As filed with the Securities and Exchange Commission on August 8, 2001.
Registration No. 333-61148
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SECURITIES AND EXCHANGE COMMISSION
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
A.B. Watley Group Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-3911867
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
40 Wall Street, New York, New York 10005 212-422-1664
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(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Steven Malin
Chairman and Chief Executive Officer
A.B. Watley Group Inc.
40 Wall Street, New York, New York 10005
212-422-1664
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(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Copies to:
Edward I. Tishelman, Esq.
Joel I. Frank, Esq.
Hartman & Craven LLP
460 Park Avenue
New York, New York 10022
(212) 753-7500
Approximate date of commencement of proposed sale to the public: From
time to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
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, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [X]
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 delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Proposed
Title of each class maximum Proposed
of offering maximum
securities price aggregate Amount of
to be Amount to be per offering registration
registered registered share (2) price fee
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Common
Stock, par value
$.001 per share 2,635,415 shares(1) $10.66 $28,093,523 $7,023.38 (3)
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(1) The Registrant is also hereby registering an indeterminate amount of
securities to be offered solely for market making purposes by one of
the named selling stockholders.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of
1933, on the basis of the average of the high and low sale prices
reported on the Nasdaq National Market on May 14, 2001.
(3) Previously paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further 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 said Section 8(a),
may determine.
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A.B. WATLEY GROUP INC.
40 Wall Street
New York, NY 10005
(212) 422-1664
PROSPECTUS
2,635,415 SHARES OF
COMMON STOCK
This prospectus relates to an offering from time to time of up to 2,635,415
shares of common stock of A.B. Watley Group Inc. The selling stockholders
identified in this prospectus are offering all of the shares to be sold in this
offering.
We will not receive any of the proceeds from the sale of the shares by the
selling stockholders. We will pay the expenses of registration of the shares
which may be offered by this prospectus.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 4.
Our common stock is traded on the Nasdaq National Market under the symbol
ABWG. On August 7, 2001, the closing price of our common stock as reported on
the Nasdaq National Market was $7.15.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is August 8, 2001.
EXPLANATORY NOTE
This prospectus also may be used by Mutual Discovery Fund, Mutual Financial
Services Fund, Mutual Qualified Fund and Franklin Mutual Beacon Fund in market
making transactions.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC the registration statement on form S-3 under the
Securities Act with respect to the common stock offered hereby. This prospectus,
which constitutes a part of the registration statement, does not contain all of
the information set forth in the registration statement and the exhibits filed
therewith, certain portions of which have been omitted as permitted by the rules
and regulations of the SEC. For further information with respect to our company
and the securities offered hereby, reference is hereby made to the registration
statement and to the exhibits filed as a part thereof. Statements contained in
this prospectus regarding the content of any contract or other document referred
to are not necessarily complete. In each instance, we refer you to the copy of
such contract or other document filed as an exhibit to the registration
statement, and each such statement is hereby qualified in its entirety by such
reference. The registration statement, including all exhibits thereto, and all
other reports filed with the SEC by us may be inspected without charge at the
principal office of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the commission's regional offices located at
Seven World Trade Center, Suite 1300, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such materials may also be obtained from the Public Reference Section of the
commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, upon
the payment of prescribed fees. Please call the SEC at 1-800-SEC-0330 for
further information on the Public Reference Room. In addition, registration
statements and certain other filings made with the commission through its
Electronic Data Gathering, Analysis and Retrieval systems are publicly available
through the commission's site on the World Wide Web located at
http://www.sec.gov. The registration statement, including all exhibits and
schedules thereto and amendments thereof, has been filed with the commission
through the Electronic Data Gathering, Analysis and Retrieval system. We
maintain a web site at www.abwatley.com.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The commission allows us to "incorporate by reference" the information we
file with the commission. This permits us to disclose important information to
you by referencing these filed documents. We incorporate by reference in this
prospectus the following documents which have been filed with the commission:
(1) our Annual Report on Form 10-KSB for the year ended September 30, 2000;
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(2) our Quarterly Report on Form 10-QSB for the quarter ended December 31,
2000 and for the quarter ended March 31, 2001; and
(3) the description of the common stock contained in our registration
statement on Form 8-A dated April 14, 2000.
We incorporate by reference all documents filed pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus and
prior to the termination of this offering.
