtaining certain licenses which are required by the NASD.
Facilities
The Company's executive offices, technology development and administrative
functions are located in Montvale, New Jersey, in approximately 12,395 feet of
space in a building owned by a company which is wholly owned by Messrs. Houtkin
and Shefts. The annual rent and maintenance for the facility are approximately
$265,000. See "Certain Transactions."
Eighteen of the Company's twenty-two branch offices are leased by
unaffiliated third parties directly to the branch managers or companies
controlled by them. In order not to be liable for the primary lease
obligations, the Company sublets such branch offices on a month-to-month basis.
Although the Company is not liable on such leases, it has a right to sublet the
facility from the primary lessor should the branch manager not remain in his
position. Three of the remaining four branch office facilities are subleased
from Double H Management, a wholly-owned subsidiary of Rushmore, at an
aggregate annual rental of $80,242, and the fourth facility is located in
property owned by Mark D. Shefts, President, Chief Operating Officer, Chief
Financial Officer and Treasurer of the Company, and is utilized at no cost to
the Company.
43
Legal Proceedings
The Company is not a party to any material legal proceedings except as
follows:
The Company and an affiliate instituted an arbitration against Instinet
Corporation for wrongful denial of service, seeking access to the Instinet ECN
as well as monetary damages, but its claims were recently dismissed. The
Company has limited access to Instinet, the largest ECN, through Nasdaq and
through its clearing firm. The Company's failure to obtain full access to
Instinet could have a material adverse effect on the Company's ability to
provide the best trading opportunities to its customers and on the Company's
business, financial condition and results of operations. The order of dismissal
requires the Company to pay Instinet $55,000 in reimbursement of legal fees
incurred, as well to pay NASD Regulation, Inc. $27,750 in hearing fees. The
Company has requested that the matter be resubmitted to the arbitration panel
with a request that the arbitrators state the basis for the award, and it has
reserved its right to seek modification and/or vacatur of the award. The
Company believes that it has a meritorious position, and it currently intends
to appeal the dismissal.
In June 1998, the Company instituted an arbitration against Knight
Securities, Inc. ("Knight") by filing a Statement of Claim with the National
Association of Securities Dealers, Inc. The arbitration seeks compensatory
damages in the amount of $97,537.50, punitive damages in the amount of
$500,000, as well as interest, costs, and disbursements and attorneys fees. The
arbitration was commenced as a result of Knight's refusal to pay the Company's
ECN fees arising from Knight's entering trades involving OTC securities with
the ATTAIN ECN. The allegations set forth in the Statement of Claim include
claims based upon breach of contract, quantum meruit and fraud. The Company is
also currently denying access to Knight, as well as 32 other ATTAIN ECN users,
because they have either requested that the Company block their access to the
ATTAIN ECN or they have stated to the Company that they will not pay their
ATTAIN ECN bills. The Company intends to vigorously pursue its legal remedies
to recover unpaid accounts receivable. However, there can be no assurance that
such efforts will be successful.
The Company has requested that the U.S. Department of Justice investigate
what the Company believes to be misconduct of Nasdaq market making participants
in their refusal to pay the Company's ECN fees. In addition, the Company has
been informed by the NASD that, based upon complaints lodged by two
broker-dealers, it is conducting an investigation as to whether the Company's
denial of access to the ATTAIN ECN constituted "backing away." Although the
Company does not believe that there is any merit to such claims, and it intends
to vigorously contest any such charge, there can be no assurance that such
claims would not result in a formal investigation being commenced or that the
Company would not incur substantial fees in contesting such claims.
From time to time the Company has been threatened with, or named as a
defendant in, lawsuits and administrative claims. Compliance, trading and
administrative problems that are reported to the NASD, SEC or state regulators
by dissatisfied customers are investigated by such regulators and, if pursued
by such customers, may rise to the level of arbitration or disciplinary action.
The Company's management does not believe any current investigations or claims
are material. There can be no assurance that one or more future lawsuits,
claims or disciplinary actions, if decided adversely to the Company, would not
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company is also subject to periodic audits and
inspections.
44
MANAGEMENT
Directors and Executives Officers
The directors and executive officers of the Company are as follows:
Name Age Position
- ----------------------------- ----- ----------------------------------------------------
Harvey I. Houtkin ........... 49 Chairman of the Board, Chief Executive Officer,
Secretary (1)
Mark D. Shefts .............. 41 President, Chief Operating Officer, Chief Financial
Officer, Treasurer, Director (2)
Harry M. Lefkowitz .......... 42 Senior Vice President--Operations, Director
Linda Lerner ................ 55 Executive Vice President, General Counsel
Josef A. Ross ............... 68 Director-Nominee (3)(4)
Robert D. Kashan ............ 44 Director-Nominee (3)(4)
(1) To become a member of the Audit Committees upon completion of the Offering.
(2) To become a member of the Compensation Committee upon completion of the
Offering.
(3) To become a member of the Compensation, Audit and Option Committees upon
completion of the
Offering.
(4) Appointment to become effective upon completion of the Offering.
Harvey I. Houtkin joined All-Tech in 1991 and has been the Company's
Chairman of the Board, Chief Executive Officer and Secretary since March 1993.
From September 1996 to January 1997 he also served as President of the Company
but not as Secretary. Mr. Houtkin has over 30 years experience in the
securities industry. He graduated from Baruch College of the City University of
New York in 1970 with a Bachelor of Science Degree and in 1973 with a Masters
Degree in Business Administration. His masters thesis was entitled "The Impact
of Nasdaq on the Over-the-Counter Market." He is an associate member of the
American Stock Exchange. He held a seat on the New York Stock Exchange for
several years and co-owns a broker/dealer which operated a floor brokerage
business on that Exchange. He also has been a member of the New York Futures
Exchange. He is the author of The SOES Bandits' Guide-Day Trading in the 21st
Century and Secrets of the SOES Bandit.
Mark D. Shefts has been a principal of All-Tech since early 1988 and has
been its President, Chief Operating Officer, Chief Financial Officer, Treasurer
and a Director since such time. From September 1996 to January 1997 he was the
Secretary of the Company and during such period he did not hold the office of
President. Mr. Shefts has over 17 years experience in the industry. Mr. Shefts
graduated in 1979 from Brooklyn College of the City of New York with a Bachelor
of Science Degree in Accounting. He is a member of the Chicago Stock Exchange
and co-owns a broker/dealer which operated a floor brokerage business on the
New York Stock Exchange. Mr. Shefts is licensed as a Commodity Pool Operator
and a Commodity Trading Advisor by the National Futures Association. He is also
a Certified Financial Services Auditor, a Certified Fraud Examiner and an
arbitrator for the American Arbitration Association and NASD Regulation, Inc.
In the Fall of 1997, he was an Adjunct Professor of Business at Ramapo College
of the State University of New Jersey.
Harry M. Lefkowitz has over 16 years experience in the securities
industry. He has been with All-Tech since 1991. Mr. Lefkowitz is the Senior
Vice President-Operations and a Director of All-Tech. He is also the sole
officer, director and shareholder of HMS Securities, Inc., an NASD registered
broker/dealer which engages in only very limited activity at present and to
which Mr. Lefkowitz now devotes only an insubstantial amount of time. Mr.
Lefkowitz obtained as Associate Degree at Kingsborough Community College in
1977.
Linda Lerner has been General Counsel to All-Tech since January 1993. In
May 1998 she became Executive Vice President of the Company. Prior to joining
All-Tech, Ms. Lerner practiced law in various law firms from 1976 through May
1991, when she joined Home Box Office, Inc. as counsel. Ms. Lerner obtained a
Bachelor of Arts from Brandeis University in 1964, a Masters of Science from
Columbia University in 1976 and a Juris Doctor from Brooklyn Law School in
1976. Ms. Lerner is a member of the Market Operations Committee and the Trading
Rules Subcommittee of The Nasdaq Stock Market, Inc. and of the Member Admission
Review Committee of NASD Regulation, Inc.
45
Josef A. Ross is the Chairman of the Board and Chief Executive Officer of
Universal Travel Corp., a manufacturer, importer and distributor of luggage
products and fine art graphic display systems which he founded in 1963. Mr.
Ross also owns several other businesses.
Robert D. Kashan has been the Chairman and Chief Executive Officer of
Earth Color Group., Inc. and its predecessors, a printer of promotional
material for Fortune 500 companies since 1983. Mr. Kashan obtained a Bachelor
of Science degree in marketing from the University of Maryland in 1976.
The Company's By-Laws provide for a division of the Board of Directors
into three classes as nearly equal as possible, with the members of each class
being elected to serve for a staggered term of three years, and one class being
elected annually. The Class I director, Harry M. Lefkowitz, serves for a term
expiring at the 1999 annual meeting of stockholders. The Class II directors,
Mark D. Shefts and, upon completion of the Offering, Robert D. Kashan, serve
for a term expiring at the 2000 annual meeting of stockholders. The Class III
directors, Harvey I. Houtkin, and upon completion of the Offering, Josef A.
Ross, serve for a term expiring at the 2001 annual meeting of stockholders. All
executive officers of the Company are elected annually by the Board of
Directors and serve until their successors are duly elected and qualified.
Other than Mr. Houtkin and Mr. Shefts, who are brothers-in-law, there are no
family relationships among any of the directors and executive officers of the
Company. Effective upon the consummation of this Offering, the Board of
Directors will have a Compensation Committee, which will approve salaries and
certain incentive compensation for management and key employees of the Company;
an Audit Committee, which will review the results and scope of the audit and
other services provided by the Company's independent accountants; and an Option
Committee, which will administer the Company's 1998 Stock Option Plan. The
Compensation Committee will be composed of Messrs. Shefts, Ross and Kashan; the
Audit Committee will be composed of Messrs. Houtkin, Ross and Kashan; the
Option Committee will be composed of Messrs. Ross and Kashan.
From time to time, situations may arise in which certain of the Company's
officers and/or directors may be presented with situations in which they are
faced with a conflict of interest arising from the fact that such persons are
affiliated with entities other than the Company. Accordingly, all future
transactions and loans between the Company and its officers, directors and 5%
shareholders will be entered into on terms no less favorable than could be
obtained from unaffiliated third parties and will be approved by a majority of
the independent, disinterested directors of the Company.
Directors' Compensation
Each of the Company's independent, non-employee Directors will receive
compensation of $1,500 per meeting for each regularly scheduled meeting in
which he participates. In addition, each of the independent, non-employee
members of the Board who serve on the Audit, Compensation and/or Option
Committee of the Board of Directors will receive a $750 fee per meeting for
each regularly scheduled Committee meeting in which he participates unless such
meeting is held on the day of a regularly scheduled meeting of the Board of
Directors. The Company also will provide reimbursement to Directors for
reasonable and necessary expenses incurred in connection with attendance at
meetings of the Board of Directors or its Committees. Directors are eligible to
receive stock option grants pursuant to the Company's 1998 Stock Option Plan.