Any statement contained in a document that is incorporated by reference will
be modified or superseded for all purposes to the extent that a statement
contained in this prospectus, or in any other document that is subsequently
filed with the commission and incorporated by reference, modifies or is contrary
to that previous statement. Any statement so modified or superseded will not be
deemed a part of this prospectus except as so modified or superseded.
We will promptly provide without charge to you, upon written or oral
request, a copy of any or all of the documents incorporated by reference in this
prospectus, other than exhibits to such documents, unless such exhibits are
specifically incorporated by reference in such documents. Requests should be
directed to A.B. Watley Group Inc., Att: Investor Relations, 40 Wall Street, New
York, New York, telephone number 201-422-1664.
Unless otherwise indicated, references to "we", "us" and "our" refer to A.B.
Watley Group Inc., a Delaware corporation, and its subsidiaries. Our common
stock, par value $.001 per share, is referred to in this prospectus as the
"common stock."
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FORWARD LOOKING STATEMENTS
This prospectus contains certain statements that may be deemed forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. All statements, other than statements of historical
facts, that address activities, events or developments that the company intends,
expects, projects, believes or anticipates will or may occur in the future are
forward-looking statements. Such statements are based on certain assumptions and
assessments made by management of the company in light of its experience and its
perception of historical trends, current conditions, expected future
developments and other factors it believes to be appropriate. The
forward-looking statements included in this prospectus are also subject to a
number of material risks and uncertainties, including but not limited to
economic, competitive, governmental and technological factors affecting the
company's operations, markets, services and prices, and other factors discussed
in the company's filings under the Securities Act and the Exchange Act.
Prospective investors are cautioned that such forward-looking statement are not
guarantees of future performance and that actual results, developments and
business decisions may differ from those envisaged by such forward-looking
statements.
RISK FACTORS
Although we are optimistic that we will be able to continue our substantial
growth and strengthen our position in the online and electronic trading of
securities, we also acknowledge that our business and this industry in general
are subject to a number of risks and uncertainties, which could adversely affect
future results. Among these are:
1. Competition In The Online And Electronic Brokerage Business Is
Increasing. Not only are we faced with competing with the traditional electronic
trading firms, such as E-Trade and E-Schwab, as well as smaller sized
competitors, but we are also faced with the entry of new firms, including
traditional brokerage firms such as Merrill Lynch, and the emergence of giants,
such as Goldman Sachs & Co., as a sponsor or joint venturer of e-commerce
brokerage firms and electronic communications networks. We will continue to
compete based upon what we perceive as the excellence of our trading systems,
the skills of our customer service personnel, the breadth of information and
other services provided, attractive pricing of our services and maintenance and
upgrade of our technology. Although added competition has also served to
increase the overall market for this type of brokerage service, the increased
competition also places more pressure on us in our competitive efforts,
including a need to increase our marketing efforts, which is already underway.
2. Our Acquisition Strategy Involves Risks, And We May Not Successfully
Implement Our Strategy. We seek to acquire companies that complement our
business. We cannot assure you, however, that we will be able to identify
acquisition candidates on commercially reasonable terms or at all. If we make
additional acquisitions, we also cannot be sure that any benefits
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anticipated from the acquisitions will actually be realized. Likewise, we cannot
be sure that we will be able to obtain additional financing for acquisitions.
The process of integrating acquired operations into our existing
operations may result in unforseen operating difficulties and may require
significant financial and managerial resources that would otherwise be available
for the ongoing development or expansion of our existing operations. Possible
future acquisitions could result in the incurrence of additional debt and
related interest expense, contingent liabilities and amortization expenses
related to goodwill and other intangible assets, all of which could have a
materially adverse effect on our financial condition, operating results and cash
flow. We consider strategic acquisitions on an ongoing basis and may be
evaluating acquisitions or engaged in acquisition negotiations at any given
time. We regularly evaluate potential acquisitions and joint venture
transactions, and recently announced that we entered into a letter of intent to
acquire substantially all the assets of On-Site Trading, Inc.
3. We Must Maintain Our Access To The Most Improved Technology.
Technological changes continue in the electronic commerce field generally and in
our segment of online brokerage. We must keep pace with these technological
developments by a combination of licensing and developing software, to be able
to continue to provide what we regard as highly efficient and attractive
services and systems for our accounts.
4. Our Industry Faces Substantial Regulatory Supervision. We, as well
as all members of the U.S. securities brokerage industry, are regulated by the
NASD and SEC. These supervisory bodies have tended to increase the intensity of
their regulatory efforts, particularly with respect to the online trading
industry. Additional regulations have been proposed, from time to time, dealing
with the suitability of online trading and broker supervision of accounts. All
these place a greater burden on the conduct of our electronic and online
brokerage business.