Executive Compensation
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by or paid to the Company's Chief
Executive Officer and each of the other executive officers of the Company whose
salary exceeded $100,000 (collectively, the "Named Executives") during the year
ended June 30, 1998.
46
Summary Compensation Table
Name and Principal Position Salary Bonus
- --------------------------------------------------- ----------- -----------
Harvey I. Houtkin
Chairman, Chief Executive Officer and Secretary
Year ended June 30:
1998 ........................................... $919,231 $100,000
1997 ........................................... 618,093 800,000
1996 ........................................... 595,000 156,000
Mark D. Shefts
President, Chief Operating Officer, Chief Financial
Officer, Treasurer and Director
Year ended June 30:
1998 ........................................... 943,363 100,000
1997 ........................................... 557,692 900,000
1996 ........................................... 600,000 176,000
Linda Lerner
Executive Vice President and General Counsel
Year ended June 30:
1998 ........................................... 149,038 --
1997 ........................................... 110,000 10,000
1996 ........................................... 100,000 5,000
1998 Stock Option Plan
The Company's 1998 Stock Option Plan (the "Plan") was adopted by the Board
of Directors and the shareholders of the Company on May 11, 1998. A total of
1,535,354 shares of Common Stock are reserved for issuance upon exercise of
options to be granted under the Plan, 1,000,000 of which will be granted as of
the effective date of this Offering. No other options have been granted under
the Plan. Those eligible to receive stock option grants under the Plan include
employees, Directors and consultants. The Plan will be administered by the
Option Committee of the Board of Directors of the Company, which will be
comprised of the two outside directors, Messrs. Ross and Kashan.
Subject to the provisions of the Plan, the Option Committee, as
administrator of the Plan, has the discretion to determine the optionees and/or
grantees, the type of options to be granted (incentive stock options ("ISOs")
or non-qualified stock options (" NQSOs")), the vesting provisions, the terms
of the option grants and such other related provisions as are consistent with
the Plan. The exercise price of an ISO may not be less than the fair market
value per share of the Common Stock on the date of grant or, in the case of an
optionee who beneficially owns 10% or more of the outstanding capital stock of
the Company, not less than 110% of the fair market value per share on the date
of grant.
The options terminate not more than ten years from the date of grant,
subject to earlier termination on the optionee's death, disability or
termination of employment with the Company, but provide that the term of any
options granted to a holder of more than 10% of the outstanding shares of
Common Stock may be no longer than five years. Options are not assignable or
otherwise transferable except by will or the laws of descent and distribution.
In the event of a merger or consolidation of the Company with or into another
corporation or the sale of all or substantially all of the Company's assets in
which the successor corporation does not assume outstanding options or issue
equivalent options, the Board of Directors of the Company is required to
provide accelerated vesting of outstanding options. The Plan terminates on May
10, 2008.
As of April 30, 1998, no awards had been granted by the Company under the
Plan. The Company intends to grant NQSOs to purchase 1,000,000 shares of Common
stock to its employees and director-nominees, such grants to become effective
only upon the successful completion of the Offering. Such options will be
exercisable at a price per share equal to the initial public offering price of
the shares of Common Stock, will have an expiration date of September 30, 2008,
and will vest at a rate of twenty-five percent per year from the date of grant.
47
401(k) Plan
The Company currently maintains a 401(k) salary reduction plan (the
"401(k) Plan") which is intended to qualify under Section 401(a) and 401(k) of
the Internal Revenue Code of 1986, as amended (the "Code"). Generally, all
employees who are not members of a collective bargaining group and who are 21
years of age or older are eligible to participate in the 401(k) Plan after they
complete six months of service. All eligible executive officers other than
Messrs. Houtkins, Shefts and Waldman participate in the 401(k) Plan.
Eligible employees electing to participate in the 401(k) Plan may defer a
portion of their compensation on a pre-tax basis by contributing a percentage
thereof to the 401(k) Plan. There is no minimum contribution, and the maximum
contribution is prescribed in Section 401(k) of the Code. Such maximum for 1998
is $10,000. The Company makes matching contributions equal to 3% of the first
6% of a participating employee's annual salary, up to $4,800. Eligible
employees who elect to participate in the Company's 401(k) Plan vest in the
Company's matching contribution as follows: less than one year of service--0%;
one year of service--20%; two years of service--40%; three years of
service--60%; four years of service--80%; and five years of service--100%.
Employment Agreements; Key-Man Insurance
On April 20, 1998, the Company entered into three-year employment
agreements with Harvey I. Houtkin Chairman, Chief Executive Officer and
Secretary of the Company, and Mark D. Shefts, President, Chief Operating
Officer, Chief Financial Officer and Treasurer of the Company commencing the
effective date of the Offering. Pursuant to the terms of these agreements,
Messrs. Houtkin and Shefts are each entitled to receive $500,000 plus 5% of net
earnings before taxes per year for the terms of the agreements, to a maximum of
an additional $500,000 in each of the first two years and $1,500,000 in the
third year, life insurance, benefits under any Company benefit plans, as well
as reimbursement of certain employment related expenses. In the event of a
change of control of ownership of the Company, each employment agreement will
be extended so that the new term of the employment agreement, as of the date of
the change of control, will be three years. Should such employment agreements
not be renewed by the Company, Messrs. Houtkin and/or Shefts will continue to
receive compensation under the employment agreements for an additional one-year
period. If Mr. Houtkin shall not be elected Chairman and Chief Executive
Officer of the Company, or Mr. Shefts not be elected President, Chief Operating
Officer, and Treasurer of the Company, or given authority or responsibilities
appropriate to their respective positions, Mr. Houtkin or Mr. Shefts, as the
case may be, could terminate his employment and receive all amounts that
otherwise would have been paid during the three year term or, if the unexpired
portion of the term is less than two years, compensation for a two year period.
The same compensation amounts would also be paid by the Company should Messrs.
Houtkin or Shefts be terminated without cause. Each of the employment
agreements contains a prohibition against competing with the Company or
soliciting customers or employees from the Company for a period of two years
after the termination of the agreement or for such longer period as the
employee is compensated by the Company; provided, however, that such
non-compete provisions are reduced and/or eliminated in their entirety after
six or nine years, respectively. Each of the agreements permits the Company to
terminate the agreement for cause or upon the death or disability of Mr.
Houtkin or Mr. Shefts.
The Company is applying for key-man insurance on the lives of Messrs.
Houtkin and Shefts in the amount of $1 million each. There can be no assurance
that such insurance can be obtained in such amount, if at all.
48
CERTAIN TRANSACTIONS
During the fiscal year ended June 30, 1997, the Company made a series of
non-interest bearing, revolving loans to Messrs. Mark D. Shefts and Harvey I.
Houtkin, shareholders, officers and directors of the Company, which loans were
payable on demand. The loans to Mark D. Shefts totaled $433,722 and the loans
to Harvey I. Houtkin totaled $300,292. Said loans were repaid in full during
the fiscal year ended June 30, 1997.
During the fiscal year ended June 30, 1997, the Company made two
non-interest bearing, revolving loans to its parent Rushmore, for working
capital purposes, which loans were payable on demand. The loans to Rushmore
totaled $500,000. Said loans, together with previously outstanding loans
totaling $886,877, were repaid during the fiscal year ended June 30, 1997.
During the nine months ended March 31, 1998, the Company made a series of
non-interest bearing, revolving loans to its parent Rushmore, for working
capital purposes, which loans were payable on demand. The loans to Rushmore
totaled $1,774,323. Said loans, together with previously outstanding loans
totaling $199,941, were repaid during the nine months ended March 31, 1998.
As of the date hereof, there were no remaining outstanding loans to
officers, directors, parents or affiliates of the Company.
During April 1998, the Company borrowed, on an interest-free basis, an
aggregate of $611,000 from its parent, Rushmore, in order to provide additional
funds for the Company's proprietary trading activities. This amount was reduced
by $38,441, which represented an advance by the Company for a portion of
Rushmore's federal tax obligation, leaving a balance due to Rushmore of
$572,559 at June 30, 1998. In July 1998, Rushmore converted the balance of
$572,559 into additional paid-in capital.
During May 1998, the Company borrowed, on an interest-free basis, an
aggregate of $135,000 from its affiliate, ATTG, for working capital purposes.
The loan was repaid in June 1998.
All-Tech leases its principal office space in Montvale, New Jersey, which
consists of 12,395 square feet of space from Summit Plaza, Inc., a company
wholly owned by Messrs. Houtkin and Shefts. The annual rent, excluding certain
additional maintenance expenses, is $247,900; this lease expires on March 31,
2003. This lease was modified in May 1998. Prior to such modification, the
Company occupied 12,395 square feet of space at an annual rental of $181,460,
pursuant to both a long-term lease and a month-to-month rental arrangement.
Approximately 400 square feet of such space was subleased to affiliates of the
Company, including Rushmore and ATTG, and to a non-affiliate. The Company
believes that its lease has been and is on terms no less favorable than could
be obtained from an unaffiliated third party. Double H Management Corp.
("Double H"), another wholly owned subsidiary of the Company's parent,
Rushmore, leases space for three branch offices of the Company. The Company
reimburses Double H for the rent due pursuant to such leases. An additional
branch office is located on property owned by Mr. Shefts, at no cost to the
Company.
ATTG, a wholly owned subsidiary of the Company's parent, operates an
electronic day trading training program. ATTG students are not required to
become customers of the Company nor does the Company require its customers to
take the ATTG program; however, ATTG is a significant source of referrals for
the Company, as approximately 85% of the Company's customers have completed
this program. Students who do open accounts at the Company are entitled to a
discounted commission equal, in the aggregate, up to the amount of their
tuition. The aggregate amount of discounted commissions accorded to students
who attend ATTG's electronic day trading training program was approximately
$272,000 and $375,000 for the year ended June 30, 1997 and the year ended June
30, 1998, respectively. When such programs are offered at branch locations, the
Company does not charge ATTG for use of its facilities. There can be no
assurance that ATTG and the Company will continue these arrangements or that
ATTG will continue to train people who wish to become active electronic day
traders. Although the Company could commence its own training, it has no plan
to do so at this time.
49
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock of the Company as of June 30, 1998,
and as adjusted to reflect the sales of the shares of Common Stock offered
hereby, with respect to the beneficial ownership of the Common Stock of the
Company by (i) each person known to the Company to own 5% or more of the
outstanding shares of Common Stock, (ii) each of the Company's directors and
director-nominees, (iii) each of the Named Executives, (iv) all of the
directors, director-nominees and executive officers as a group, and (v) the
Selling Stockholders.
Shares
Beneficially
Owned Prior to
Offering
Name of Beneficial Owner(1)(2) Number Percent(3)
- -------------------------------------------- ------------------- ---------------
Harvey I. Houtkin .......................... 10,344,448(4) 98.0%(4)
Mark D. Shefts ............................. 10,344,448(4) 98.0%(4)
Rushmore Financial Services, Inc. .......... 10,133,337 96.0%
Harry M. Lefkowitz ......................... -- --
Linda Lerner ............................... -- --
Robert D. Kashan(7) ........................ -- --
Josef A. Ross (7) .......................... -- --
All Directors, Director-Nominees and
executive officers as a group (6 persons) . 10,555,559 100%
Shares
Number Beneficially
Of Shares Owned After the
Being Offering
Name of Beneficial Owner(1)(2) Offered Number Percent(3)
- -------------------------------------------- ---------------- ------------------------- ---------------
Harvey I. Houtkin .......................... 195,000(5) 10,149,448(4)(6) 72.2%(4)
Mark D. Shefts ............................. 195,000(5) 10,149,448(4)(6) 72.2%(4)
Rushmore Financial Services, Inc. .......... -- 10,133,337(6) 72.0%
Harry M. Lefkowitz ......................... -- -- --
Linda Lerner ............................... -- -- --
Robert D. Kashan(7) ........................ -- -- --
Josef A. Ross (7) .......................... -- -- --
All Directors, Director-Nominees and
executive officers as a group (6 persons) . 390,000 10,149,448 72.2%
- ------------
(1) The address of each beneficial owner is in care of the Company, 160 Summit
Avenue, Montvale, New Jersey 07645.
(2) Beneficial ownership has been determined in accordance with Rule 13d-3 of
the Securities Exchange Act of 1934, as amended. Generally, a person is
deemed to be the beneficial owner of a security if she/he has the right to
acquire voting or investment power within 60 days. Except as set forth in
the footnotes to this table, the persons and entity named in the table
have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by such shareholder.
(3) The applicable percentage of ownership is based on shares of Common Stock
outstanding on June 30, 1998, and shares of Common Stock outstanding after
the completion of this Offering.
(4) Includes shares beneficially owned by Rushmore, which is 50% owned by Mr.
Houtkin and 50% owned by Mr. Shefts.
(5) Shares of Common Stock being offered by such stockholder as a Selling
Stockholder in this Offering.
(6) The Selling Stockholders have granted the Underwriters an Over-Allotment
Option to purchase up to 292,500 shares of Common Stock solely to cover
over-allotments, if any. This table assumes that the Over-Allotment Option
will not be exercised by the Underwriters. See "Underwriting."
(7) Director-nominee.
50
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 55,000,000 shares of
Common Stock, par value $0.001 per share, and 5,000,000 shares of undesignated
Preferred Stock, $.01 par value per share. As of the date of this Prospectus,
there were 10,555,559 shares of Common Stock issued and outstanding and held of
record by three shareholders. There are no shares of Preferred Stock designated
or issued. See "Capitalization."
The following statements are brief summaries of certain provisions with
respect to the Company's capital stock contained in its Certificate of
Incorporation and By-Laws, copies of which have been filed as exhibits to the
Registration Statement. The following summary is qualified in its entirety by
reference thereto.
Common Stock
Holders of shares of Common Stock are entitled to one vote for each share
held of record on matters to be voted on by the shareholders of the Company.
Subject to the rights of holders of shares of Preferred Stock, if any, holders
of shares of Common Stock will be entitled to receive dividends when, as and if
declared by the Board of Directors and to share ratably in the assets of the
Company legally available for distribution to its shareholders in the event of
the liquidation, dissolution or winding up of the Company. Holders of Common
Stock have no preemptive, subscription, redemption or conversion rights. All of
the issued and outstanding shares of Common Stock are, and all shares of Common
Stock to be sold in this Offering will be, duly authorized, validly issued,
fully paid and non-assessable. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by,
shares of any series of Preferred Stock that the Company may designate and
issue in the future.
Preferred Stock
The Company's Board of Directors may, without further action by the
Company's shareholders, from time to time, direct the issuance of any
authorized but unissued or unreserved shares of Preferred Stock in series and
may, at the time of issuance, determine the rights preferences and limitations
of each series. The holders of Preferred Stock may be entitled to receive a
preference payment in the event of any liquidation, dissolution or winding-up
of the Company before any payment is made to the holders of the Common Stock.
The Board of Directors could issue Preferred Stock with voting and other rights
that could adversely affect the voting power of the holders of Common Stock and
could have certain anti-takeover effects. The Company has no present plan to
issue any shares of Preferred Stock.
Registration Rights
Pursuant to the Representatives' Warrant Agreement between the
Representatives (other than All-Tech) and the Company, for a period of five
years commencing on the effective date of this Offering the Representatives may
request that the Company file a registration statement covering the sale of the
390,000 shares of Common Stock which may be issued upon exercise of the
Representatives' Warrants. In general, all fees, costs and expenses of any such
registration will be borne by the Company. The Representatives may also request
that any registration statement filed by the Company during the five year
period commencing on the date of this Prospectus cover the sale of such shares
of Common Stock, at the Company's expense. See "Underwriting."
Limitation of Director Liability
The Certificate of Incorporation of the Company limits the liability of
directors of the Company to the Company and its shareholders to the fullest
extent permitted by Delaware law. Specifically, directors of the Company will
not be personally liable for money damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its shareholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporate Law ("DGCL"),
which concerns unlawful payments of dividends, stock purchases or redemptions,
or (iv) for any transaction from which the director derived an improper
personal benefit.
51
In addition, the Company's By-Laws provide for indemnification of
directors, officers, employees or agents of the Company under certain
circumstances. Specifically, the Company shall indemnify any person who (i) was
or is a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the Company) by reason of the fact that he
or she was a director, officer, employee or agent of the Company, or is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him or her in connection with
such action, suit or proceeding if he or she acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the Company, and with respect to any criminal action or
proceeding, has no reasonable cause to believe his or her conduct was unlawful,
or (ii) was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit by or in the right of the Company
to procure a judgment in its favor by reason of the fact that he or she was a
director, officer, employee or agent of the Company, or is or was serving at
the request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or her in connection with
such action, suit or proceeding if he or she acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the Company, and except that no indemnification shall be made in
respect to any claim, issue or matter as to which such person shall have been
adjusted to be liable to the Company unless and only to the extent that the
Court of Chancery of the State of Delaware or the court in which such action or
suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnify for such expenses
which the Court of Chancery or such other court shall deem proper.
Delaware Law and Certain Charter and By-Law Provisions
Delaware Law:
The Company is subject to the provisions of Section 203 ("Section 203") of
the DGCL. In general, Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an "interested stockholder," unless the business
combination is approved in a prescribed manner. A "business combination" is
defined generally to include mergers or consolidations, asset sales and certain
other transactions resulting in a financial benefit to the "interested
stockholder." An "interested stockholder" is a person who, together with
affiliates and associates, owns (or, in certain cases, within three years
prior, did own) 15% or more of the corporation's outstanding voting stock.
Under Section 203, a business combination between the Company and an
"interested stockholder" is prohibited unless it satisfies one of the following
conditions: (i) the Com-pany's Board of Directors must have previously approved
either the business combination or the transaction that resulted in the
stockholder becoming an "interested stockholder," or (ii) upon consummation of
the transaction that resulted in the stockholder becoming an "interested
stockholder," the "interested stockholder" owned at least 85% of the voting
stock of the Company outstanding at the time the transaction commenced
(excluding, for purposes of determining the number of shares outstanding,
shares owned by (a) persons who are directors and also officers and (b)
employee stock plans, in certain instances); or (iii) the business combination
is approved by the Board of Directors and authorized at an annual or special
meeting of the shareholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the "interested stockholder."
Special Meetings:
The By-Laws provide that special meetings of shareholders for any purpose
or purposes can be called only upon the request of the Chairman of the Board or
the written consent of three-quarters of the entire Board.
Number of Directors; Removal; Filling Vacancies
Subject to any rights of holders of Preferred Stock to elect additional
directors under specified circumstances, the By-laws provide that the number of
directors shall be not less than two nor more than 12; provided,
52
however, that no decrease in the number of directors shall have the effect of
shortening the term of any incumbent director. Directors are elected to
staggered terms of three years. Any vacancy occurring in the Board caused by
death, resignation, removal or otherwise, and any newly created directorship
resulting from an increase in the number of directors, may be filled only by
the affirmative vote of at least a majority of the directors then in office,
although such directors are less than a quorum, or by the sole remaining
director. Furthermore, the By-Laws provide that any one or more of the
directors of the Company may be removed from office only for cause and only by
the affirmative vote of three-quarters of the entire Board of Directors or by
the affirmative vote of two-thirds of the votes represented by the issued and
outstanding shares of the Company entitled to vote at a meeting called for such
purpose.
The provisions of the By-Laws governing terms of office and removal may
have the effect of discouraging a third party from initiating a proxy contest,
making a tender offer or otherwise attempting to gain control of the Company,
or of attempting to change the composition or policies of the Board of
Directors, even though such attempt might be beneficial to the Company or its
shareholders. These provisions of the By-Laws could thus increase the
likelihood that incumbent directors will retain their positions.
Amendment of Company By-Laws:
In order to adopt, repeal, alter or amend the provisions set forth
therein, the By-Laws require the unanimous written consent of all directors or
the affirmative vote of a majority of the entire Board of Directors acting at a
regular or special meeting called by written notice, which written notice shall
include notice of the proposed action to amend the By-Laws, or by the
affirmative vote of a majority of votes represented by the issued and
outstanding shares of the Company entitled to vote at a meeting called for such
purpose.
Classified Board
The Certificate of Incorporation and By-Laws provide that the Board of
Directors be divided into three classes with each class serving for a
three-year term. Each class will consist, as nearly as possible, of an equal
number of directors. Classes shall be elected in successive years.
Consent of Shareholders
The Certificate of Incorporation provides that any action required to be
taken or which may be taken at any annual or special meeting of stockholders of
the Corporation may not be taken by written consent without a meeting except in
the case of a merger in which the Corporation is the surviving corporation.
Certain provisions of Delaware Law, the Certificate of Incorporation and
the By-Laws may have the effect of discouraging a third party from initiating a
proxy contest, making a tender offer or otherwise attempting to gain control of
the Corporation, or of attempting to change the composition or policies of the
Board of Directors, even though such attempt might be beneficial to the
Corporation or its shareholders. These provisions of Delaware Law, the
Certificate of Incorporation and the By-Laws could thus increase the likelihood
that incumbent directors will retain their positions.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer & Trust Company.