5. Our Proposed Conversion To Self-Clearing Operations Subjects Us to
Additional Risks. Although self-clearing will allow us to theoretically increase
the profitability of our operations, it will also place additional burdens upon
managing our business. We will collect dividends and interest on securities held
in nominee name and make the appropriate credits to our client's account. We
will also facilitate exercise of subscription rights on securities held for our
clients. We will arrange for the transmittal of proxy and tender offer materials
and issuer reports to our clients.
Self-clearing operations, especially where conducted by firms such as
ours, without significant prior experience, involve substantial risk of losses
due to clerical errors related to the handling of client funds and securities.
We have attempted to mitigate this risk by hiring, from a large competitor, as a
senior officer someone who has extensive experience in the senior management of
self-clearing operations and conversions to self-clearing. Errors in the
clearing process also may lead to civil liability for actions in negligence
brought by parties who are financially harmed as a result of these errors.
Clearing operations have accounted for a significant
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portion of our cost of services. Our failure to perform self-clearing operations
accurately and cost-effectively could have a material adverse effect on our
business, financial condition and operating results.
THE COMPANY
A.B. Watley Group Inc. provides direct-access trading capabilities and related
software to both retail as well as corporate customers. Since 1997 we have
offered direct-access trading products and services to retail customers. As of
July 31, 2001 we had approximately 12,100 retail customers. In August 2000 we
began marketing our proprietary technology, which we call a Direct-access
Vertical Exchange (DAVE), to the brokerage and banking industries. These
initiatives resulted in our recently announced licensing agreement with E*TRADE
Group, Inc. Historically, revenues have been generated primarily from retail
customer transactional fees. In the future, we anticipate augmenting that
revenue with licensing and related fees from our corporate clients.
Direct-access trading technology provides customers with the opportunity to
trade securities directly into various market centers, including exchanges and
Electronic Communication Networks (ECNs) without the intervention of a broker.
The absence of broker intervention is a key feature that differentiates us from
most online brokers. Other features of our service include:
o Integrated Product: real-time market data delivery and trade execution
software
o Speed: Average trade execution is less than 5 five seconds
o Market Transparency: Ability to view all market participants and market
centers in real-time
Generally, direct-access results in better trade execution as well as lower
transactional costs for the user.
Our services are delivered through DAVE, which is a combination of our
proprietary: (a) order entry and trade processing and, (b) data delivery
engines. Today, customers can access DAVE through (i) UltimateTrader(R) II, our
proprietary client-server direct-access software application; and, (ii)
WatleyTrader, our proprietary web-based direct-access platform. In the near
term, we will add a voice recognition platform and a wireless application.
We believe our subsidiary, A.B. Watley, Inc. is one of the largest direct-access
brokerage firms in the U.S. A.B. Watley, Inc. is a registered securities
broker-dealer and member of the National Association of Securities Dealers, Inc.
Through this unit we provide real-time online financial brokerage products and
services to retail customers.
In September 2000 we began distributing our proprietary direct-access software
product to our retail customers. Prior to this, we had licensed enabling
software from third-party vendors. We
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anticipate that by January 2002, all of our retail customers will have migrated
to our proprietary software. This change provides us with meaningful operating
and financial benefits. For example, direct-access software licensing fees paid
to third party vendors totaled $14.4 million in fiscal 2000, representing
approximately 25% of total operating expenses. We anticipate eliminating almost
this entire expense item in the future.
Of equal significance, we are leveraging our proprietary software development
experience and products. We are fully prepared to provide these same large-scale
technology solutions to corporate clients, primarily banks and brokerage firms.
We recently launched the B-2-B Solutions Group. This group is responsible for
marketing our technology and services to corporate clients. In this regard, on
November 22, 2000 we signed a licensing agreement with E*TRADE Group, Inc. We
are actively seeking additional B-2-B clients. We anticipate that this area will
become a significant portion of our future business and revenue.
Industry Overview
Our industry has recently experienced a series of changes led by electronic and
online commerce. These changes have created significant market opportunities for
us along with other similar brokerage firms. Favorable market trends have
resulted from (i) growing market acceptance of online brokerage services; (ii)
pronounced market segmentation; (iii) a complementary regulatory environment;
and, (iv) disparity in the scalability and quality of competing trading
technologies.