53
SHARES ELIGIBLE FOR FUTURE SALE
Immediately following the consummation of this Offering there will be
14,065,559 shares of Common Stock issued and outstanding (assuming no exercise
of the Underwriter's Over-Allotment Option). Of these shares, the 3,900,000
shares of Common Stock sold in this Offering will be freely transferable and
tradeable in the United States (except for shares held by affiliates of the
Company) without restriction or further registration under the Securities Act.
An additional 1,535,354 shares of Common Stock are reserved for issuance under
the Company's 1998 Stock Option Plan. The remaining 10,165,559 shares of Common
Stock outstanding will be "restricted securities" for purposes of Rule 144
under the Securities Act and may not be sold in the absence of registration
under the Securities Act unless an exemption from registration is available,
including the exemption afforded by Rule 144. Additionally, each officer,
director and holder of Common Stock of the Company and all holders of options
to acquire shares of Common Stock have agreed not to, directly or indirectly,
offer, sell, transfer, pledge, assign, hypothecate or otherwise encumber or
dispose of any securities of the Company for a period of 12 months following
the date of this Prospectus without the prior written consent of the
Representatives. All of such shares of Common Stock will be eligible for resale
in the public market without registration, subject to certain volume and other
limitations, pursuant to Rule 144 upon the later to occur of (i) 90 days after
the effective date of this Offering or (ii) expiration or waiver of the Lockup
Agreements.
In general, under Rule 144(e), as currently in effect, a stockholder (or
stockholders whose shares are aggregated), including an affiliate, who has
beneficially owned for at least one year shares of Common Stock that are
treated as "restricted securities," would be entitled to sell publicly, within
any three-month period, up to the greater of 1% of the then outstanding shares
of Common Stock (140,655 shares immediately after the completion of this
Offering) or the average weekly reported trading volume in the Common Stock
during the four calendar weeks preceding the date on which notice of sale is
given, provided certain requirements are satisfied. In addition, affiliates of
the Company must comply with additional requirements of Rule 144 in order to
sell shares of Common Stock (including shares acquired by affiliates in this
Offering). Under Rule 144, a shareholder deemed not to have been an affiliate
of the Company at any time during the 90 days preceding a sale by him or her,
and who has beneficially owned for at least two years shares of Common Stock
that are treated as "restricted securities," would be entitled to sell those
shares without regard to the foregoing requirements.
No predictions can be made as to the effect, if any, that sales of
securities or the availability of securities for sale will have on the market
price prevailing from time to time. Nevertheless, sales of substantial amounts
of the Common Stock in the public market, or the perception that such sales
could occur, could adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities. See "Risk Factors--Potential Decreases in the Market
Price of Common Stock Resulting from Future Sale of Common Stock."
54
UNDERWRITING
The Underwriters named below (the "Underwriters"), acting through their
representatives, ISG Solid Capital Markets, LLC, Joseph Charles & Associates,
Inc., and All-Tech Investment Group, Inc. (the "Representatives"), have
severally agreed, subject to the terms and conditions contained in the
Underwriting Agreement (the "Underwriting Agreement"), to purchase from the
Company and the Selling Stockholders, and the Company and the Selling
Stockholders have agreed to sell to the Underwriters on a firm commitment
basis, the respective number of shares of Common Stock set forth opposite their
names:
Number of
Underwriter Shares
----------- ---------
ISG Solid Capital Markets, LLC ............
Joseph Charles & Associates, Inc. .........
All-Tech Investment Group, Inc. ...........
Total .................................... 3,900,000
=========
The Underwriters are committed to purchase all of the shares of Common
Stock offered hereby, if any of the shares are purchased. The Underwriting
Agreement provides that the obligations of the several Underwriters are subject
to the conditions precedent specified therein.
The Company and the Selling Stockholders have been advised by the
Representative that the Underwriters initially propose to offer the shares of
Common Stock to the public at the public offering price set forth on the cover
page of this Prospectus and to certain dealers at such price less concessions
not in excess of $ per share. Such dealers may re-allow a concession not in
excess of $ per share to certain other dealers. After the commencement of
the Offering, the public offering price, concessions and re-allowances may be
changed by the Representatives. Pursuant to the Rules of the NASD, the
Underwriters will not make any sales to discretionary accounts.
The Company and the Selling Stockholders have granted to the Underwriters
the Over-Allotment Option, exercisable during the 45-day period from the date
of this Prospectus, to purchase from the Company and the Selling Shareholders
up to an additional 585,000 shares of Common Stock in the aggregate at the
initial public offering price, less underwriting discounts and the
non-accountable expense allowance. Such option may be exercised only for the
purpose of covering over-allotments, if any, incurred in the sale of the Common
Stock offered hereby. To the extent such option is exercised in whole or in
part, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase the number of shares of Common Stock proportionate to
its initial commitment.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriters may be required
to make. The Company and the Selling Stockholders have agreed to pay to the
Representatives a non-accountable expense allowance equal to 1 1/2% of the
gross proceeds derived from the sale of the Common Stock underwritten, or
$526,500 ($605,475 if the Underwriter's Over-Allotment Option is exercised in
full), of which $75,000 has been paid to date by the Company.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase the Common Stock for the purpose of stabilizing market prices. The
Underwriters also may create a short position for the account of the
Underwriters by selling more shares of Common Stock in connection with the
Offering than they are committed to purchase from the Company and the Selling
Stockholders, and in such case may purchase shares of Common Stock in the open
market following completion of the Offering to cover all or a portion of such
short position. The Underwriters may also cover all or a portion of such short
position, up to 585,000 shares of Common Stock by exercising the Over-Allotment
Option referred to above. In addition, the Representatives may impose "penalty
bids" under
55
contractual arrangements with the Underwriters whereby it may reclaim from an
Underwriter (or dealer participating in the Offering) for the account of other
Underwriters, the selling concession with respect to the shares of Common Stock
that are distributed in the Offering but subsequently purchased for the account
of the Underwriters in the open market. Any of the transactions described in
this paragraph may result in the maintenance of the price of the Common Stock
at a level above that which might otherwise prevail in the open market. None of
the transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
All directors, officers and holders of shares of Common Stock, options,
warrants or other securities convertible, exercisable or exchangeable for
Common Stock have, pursuant to certain lock-up agreements, agreed not to offer,
sell or otherwise dispose of any securities of the Company for a period of 12
months following the date of this Prospectus without the prior written consent
of the Representatives and the Company. An appropriate legend shall be placed
on the certificates representing such securities. The Representatives have no
general policy with respect to the release of such securities prior to the
expiration of the lock-up period and no present intention to waive or modify
any of these restrictions on the sale of Company securities.
In connection with this Offering, the Company has agreed to sell to the
Representatives (other than All-Tech), and/or its designees, for nominal
consideration, Representatives' Warrants to purchase from the Company up to
390,000 shares of Common Stock. The Representatives' Warrants are initially
exercisable at any time during a period of four (4) years commencing at the
beginning of the second year after their issuance and sale at a price of $
(120% of the public offering price of the Common Stock) per share of Common
Stock. The Representatives' Warrants provide for adjustment in the number of
securities issuable upon the exercise thereof as a result of certain
subdivisions and combinations of the Common Stock. The Representatives'
Warrants grant to the holders thereof certain rights of registration for the
securities issuable upon exercise thereof. In addition, the Representatives'
Warrants may not be sold, transferred, assigned, hypothecated or otherwise
disposed of, in whole or in part, for a period of one year from the date of
this Prospectus except to officers of the Representatives. All-Tech will not be
entitled to any portion of the Representatives' Warrants.
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price of the Common Stock has
been determined by negotiation between the Company, the Selling Stockholders
and the Representatives and does not necessarily bear any relationship to the
Company's asset value, net worth or other established criteria of value. The
factors considered in such negotiations, in addition to prevailing market
conditions, included the history of and prospects for the industry in which the
Company competes, an assessment of the Company's management, the prospects of
the Company, its capital structure and such other factors as were deemed
relevant. Under the Rules of the NASD, when an NASD member such as All-Tech
participates in the distribution of its securities, the public offering price
can be no higher than that recommended by a "qualified independent underwriter"
meeting certain standards. In accordance with this requirement, Joseph Charles
& Associates Inc. has served as a "qualified independent underwriter" of the
Offering, and in connection therewith recommended a price in compliance with
the Rules, and conducted due diligence, and participated in the preparation of
the Registration Statement of which this Prospectus is a part.
ISG Solid Capital Markets, LLC ("ISG") commenced operations in early 1997.
The current president and chief executive officer of ISG has been a principal
of various broker-dealers since 1978; however, prior to this Offering, ISG had
co-managed only two other public securities offerings, and had acted as an
underwriter in several other offerings. Prior to this Offering, All-Tech had
not co-managed or acted as an underwriter of any other public offerings.
However, the principals of All-Tech have been principals of a broker-dealer
which co-managed only two other public securities offerings and had acted as an
underwriter in one other offering. Therefore, except for Joseph Charles &
Associates, Inc., each of the Representatives has limited experience as a
manager, co-manager or underwriter of public offerings of securities. During
the five years immediately preceding the filing of the Registration Statement
of which this prospectus forms a part, Joseph Charles & Associates, Inc. has
managed or co-managed 12 public offerings of securities.
On or about August 19, 1998 the Securities Division of the Office of the
Secretary of the Commonwealth of Massachusetts ("the Division") filed an
Administrative Complaint against Joseph Charles & Associates, Inc. ("JCA")
alleging violations of various provisions of the Massachusetts Uniform
Securities Act. The Complaint charges JCA violated a Consent Order granting
conditional registration to a former associated person of JCA's
56
former Boston, Massachusetts office and that JCA adopted and did not disclose
an informal policy to discourage purchasers of securities in initial public
offerings underwritten by JCA from selling their securities immediately. The
Division seeks sanctions including revocation of JCA's Massachusetts
registration, a cease and desist order, an accounting and offer of rescission,
and a monetary penalty. JCA is defending this matter vigorously. No assurance
can be given that the proceeding will not result in an adverse outcome to JCA,
or that, if the proceeding results in an adverse outcome to JCA, that the
business or financial condition of JCA will not be materially adversely
affected. Further, there can be no assurance of the effect, if any, of an
adverse outcome in this matter on trading in the Company's securities following
completion of this Offering.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a
copy of each such agreement which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part. See "Additional Information."
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Sichenzia, Ross & Friedman LLP, located in New
York, New York. Orrick, Herrington & Sutcliffe LLP, New York, New York, has
acted as counsel for the Underwriters in connection with the Offering.