Growing Market Acceptance of Online Brokerage Services
Online trading is the fastest growing segment of the brokerage industry and is
expected to continue to grow significantly. The evolution of the Internet has
fundamentally changed the way in which many investors manage their financial
affairs. The speed, convenience, choice, cost savings and information offered by
the Internet as an investment tool has increasingly driven investor assets
online. Forrester Research and IDC project that total U.S. assets managed online
will increase from $325 billion at the end of 1998 to $3.1 trillion in 2003, a
compound annual growth rate of 57%. During this five-year period, the number of
online accounts is expected to grow to over 20 million, up from 5.0 million in
1998. Forrester and IDC also estimate that by 2003, 30% of all investors will
invest online, up significantly from approximately 10% today. According to The
Industry Standard, total online trades as a percent of total trading volume has
grown from less than 1% to 14% within the last four years, and currently
represents approximately 30% of the total average trading volume on NASDAQ and
the NYSE.
Historically, individual investors accessed the financial markets through
full-commission brokers, who offered investment advice and placed trades. With
deregulation of brokerage commissions in 1975 and the resulting unbundling of
brokerage services, investors began to realize that they could separate
financial advisory services from securities trading. This brought about the
advent and subsequent proliferation of discount brokerage firms, which provided
an alternative investment approach by completing trades at a reduced cost.
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The emergence of electronic brokerage services has provided investors with the
ability to further unbundle services and costs typically charged by
full-commission and traditional discount brokerage firms. By requiring personnel
to handle each transaction, most traditional brokerage firms restrict client
access to trading and information. Further, while full-commission and discount
brokerage firms are able to offer electronic trading services, their continued
reliance on personnel, branch offices and associated infrastructure prevents
them from capturing the same operating efficiencies that are achievable by
electronic trading.
The growth of discount brokerage firms and the increasing utilization of the
Internet to access a wide range of financial services underscore a fundamental
shift in market demographics. This shift has altered the way consumers manage
their personal financial assets. Based on industry research reports and the
rapid consumer acceptance of online transactions, we believe consumers are
increasingly taking direct control over their personal financial affairs, not
only because they are now able to do so, but also because they find it more
convenient and less expensive than relying on financial intermediaries.
Pronounced Market Segmentation
As the brokerage industry has matured, market segmentation has become more
pronounced. Segments within the industry are defined and identified based on a
variety of demographic factors. One of these factors is customer trading
activity. In July 2000, Robertson Stephens stated in its Active Trading report
that active traders (all accounts trading 30-plus times a quarter), represent
approximately 54% of the 1.68 million average online daily trades yet only 6.3%,
or 800,000 of approximately 12.7 million total online accounts. This translates
into 910,000 trades per day from 800,000 accounts, or an average of 68 trades
per account per quarter, versus the overall online industry average of 7 trades
per quarter.
Since inception, we have targeted and served the most active 6.3% of trading
clients in the U.S. It is our belief that this group also happens to be among
the most profitable and historically under-served segment within the brokerage
community. This active trading segment is our primary target market.
There has been an active trader segment in the U.S. for many years. Active
trading is dependent upon the following core characteristics: (i) software
quality; (ii) software reliability; and, (iii) access to efficient liquid market
centers. Until recently, access to that efficiency and liquidity was primarily
limited to institutions. Direct-access broadens the availability to all
investors. Moreover, this capability fuels the expansion of the active trader
segment.
We are positioned to provide this market segment with some of the most
sophisticated trading systems available. As recently as five years ago, a
website that offered online trading technology was considered state-of-the-art.
Today, our direct-access technology, featuring smart-order
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routing and split-second trade execution empowers all investors. Through our
leadership and adherence to the direct-access model of speed and market
transparency, we believe our business model is defining a new paradigm. While
many of our competitors in the brokerage industry decide whether to adopt this
leading edge technology or not, we have created and grown our business model
based on three core elements that together represent the foundation of our
trading platforms. These core elements are maximum liquidity, transparency and
speed.
A Complementary Regulatory Environment
In 1996, the SEC adopted rules that brought sweeping changes to the structure of
the over-the-counter market. These rule changes also brought potential benefits
to our business and to our competitors. They also brought significant benefits
to active trading clients. Known as "order handling rules", they allowed for the
creation and operation of ECN's. ECN's are open broadcasting systems that allow
anyone with a connection to the network to see all the bids and offers posted
into the system for any Nasdaq traded security. The order handling rules require
market makers to display certain limit orders in their quotations or to send
those orders to an ECN for display. The increased regulatory emphasis on
enforcing compliance with the duty of brokers to obtain the best execution for
their clients has fostered the growing importance of ECN's, which provide an
ever-increasing source of liquidity in the over-the-counter market.