EXPERTS
The financial statements of All-Tech Investment Group, Inc. have been
audited by Wolinetz, Gottlieb & Lafazan, P.C., independent auditors, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission in
Washington, D.C., a Registration Statement under the Securities Act for the
shares of Common Stock offered by this Prospectus. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits included with the Registration Statement. Statements contained in this
Prospectus as to the contents of any contract or any other document referred to
are not necessarily complete, and with respect to any contract or other
document filed as an exhibit to the Registration Statement, reference is made
to the exhibit for a more complete description of the matter involved, and each
such statement is qualified in its entirety by this reference. For further
information about the Company and the Securities offered by this Prospectus,
reference is hereby made to the Registration Statement and exhibits included
with the Registration Statement. A copy of the Registration Statement,
including exhibits, may be inspected without charge at the Securities and
Exchange Commission's principal office in Washington, D.C., and copies of all
or any part thereof may be obtained from the Public Reference Section of the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of certain prescribed rates.
Upon consummation of the Offering, the Company will become subject to the
information requirements of the Exchange Act and, in accordance therewith, will
file reports and other information with the Securities and Exchange Commission
in accordance with its rules. These reports and other information concerning
the Company may be inspected and copied at the public reference facilities
referred to above as well as certain regional offices of the Securities and
Exchange Commission located at Seven World Trade Center, 13th Floor, New York,
New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511.
The Securities and Exchange Commission also maintains a Web Site which
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Securities and Exchange
Commission (such as the Company) at http:\\www.sec.gov.
57
ALL-TECH INVESTMENT GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report .................................................................. F-2
Balance Sheets as of June 30, 1997 and 1998 ................................................... F-3
Statements of Operations for the Years Ended June 30, 1996, 1997 and 1998...................... F-4
Statement of Changes in Stockholders' Equity for the Years Ended June 30, 1997 and 1998........ F-5
Statements of Cash Flows for the Years Ended June 30, 1996, 1997 and 1998...................... F-6
Notes to Financial Statements ................................................................. F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Officers and Directors
All-Tech Investment Group, Inc.
Montvale, New Jersey
We have audited the accompanying balance sheets of All-Tech Investment Group,
Inc. as of June 30, 1997 and 1998, and the related statements of operations,
changes in stockholders' equity and cash flows for each of the three years in
the period ended June 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of All-Tech Investment Group,
Inc. as of June 30, 1997 and 1998, and the results of its operations and cash
flows for each of the three years in the period ended June 30, 1998 in
conformity with generally accepted accounting principles.
WOLINETZ, GOTTLIEB & LAFAZAN, P.C.
Rockville Centre, New York
August 20, 1998
(Except for Note 12, as to which
the date is September 11, 1998)
F-2
ALL-TECH INVESTMENT GROUP, INC.
BALANCE SHEETS
June 30,
-----------------------------
1997 1998
------------- -------------
ASSETS
Cash and cash equivalents ..................................... $ 641,414 $ 985,182
Receivable from brokers (net of allowance for doubtful
accounts of $409,921 in 1998) ............................... 98,033 1,648,071
Securities owned -- at market value ........................... 2,243,007 546,084
Other receivables ............................................. 195,870 213,643
Property and equipment -- net ................................. 411,322 591,859
Loan receivable -- parent ..................................... 199,941 --
Loans receivable -- affiliates ................................ 9,000 --
Deferred tax assets ........................................... -- 71,000
Deferred offering costs ....................................... 223,099
---------- ----------
Total Assets ................................................... $3,798,587 $4,278,938
========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Liabilities:
Payable to clearing broker .................................... $1,027,113 $ --
Accounts payable .............................................. 501,766 811,920
Securities sold, not yet purchased -- at market value ......... 368,800 378,067
Income taxes payable .......................................... 46,250 339,812
Loan payable-parent ........................................... -- 572,559
---------- ----------
Total Liabilities ........................................... 1,943,929 2,102,358
---------- ----------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.01 par value;
5,000,000 shares authorized, none outstanding ............... -- --
Common stock, $.001 par value; 55,000,000
shares authorized, 10,555,559 shares issued
and outstanding ............................................. 10,556 10,556
Additional paid-in capital .................................... 1,553,212 1,553,212
Retained earnings ............................................. 290,890 612,812
---------- ----------
Total Stockholders' Equity .................................. 1,854,658 2,176,580
---------- ----------
Total Liabilities and Stockholders' Equity ..................... $3,798,587 $4,278,938
========== ==========
The accompanying notes are an integral part of the financial statements.
F-3
ALL-TECH INVESTMENT GROUP, INC.
STATEMENTS OF OPERATIONS
Years Ended
June 30,
----------------------------------------------------
1996 1997 1998
---------------- ---------------- --------------
REVENUES:
Brokerage commissions and fees ............. $ 10,703,575 $ 15,392,862 $16,619,453
Trading gains (losses) ..................... 64,112 132,421 (392,558)
ECN fees -- net ............................ -- -- 1,652,536
Other ...................................... 306,892 538,533 416,418
------------ ------------ -----------
Total Revenues .......................... 11,074,579 16,063,816 18,295,849
------------ ------------ -----------
COSTS AND EXPENSES:
Clearing charges ........................... 2,505,805 3,688,293 3,030,722
Technology development ..................... 208,877 366,475 442,177
Communication costs ........................ 976,626 2,376,036 4,043,794
Employee compensation and benefits ......... 4,161,102 6,056,590 6,323,938
Occupancy costs ............................ 105,585 386,271 1,077,104
Other ...................................... 1,755,160 1,588,210 2,674,251
------------ ------------ -----------
Total Costs and Expenses ................ 9,713,155 14,461,875 17,591,986
------------ ------------ -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES ........................... 1,361,424 1,601,941 703,863
PROVISION FOR INCOME TAXES .................. 610,278 664,505 211,000
------------ ------------ -----------
NET INCOME .................................. $ 751,146 $ 937,436 $ 492,863
============ ============ ===========
Basic earnings per common share ............. $ .07 $ .09 $ .05
============ ============ ===========
Weighted average common shares outstanding 10,555,559 10,555,559 10,555,559
============ ============ ===========
The accompanying notes are an integral part of the financial statements.
F-4
ALL-TECH INVESTMENT GROUP, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Retained
Preferred Common Paid-In Earnings
Stock Stock Capital (Deficit) Total
----------- ---------- ------------ --------------- ---------------
Balances -- July 1, 1995 .......... $ -- $10,556 $1,553,212 $ (47,692) $ 1,516,076
Net Income ........................ -- -- -- 751,146 751,146
---- ------- ---------- ------------ ------------
Balances -- June 30, 1996 ......... -- 10,556 1,553,212 703,454 2,267,222
Net Income ........................ -- -- -- 937,436 937,436
Dividends Paid .................... -- -- -- (1,350,000) (1,350,000)
---- ------- ---------- ------------ ------------
Balances -- June 30, 1997 ......... -- 10,556 1,553,212 290,890 1,854,658
Net Income ........................ -- -- -- 492,863 492,863
Dividends Paid .................... -- -- -- (170,941) (170,941)
---- ------- ---------- ------------ ------------
Balances -- June 30, 1998 ......... $ -- $10,556 $1,553,212 $ 612,812 $ 2,176,580
==== ======= ========== ============ ============
The accompanying notes are an integral part of the financial statements.
F-5
ALL-TECH INVESTMENT GROUP, INC.
STATEMENTS OF CASH FLOWS
Years Ended
---------------------------------------------------
June 30,
---------------------------------------------------
1996 1997 1998
--------------- --------------- ---------------
Cash Flows from Operating Activities:
Net income .......................................................... $ 751,146 $ 937,436 $ 492,863
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation ....................................................... 28,159 63,026 250,871
Allowance for doubtful accounts .................................... -- -- 409,921
Loss on abandonment ................................................ -- 43,544 --
Deferred tax assets ................................................ -- -- (71,000)
Changes in Operating Assets and
Liabilities:
Receivable from brokers ........................................... (479,188) 624,819 (1,959,959)
Securities owned -- at market value ............................... (947,941) (1,143,636) 1,696,923
Prepaid expenses .................................................. 18,661 -- --
Other receivables ................................................. (30,889) (161,581) (17,773)
Other ............................................................. -- -- --
Accounts payable .................................................. 28,391 408,932 310,154
Payable to clearing broker ........................................ 181,055 769,237 (1,027,113)
Securities sold, not yet purchased-at market value ................ 35,291 333,509 9,267
Income taxes payable .............................................. 610,000 (563,750) 293,562
------------ ------------ ------------
Net Cash Provided by Operating Activities ............................ 194,685 1,311,536 387,716
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchases of property and equipment ................................. (43,074) (380,632) (431,408)
------------ ------------ ------------
Cash Flows from Financing Activities:
Payments of loans -- parent ......................................... (1,774,378) (500,000) (1,812,764)
Procceds of loans -- parent ......................................... 1,768,700 1,386,877 2,585,264
Dividends paid ...................................................... -- (1,350,000) (170,941)
Loan to related parties and affiliates .............................. (49,429) (743,014) --
Repayment of loans to related parties and
affiliates ......................................................... 43,463 739,980 9,000
Proceeds of loans -- affiliate ...................................... -- -- 135,000
Repayments of loans -- affiliate .................................... -- -- (135,000)
Deferred offering costs ............................................. -- -- (223,099)
------------ ------------ ------------
Net Cash Provided (Used) by Financing
Activities .......................................................... (11,644) (466,157) 387,460
------------ ------------ ------------
Increase in Cash and Cash
Equivalents ......................................................... 139,967 464,747 343,768
Cash and Cash Equivalents -- Beginning of Period ..................... 36,700 176,667 641,414
------------ ------------ ------------
Cash and Cash Equivalents -- End of Period ........................... $ 176,667 $ 641,414 $ 985,182
============ ============ ============
Supplemental Cash Flow Disclosure:
Cash Paid for Interest .............................................. $ 20,174 $ 41,975 $ 27,511
============ ============ ============
Cash Paid for Income Taxes .......................................... $ -- $ 1,246,965 $ 49,480
============ ============ ============
The accompanying notes are an integral part of the financial statements.
F-6
ALL-TECH INVESTMENT GROUP, INC.
Notes to Financial Statements
NOTE 1 -- Nature of Business and Summary of Significant Accounting Policies
Nature of Business
All-Tech Investment Group, Inc., (the "Company") is a corporation formed
for the purpose of conducting business as a broker/dealer in securities. The
Company is a 96% owned subsidiary of Rushmore Financial Services, Inc., a
privately owned corporation (the "Parent").
The Company operates under the provisions of Paragraph (k)(2)(ii) of Rule
15c3-3 of the Securities and Exchange Commission and, accordingly, is exempt
from the remaining provisions of that Rule. Essentially, the requirements of
Paragraph (k)(2)(ii) provide that the Company clear all transactions on behalf
of customers on a fully disclosed basis with a clearing broker/dealer, and
promptly transmit all customer funds and securities to the clearing
broker/dealer. The clearing broker/dealer carries all of the accounts of the
customers and maintains and preserves all related books and records as are
customarily kept by a clearing broker/dealer.
The Company, through its trading system software, provides its customers
with real time computerized access to price information for over-the-counter
securities traded on Nasdaq and securities traded on various national and
regional exchanges, and enables its customers to instaneously transmit buy and
sell orders for execution. The Company has also commenced operation of an
electronic communications network ("ECN").
Revenue Recognition
The Company derives its revenues primarily from commissions related to
customer transactions. The Company records client and proprietary trading
transactions on a settlement date basis, which is generally three business days
after trade date. Revenues and expenses related to such transactions are
recorded on settlement date which is not materially different than trade date.
The Company is exposed to risk of loss on these transactions in the event a
client or broker fails to meet the terms of their contracts, in which case the
Company may have to purchase or sell the positions at prevailing market prices.
The Company records revenues from its ECN subscribers and non-subscribers
on a transaction date basis. Revenues from remote customers are recognized on
the last date of the month for the services provided for that month.
High volume users are not billed for the monthly remote service fee.
Students of ATTG (see Note 10) receive a rebate based on the amount of
trades executed during the month. This amount is recorded as a reduction of
income.
One time, non-refundable fees for the opportunity to manage a branch are
recognized upon execution of the branch office management agreement.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents. Cash
equivalents consist primarily of money market accounts.
Marketable Securities
Securities owned and securities sold but not yet purchased are stated at
fair market value and represent equity securities in which the Company acts as
market maker and performs proprietary trading. Securities owned and securities
sold but not yet purchased consist of equity securities.
F-7
ALL-TECH INVESTMENT GROUP, INC.
Notes to Financial Statements -- (Continued)
NOTE 1 -- Nature of Business and Summary of Significant Accounting Policies
-- (Continued)
Securities sold but not yet purchased represent obligations of the Company
to deliver the specified security at the contracted price. A liability is
thereby created to purchase the security in the market at prevailing prices.
Accordingly, these transactions result in off-balance-sheet risk as the
Company's ultimate obligation to satisfy the sale of securities sold but not
yet purchased may exceed the amount recognized in the statement of operations.
Unrealized gains and losses on securities are reflected in the statement
of operations.
Depreciation
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is computed primarily by the straight-line method over the
estimated useful lives of the related assets, which approximate three to five
years.
Estimated Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosure about
Fair Value of Financial Instruments," requires the Company to report the fair
value of financial instruments, as defined. Substantially all of the Company's
assets and liabilities are carried at fair value or contracted amounts which
approximate fair value.
Brokerage receivables and payables are recorded at contracted amounts
which approximate fair value.
Technology Development Costs
Technology development costs are charged to operations as incurred.
Technology development costs include costs incurred in the development and
enhancement of software used in connection with services provided by the
Company.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, which requires the recognition of deferred tax
liabilities and assets at tax rates expected to be in effect when these
balances reverse. Future tax benefits attributable to temporary differences are
recognized to the extent that realization of such benefits is more likely than
not.
Deferred Offering Costs
Deferred offering costs represent charges incurred in connection with a
proposed initial public offering of the Company's Common Stock and Warrants.
Upon successful completion of such Offering, the aggregate offering costs will
be charged to additional paid-in capital. In the event that the proposed
Offering is unsuccessful, the aggregate offering costs will be charged to
operations in the appropriate period.
Reclassifications
Certain items in these financial statements have been reclassified to
conform to the current period presentation.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value.
The Company has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. Accordingly, compensation cost for stock options is measured
as the excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the amount an
F-8
ALL-TECH INVESTMENT GROUP, INC.
Notes to Financial Statements -- (Continued)
NOTE 1 -- Nature of Business and Summary of Significant Accounting Policies
-- (Continued)
employee must pay to acquire the stock. Since the Company intends to set the
exercise price of the Company's employee stock options to be granted prior to
the Company's proposed initial public offering (see Note 9) equal to the market
price of the underlying stock on the date of grant, no compensation expense
will be recognized.
New Accounting Pronouncements
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). The
new rules are effective for both interim and annual financial statements for
the periods ending after December 15, 1997. SFAS 128 supersedes APB No. 15 to
conform earnings per share with international standards as well as to simplify
the complexity of the computation under APB No. 15. The previous primary
earnings per share ("EPS") calculation is replaced with a basic EPS
calculation. The basic EPS differs from the primary EPS calculation in that the
basic EPS does not include any potentially dilutive securities. Fully dilutive
EPS is replaced with diluted EPS and should be disclosed regardless of dilutive
impact to basic EPS. Accordingly, the Company has adopted SFAS 128 effective
December 31, 1997.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
statement, which is effective for fiscal years beginning after December 15,
1997, expands or modifies disclosures and should have no impact on the
Company's financial position, results of operations or cash flows.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). This statement, which is
effective for fiscal years beginning after December 15, 1997, establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. This Statements supersedes SFAS 14, "Financial Reporting for
Segments of a Business Enterprise", but retains the requirements to report
information about major customers. It amends SFAS 94, "Consolidation of All
Majority-Owned Subsidiaries", to remove the special disclosure requirements for
previously unconsolidated subsidiaries. Management is currently evaluating what
impact, if any, SFAS 131 would have on the Company's financial position,
results of operations or cash flows.
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits" (SFAS 132). This statement, which is
effective for fiscal years beginning after December 15, 1997, although earlier
application is encouraged, revises employers' disclosures about pension and
other postretirement benefit plans, It does not change the measurement or
recognition of those plans, It standardizes the disclosure requirements for
pension and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer as useful as they were when SFAS 87, "Employers'
Accounting for Pensions, No. 88, Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and
No. 106, Employers' Accounting for Postretirement Benefits Other than
Pensions," were issued. The Statement suggests combined formats for
presentation of pension and other postretirement benefit disclosures.
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). This statement, which is effective for
years beginning after June 15, 1999, establishes accounting and reporting
standards for derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as (a)
a hedge of the exposure of changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transactions. SFAS 133 should have no
impact on the Company's financial position, results of operations or cash flows.
F-9
ALL-TECH INVESTMENT GROUP, INC.
Notes to Financial Statements -- (Continued)
NOTE 2 -- Brokerage Receivables and Payables
June 30,
--------------------------
1997 1998
---------- -------------
Receivable from brokers consist of the following:
Receivable from clearing broker-commissions and trading ......... $65,396 $1,041,323
Clearing broker deposit receivable .............................. 32,637 25,576
Receivable from brokers--ECN fees (net of
allowance for doubtful accounts of $409,921) ................... -- 581,172
------- ----------
$98,033 $1,648,071
======= ==========
Payable to clearing broker represents net amounts owed on security
positions.
NOTE 3 -- Property and Equipment
June 30,
-----------------------
1997 1998
---------- ----------
Property and equipment consists of the following:
Furniture and Fixtures .......................... $ 78,570 $ 78,570
Office Equipment and Computers .................. 380,632 800,040
Vehicles ........................................ 51,739 51,739
Leasehold Improvements .......................... -- 12,000
-------- --------
510,941 942,349
Less: Accumulated Depreciation .................. 99,619 350,490
-------- --------
$411,322 $591,859
======== ========
NOTE 4 -- Regulatory Requirements
The Company is subject to the Uniform Net Capital Rule (the "Rule") under
the Securities Exchange Act of 1934. Under this Rule, the Company is required
to maintain net capital, as defined, equal to the greater of $100,000 or $2,500
for each stock it posts a quote in that trades above $5 per share and $1,000
for each stock it posts a quote in that trades at $5 or less per share, up to
$1,000,000 and a net capital ratio, as defined, of a maximum of 1500%. At June
30, 1997 the Company's net capital was $453,672, which exceeded its net capital
requirement by $353,672 and its net capital ratio was 121%. At June 30, 1998
the Company's net capital was $551,934, which exceeded its minimum net capital
requirement by $227,434 and its net capital ratio was 312%.
NOTE 5 -- Commitments and Contingencies
Lease Commitments
The Company has entered into a new lease commencing June 1, 1998 and
ending March 31, 2003 for office facilities. The lessor is a corporation whose
stockholders are also the stockholders of both the Company's parent and the
Company. The lease provides for annual base rent of approximately $248,000 and
the payment of other occupancy costs. The lease also provides that the Company
pay for increases in its pro-rata share of real estate taxes and utility costs
above the original base period. The Company sublets a portion of its office
facilities on a month to month basis to certain related companies.
F-10
ALL-TECH INVESTMENT GROUP, INC.
Notes to Financial Statements -- (Continued)
NOTE 5 -- Commitments and Contingencies -- (Continued)
Approximate future minimum rentals under this lease is summarized as
follows:
Year Ending June 30,
---------------------
1999 $248,000
2000 $248,000
2001 $248,000
2002 $248,000
2003 $186,000
Rent expense net of sublets under a prior lease with this affiliate for
the years ended June 30, 1996, 1997 and 1998 was approximately $65,100, $69,900
and $142,000 respectively.
Third Party Vendors
The Company depends on third party vendors for real time and historical
financial market data. The Company has written agreements with these vendors.
The Company has an alternative arrangement for backup with respect to one
significant vendor and will have to make additional alternative arrangements if
other vendors become unable to perform. These arrangements with third party
vendors are generally for one to two year periods. Minimum annual commitments
at June 30, 1998 under these agreements were approximately $130,000 expiring
June 30, 1999.
Legal
The Company is involved in legal proceedings and claims which arise in the
ordinary course of its business. Management believes that the outcome of such
litigation and claims will not result in any material adverse effect on the
Company's financial position or results of operations.
Litigation
In June 1998, the Company instituted an arbitration against a broker
dealer ("B/D") by filing a Statement of Claim with the National Association of
Securities Dealers, Inc. The arbitration seeks compensatory damages in the
amount of $97,538, punitive damages in the amount of $500,000, as well as
interest, costs, and disbursements and attorneys fees. The arbitration was
commenced as a result of the B/D's refusal to pay the Company's ECN fees
arising from the B/D's entering trades involving OTC securities with the ATTAIN
ECN. The allegations set forth in the Statement of Claim include claims based
upon breach of contract, quantum meruit and fraud. The Company is also
currently denying access to the B/D, as well as 33 other ATTAIN ECN users,
because they have either requested that the Company block their access to the
ATTAIN ECN or they have stated to the Company that they will not pay their
ATTAIN ECN bills. The Company intends to vigorously pursue its legal remedies
to recover unpaid accounts receivable. However, there can be no assurance that
such efforts will be successful.
Employment Agreements
The Company has employment agreements with two senior executives and
stockholders of the Company. The employment agreements were made on April 20,
1998 and commence on the effective date of the Company's proposed initial
public offering of its Common Stock (see Note 9). The agreements have a term of
three years from the effective date and provide for annual aggregate
compensation of $1,000,000, aggregate additional salaries of 10% of net
earnings before taxes to a maximum of an additional $1,000,000 in the first two
years and $3,000,000 in the third year, and payment of certain employment
related expenses.
ATTAIN ECN
The Company operates the ATTAIN ECN pursuant to a no-action letter
originally issued by the SEC in February 1998, which granted no-action relief
through the period ending April 15, 1998. In April 1998 the
F-11
ALL-TECH INVESTMENT GROUP, INC.
Notes to Financial Statements -- (Continued)
NOTE 5 -- Commitments and Contingencies -- (Continued)
no-action relief was extended through the period ending August 17, 1998, and in
August 1998, the no-action relief was further extended through the period
ending October 16, 1998. In the event that the no-action letter is not
extended, the Company would be required to cease operating the ATTAIN ECN,
which could have a material adverse effect on the Company's financial position
and results of operations. The no-action letter, as extended, is conditioned
upon the continued compliance with the terms expressed in the earlier no-action
letters, which include, but are not limited to, rapid response time to orders
by the ATTAIN ECN, periodic review of the capacity and integrity of the system,
compliance with Year 2000 review and compliance with restrictions as to maximum
transaction fees.
All ECN's, including the ATTAIN ECN, are subject to an ongoing review of
their operations by the SEC for compliance with the provisions of the no-action
letter and for compliance with securities regulations in general. In this
regard, the operation of the ATTAIN ECN is examined, on an ongoing basis, by
the Division of Market Regulation of the SEC for such compliance. In the course
of its review, the Division of Market Regulation of the SEC has questioned
whether the Company's operation of the ATTAIN ECN is in the manner described in
the Company's letter requesting a no-action position. The Company believes that
it has, at all times, operated the ATTAIN ECN in accordance with the provisions
of the no-action letter. No assurance can be given that a determination will
not be made that the Company's operation of the ATTAIN ECN was not in
accordance with the provisions of the no-action letter or securities laws in
general.
Year 2000
The Company's review of its own operating systems does not indicate any
Year 2000 problems. However, the Company is highly dependent on third party
vendors. Failures and interruptions, if any, resulting from the inability of
certain computing systems of third party vendors, including the Company's
clearing broker, to recognize the Year 2000 could have a material adverse
effect on the Company's results of operations. The Company's clearing broker
has recently informed the Company that it is not currently Year 2000 compliant.
There can be no assurance that the Year 2000 issue can be resolved by any of
such third parties prior to the upcoming change in the century. Although the
Company may incur substantial costs, particularly costs resulting from
increased charges by its third party service providers, as a result of such
third party service providers correcting Year 2000 issues, such costs are not
sufficiently certain to estimate at this time.
NOTE 6 -- Financial Instruments with Off-Balance Sheet Credit Risk
As a securities broker, the Company is engaged in buying and selling
securities for a diverse group of investors. The Company introduces these
transactions for clearance to another broker/dealer on a fully disclosed basis.
The Company's exposure to credit risk associated with non-performance of
customers in fulfilling their contractual obligations pursuant to securities
transactions can be directly impacted by volatile trading markets which may
impair the customers' ability to satisfy their obligations to the Company and
the Company's ability to liquidate the collateral at an amount equal to the
original contracted amount. The agreement between the Company and its clearing
broker provides that the Company is obligated to assume any exposure related to
such non-performance by its customers. The Company seeks to control the
aforementioned risks by requiring customers to maintain margin collateral in
compliance with various regulatory requirements and the clearing broker's
internal guidelines. The Company monitors its customer activity by reviewing
information it receives from its clearing broker on a daily basis, and
requiring customers to deposit additional collateral, or reduce positions when
necessary. At June 30, 1998, the Company believes that its exposure to such
credit risk is immaterial.
The Company is obligated to settle transactions with brokers and/or other
financial institutions even if its customers fail to meet their obligations to
the Company. Customers are required to complete their transactions on
settlement date, generally three business days after trade date. If customers
do not fulfill their contractual obligations, the Company may incur losses. The
Company has established procedures to reduce this risk by
F-12
ALL-TECH INVESTMENT GROUP, INC.
Notes to Financial Statements -- (Continued)
NOTE 6 -- Financial Instruments with Off-Balance Sheet Credit Risk
-- (Continued)
requiring that customers deposit cash and/or securities into their account
prior to placing an order. In addition, the Company monitors each of its
customers via computer analysis to assess risk of each trade and the customer's
overall position. The Company believes that its risk of significant loss is
unlikely in light of margin requirements and the Company's computerized risk
management procedures.
The Company may at times maintain inventories in equity securities on both
a long and short basis. While long inventory positions represent the Company's
ownership of securities, short inventory positions represent obligations of the
Company to deliver specified securities at a contracted price, which may differ
from market prices prevailing at the time of completion of the transactions.
Accordingly, both long and short inventory positions may result in losses or
gains to the Company as market values of securities fluctuate. To mitigate the
risk of losses, long and short positions are marked to market daily and are
continuously monitored by the Company.
NOTE 7 -- Savings Plan
The Company established a defined contribution 401(k) plan effective
January 1, 1998 that covers substantially all employees meeting certain minimum
eligibility requirements. Participating employees can elect to defer a portion
of their compensation and contribute it to the plan on a pretax basis. The
Company may also match certain amounts and/or provide additional discretionary
contributions, as defined. The Company has made discretionary contributions of
approximately $34,000 to date.
NOTE 8 -- Income Taxes
The Company and its Parent and subsidiaries are members of a group of
affiliated companies which join in filing a consolidated federal income tax
return. In addition, the Company also files separate state and local tax
returns.
Each company in the consolidated group pays its share of federal income
taxes based on its taxable income. Members with losses record tax benefits to
the extent such losses are recognized in the consolidated federal tax
provisions. Federal taxes are paid to, or received from, the Parent based upon
each company's unconsolidated taxable income or loss. State and local taxes are
paid on a separate basis by each company. At June 30, 1997 and 1998, the
Company had no taxes payable to the Parent.
The components of income tax provision (benefit) are as follows:
Year Ended June 30
---------------------------------------
1996 1997 1998
----------- ----------- -----------
Current:
Federal (Net of benefit of $88,000 in 1998) ......... $417,198 $512,505 $ 207,000
State ............................................... 193,080 152,000 75,000
-------- -------- ---------
Total current .................................... 610,278 664,505 282,000
Deferred -- (benefit) ............................... -- -- (71,000)
-------- -------- ---------
Total income tax provision .......................... $610,278 $664,505 $ 211,000
======== ======== =========
Deferred income taxes are recorded when revenues and expenses are
recognized in different periods for financial statement and tax return
purposes. Temporary differences that created deferred tax assets are as
follows:
Year Ended June 30
----------------------------
1996 1997 1998
------ ------ ----------
Deferred Tax Assets:
Depreciation ................... $-- $-- $25,000
Uncollectible Reserves ......... -- -- 46,000
--- --- -------
$-- $-- $71,000
=== === =======
F-13
ALL-TECH INVESTMENT GROUP, INC.
Notes to Financial Statements -- (Continued)
NOTE 8 -- Income Taxes -- (Continued)
The effective tax rates differed from the federal statutory rates as
follows:
Year Ended June 30,
------------------------------------
1996 1997 1998
---------- ---------- ----------
Tax expense at federal statutory rate .................. 34.0% 34.0% 34%
State income taxes, net of federal tax benefit ......... 10.4 6.3 7.0
Federal income tax refund .............................. -- -- (12.5)
Other .................................................. .4 1.2 1.5
----- ----- ------
Effective tax rate .................................. 44.8% 41.5% 30.0%
===== ===== ======
NOTE 9 -- Proposed Initial Public Offering
The Company has filed a Registration Statement relating to the initial
public offering of its common stock (the "Offering"). The Company intends to
offer to the public 3,510,000 shares of its Common Stock at $9.00 per share for
gross proceeds to the Company of $31,590,000 before underwriting costs and
expenses of the Offering. In addition, the Company may sell an additional
292,500 shares at $9.00 per share pursuant to an over-allotment option
exercisable by the Underwriters. Additional terms of the Offering include: the
sale of 390,000 shares of Common Stock at $9.00 per share to be offered by
Selling Stockholders, an Over-Allotment Option of 292,500 shares at $9.00 per
share to be offered by Selling Stockholders exercisable by the Underwriters and
at the closing of the proposed Offering a grant to the Underwriter of five year
warrants.
NOTE 10 -- Related Party Transactions
The Company has an agreement with All-Tech Training Group, Inc. ("ATTG"),
an affiliate and wholly-owned subsidiary of the Company's Parent, whereby the
Company offers ATTG students a discounted commission equal, in the aggregate,
up to the amount of their tuition.
The Company subleases on a month to month basis three branch office
facilities from Double H Management, Inc. ("Double H"), an affiliate and wholly
owned subsidiary of the Company's Parent at an aggregate annual rental of
approximately $80,000.
The Company leases its executive offices from Summit Plaza Associates,
Inc. ("Summit"), an affiliate of the Company's Parent at an aggregate annual
rental of approximately $248,000 (See Note 5).
In April 1998 the Company borrowed $611,000 from its Parent. The loan is
non-interest bearing and payable on demand. This amount was reduced by $38,441,
which represented an advance by the Company for a portion of the Parent's
federal tax obligation, leaving a balance due to the Parent of $572,559 at June
30, 1998.
NOTE 11 -- Stockholders' Equity
Recapitalization and Reincorporation
In May, 1998 the Company re-incorporated in the State of Delaware with
authorized capital stock consisting of 55,000,000 shares of Common Stock, par
value $.001 per share and 5,000,000 shares of undesignated Preferred Stock,
$.01 par value per share. Concurrently, the Company effected a 68.75 for 1
forward split on the new Delaware common shares. All share and per share data
have been restated to give retroactive effect to this recapitalization.
The Company's Board of Directors may, without further action by the
Company's stockholders, from time to time, direct the issuance of any
authorized but unissued or unreserved shares of Preferred Stock in series and
F-14
ALL-TECH INVESTMENT GROUP, INC.
Notes to Financial Statements -- (Continued)
NOTE 11 -- Stockholders' Equity -- (Continued)
may, at the time of issuance, determine the rights, preferences and limitations
of each series. The holders of Preferred Stock may be entitled to receive a
preference payment in the event of any liquidation, dissolution or winding-up
of the Company before any payment is made to the holders of the Common Stock.
The Board of Directors could issue Preferred Stock with voting and other rights
that could adversely affect the voting power of the holders of Common Stock and
could have certain anti-takeover effects.
Stock Option Plan
The Company's 1998 Stock Option Plan (the "Plan") was adopted by the Board
of Directors of the Company on May 11, 1998. A total of 1,535,354 shares of
Common Stock are reserved for issuance upon exercise of options to be granted
under the Plan, of which the Company intends to grant 1,000,000 stock options
as of the effective date of the Company's proposed initial public offering of
its Common Stock and Warrants. The options granted will be exercisable at a
price equal to the initial public offering price per share, have an expiration
date of September 30, 2008, and vest at a rate of 25% per year from the date of
grant.
Note 12 -- Subsequent Events
In July 1998, the Parent converted its loan to the Company of $572,559
into additional paid-in capital (see Note 10).
On September 9, 1998 NASD Regulation, Inc. issued an order of dismissal,
dismissing the Company's claims against Instinet Corporation. The order of
dismissal requires the Company to pay Instinet $55,000 in reimbursement of
legal fees incurred, as well to pay NASD Regulation, Inc. $27,750 in hearing
fees. The Company believes that is has a meritorious position, and it currently
intends to appeal the dismissal.
On September 11, 1998 the Company effected a 1.46546 for 1 reverse split
on its common stock. All share and per share data have been restated to give
retroactive effect to this recapitalization.
F-15
===============================================================================
No Underwriter, dealer, sales representative or any other person has
been authorized to give any information or to make any representations in
connection with this Offering other than those contained in this Prospectus,
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company, by any Selling Stockholder or by
any Underwriter. This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, any securities other than the registered
securities to which it relates or an offer to, or a solicitation of, any person
in any jurisdiction where such an offer or solicitation is unauthorized or in
which the person making such offer or solicitation is not qualified to do so or
to anyone to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to the date hereof.
-----------------------------------
TABLE OF CONTENTS
Page
---------
Prospectus Summary .......................... 3
Risk Factors ................................ 6
Use of Proceeds ............................. 21
Dividend Policy ............................. 21
Dilution .................................... 22
Capitalization .............................. 23
Selected Financial Data ..................... 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................... 25
Business .................................... 33
Management .................................. 45
Certain Transactions ........................ 49
Principal and Selling Stockholders .......... 50
Description of Capital Stock ................ 51
Shares Eligible for Future Sale ............. 54
Underwriting ................................ 55
Legal Matters ............................... 57
Experts ..................................... 57
Additional Information ...................... 57
Index to Financial Statements ............... F-1
-----------------------------------
Until , 1998 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
===============================================================================
===============================================================================
[GRAPHIC OMITTED]
All-Tech
Investment Group, Inc.
3,900,000 Shares of Common Stock
----------------------------------------
PROSPECTUS
----------------------------------------
ISG Solid Capital Markets, LLC
Joseph Charles & Associates, Inc.
All-Tech Investment Group, Inc.
, 1998
===============================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses payable by the
Registrant in connection with the sale of Common Stock being registered,
excluding underwriting discounts and commissions and the Representative's
non-accountable expense allowance. All amounts are estimates except the SEC
registration fee, the NASD filing fee and the AMEX listing fee.
Amount to
be Paid
-----------
SEC registration fee ................. $ 32,677.71
NASD filing fee ...................... 11,577.19
AMEX listing fee ..................... 50,000.00
Printing and engraving ............... 110,000.00
Legal fees and expenses .............. 70,000.00
Accounting fees and expenses ......... 75,000.00
Blue sky fees and expenses ........... 20,000.00
Transfer agent fees .................. 5,000.00
Miscellaneous ........................ 35,745.10
-----------
Total ............................... $410,000.00
===========
ITEM 14. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware
("Delaware Law") empowers a Delaware corporation to indemnify any persons who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceedings, whether civil, criminal,
administrative or investigative (other than action by or in the right of such
corporation), by reason of the fact that such person was an officer or director
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise.
The indemnity may include expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding, provided that such
officer or director acted in good faith and in a manner s/he reasonably
believed to be in or not opposed to the corporation's best interests, and, for
criminal proceedings, had no reasonable cause to believe his or her conduct was
illegal. A Delaware corporation may indemnify officers and directors in an
action by or in the right of the corporation under the same conditions, except
that no indemnification is permitted without judicial approval if the officer
or director is adjudged to be liable to the corporation in the performance of
his or her duty. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses which such officer or director actually and
reasonably incurred.
In accordance with Delaware Law, the Certificate of Incorporation of the
Company contains a provision to limit the personal liability of the directors
of the Registrant for violations of their fiduciary duty. This provision
eliminates each director's liability to the Registrant or its stockholders for
monetary damages except (i) for any breach of the director's duty of loyalty to
the Registrant or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Delaware Law providing for liability of
directors for unlawful payment of dividends or unlawful stock purchases or
redemptions, or (iv) for any transaction from which a director derived an
improper personal benefit. The effect of this provision is to eliminate the
personal liability of directors for monetary damages for actions involving a
breach of their fiduciary duty of care, including any such actions involving
gross negligence.
Article 13 of the By-Laws of the Registrant provides for indemnification
of the officers and directors of the Registrant to the fullest extent permitted
by applicable law.
II-1
In connection with the reincorporation of the Registrant in the State of
Delaware, the Registrant entered into indemnification agreements with each
director and officer, a form of which is attached as Exhibit 10.1 hereto. The
indemnification agreements provide indemnification to such directors and
officers under certain circumstances for acts or omissions which may not be
covered by directors' and officers' liability insurance. Reference is also made
to Section 8 of the Underwriting Agreement contained in Exhibit 1.1 hereto,
indemnifying officers and directors of the Registrant against certain
liabilities.
ITEM 15. Recent Sales of Unregistered Securities
None.
ITEM 16. Exhibits and Financial Statement Schedules
(1) Exhibits
Exhibit
Number Document Description
- ---------------------- ------------------------------------------------------------------------------------------------
*1.1 Form of Underwriting Agreement.
*3.1 Certificate of Incorporation.
*3.2 By-Laws of the Registrant.
*4.1 Specimen of Common Stock Certificate.
*4.2 Form of Representative's Warrant Agreement, including Form of Representative's Warrant
Certificate.
5.1 Opinion of Sichenzia, Ross & Friedman LLP.
*10.1 1998 Stock Option Plan.
*10.2 401(k) Plan.
*10.3 Lease of premises at 160 Summit Avenue, Montvale, New Jersey.
*10.4 Employment Agreement dated April 20, 1998, by and between Harvey I. Houtkin and the
Registrant.
*10.5 Employment Agreement dated April 20, 1998, by and between Mark D. Shefts and the Registrant.
*+10.6 Clearing Agreement between Registrant and Southwest Securities Corp. dated July 15, 1997, as
amended August 4, 1997.
*10.7 License Agreement dated January 31, 1995 by and between the Registrant and PC Quote.
*10.8 Dow Jones Financial News Services 2 Year Plan Subscription Agreement.
*10.9 S&P Comstock Subscriber Agreement.
*10.10 Form of Branch Office Management Agreement.
23.1 Consent of Independent Auditors.
23.2 Consent of Counsel (included in Exhibit 5.1).
*24.1 Power of Attorney (see page II-4).
*27.1 Financial Data Schedule as of and for the year ended June 30, 1997 and as of and for the year
ended June 30, 1998.
*99.1 Consent of Josef A. Ross.
*99.2 Consent of Robert D. Kashan.
- ------------
* Previously filed
** To be filed by amendment
+ Certain portions of this Exhibit have been omitted based upon a request for
confidential treatment. The omitted portions have been separately filed
with the Commission under the confidentiality request
(2) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the Financial
Statements or Notes thereto.
II-2
ITEM 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Restated By-Laws of Registrant, Indemnification Agreements
entered into between the Registrant and its directors and officers,
Underwriting Agreement or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
MONTVALE, STATE OF NEW JERSEY ON THIS 8TH DAY OF OCTOBER, 1998.
ALL-TECH INVESTMENT GROUP, INC.
By /s/ Harvey I. Houtkin
---------------------------------
Harvey I. Houtkin
Chairman and Chief
Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Harvey
Houtkin and Mark Shefts, and each of them, as his true and lawful
attorneys-in-fact and agents with full power of substitution and
resubstitution, for him and his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective amendments)
to this Registration Statement and a new Registration Statement filed pursuant
to Rule 462(b) of the Securities Act of 1933 and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
foregoing, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
SIGNATURES
/s/ Harvey I. Houtkin Chief Executive Officer, Secretary and Director
- ----------------------------- October 8, 1998
Harvey I. Houtkin
/s/ Mark D. Shefts President, Treasurer and Director
- ----------------------------- October 8, 1998
Mark D. Shefts
/s/ Harry M. Lefkowitz Senior Vice President and Director
- ----------------------------- October 8, 1998
Harry M. Lefkowitz
II-4
EXHIBIT INDEX
Exhibit
Number Document Description
-------- ------------------------------------------------------------------------------------------------
*1.1 Form of Underwriting Agreement.
*3.1 Certificate of Incorporation.
*3.2 By-Laws of the Registrant.
*4.1 Specimen of Common Stock Certificate.
*4.2 Form of Representative's Warrant Agreement, including Form of Representative's Warrant
Certificate.
5.1 Opinion of Sichenzia, Ross & Friedman LLP.
*10.1 1998 Stock Option Plan.
*10.2 401(k) Plan.
*10.3 Lease of premises at 160 Summit Avenue, Montvale, New Jersey.
*10.4 Employment Agreement dated April 20, 1998, by and between Harvey I. Houtkin and the
Registrant.
*10.5 Employment Agreement dated April 20, 1998, by and between Mark D. Shefts and the Registrant.
+10.6 Clearing Agreement between Registrant and Southwest Securities Corp. dated July 15, 1997, as
amended August 4, 1997.
*10.7 License Agreement dated January 31, 1995 by and between the Registrant and PC Quote.
*10.8 Dow Jones Financial News Services 2 Year Plan Subscription Agreement.
*10.9 S&P Comstock Subscriber Agreement.
*10.10 Form of Branch Office Management Agreement.
23.1 Consent of Independent Auditors.
23.2 Consent of Counsel (included in Exhibit 5.1).
*24.1 Power of Attorney (see page II-4).
*27.1 Financial Data Schedule as of and for the year ended June 30, 1997 and as of and for the year
ended June 30, 1998.
*99.1 Consent of Josef A. Ross.
*99.2 Consent of Robert D. Kashan.
- ------------
* Previously filed
** To be filed by amendment
+ Certain portions of this Exhibit have been omitted based upon a request for
confidential treatment. The omitted portions have been separately filed
with the Commission under the confidentiality request.