Additional and more recent rule changes have facilitated the emergence of
direct-access trading technology and business models offering such technology.
The Securities and Exchange Commission is adopting two rules to improve public
disclosure of order execution and routing practices. Under Rule 11Ac1-5, market
centers that trade the Nasdaq National Market System securities will be required
to make available to the public monthly electronic reports that include uniform
statistical measures of execution quality. Under Rule 11Ac1-6, broker-dealers
that route customer orders in equity and option securities to certain
destinations for execution will be required to make available on a quarterly
basis reports that, among other things, identify the venues to which customer
orders are routed for execution. In addition, broker-dealers will be required to
disclose to customers, on request, the venues to which their individual orders
were routed. By reporting execution activity, many expect that the brokerage
industry, in particular order-handing, will become more transparent to the
public. These rules are also intended to spur more vigorous competition among
market participants to provide the best possible prices for investor orders.
In light of the new disclosure rules being adopted, many industry analysts feel
that demand for direct-access execution capabilities and real-time market
information will continue to grow and potentially grow at an increasing rate. We
believe that these recent regulatory developments, coupled with the increased
availability of real-time information, advances in the Internet and networking
and communications technologies, have created significant investing
opportunities for active traders and investors. These recent changes also
represent significant market opportunities for online brokerage services.
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Disparity in the scalability and quality of competing trading technologies
The expansion of the online brokerage market has significantly impacted the
financial markets. The development of direct-access and our DAVE technology
represent the next wave of change. While the established online brokers have
used the Internet to make more efficient the communication with investors, our
proprietary direct-access technology allows investors to interact directly with
markets. In our opinion, this interactive capability represents a fundamental
change and will become the accepted standard in the financial markets.
Our direct-access platform is not only technologically advanced, but is also
highly scalable (see Technology section). The combination of technology and
scalability provides us with a competitive advantage versus the established
online brokers as well as the smaller PC-based direct-access competitors. Many
of the largest online brokers presently possess the scale to accommodate
increased customer adoption; however, few currently own and/or offer a
direct-access service. In addition, the PC-based direct-access brokers are at a
competitive disadvantage because their existing capabilities lack the
much-needed scalability. Our current technological architecture allows us to
deliver a direct-access product efficiently to thousands, and potentially,
hundreds-of-thousands of simultaneous highly active retail and institutional
clients.
The Future of Direct-Access Trading Technology and DAVE
Our services are delivered through DAVE, which is a combination of our
proprietary: (a) order entry and trade processing and, (b) data delivery
engines. Today, customers can access DAVE through (i) UltimateTrader(R) II, our
proprietary client-server direct-access software application; and, (ii)
WatleyTrader, our proprietary web-based direct-access platform. In the near
term, we will add a voice recognition platform and a wireless application.
Benefits of our proprietary technology platform to us include significantly
increased scalability, reliability, and manageability. We also expect our
technology platform to substantially increase operating margins by eliminating
almost all third-party software licensing and data services fees and
streamlining internal information management support.
State-of-the-Art Technology
In the latter part of 1998, we commenced a strategic upgrade of our entire
technology platform in order to support an anticipated increase in demand for
our direct-access online brokerage services. Since that time, we have developed
and launched DAVE, our state-of-the-art trading and market data system. Our
system is designed to accommodate substantial increases in both client demand
and the regulatory
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requirements expected to result from decimalization, regulatory reporting
changes and T+1 settlement. Our current implementation of leading-edge order
entry and trade processing and data delivery technology ensures scalability,
flexibility, reliability and manageability to accommodate the "next wave of
change in the financial markets."
Features
Our technology model provides a number of significant and value-added benefits
to active investors:
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A.B. Watley Technology Benefits for the retail market
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System Feature Client Benefits
- ------------------------------------ --------------------------------------------------------------------------
o Direct Access to Exchanges & o Allows investors to execute independently of third party market
ECNs makers for more efficient executions. Provides ability to act as
"market maker" on par with institutional traders.
o Superior Speed of Execution o Client-server order execution model substantially reduces time
elapsed between investor order entry and receipt of order by
exchange/ECN. Average order execution time for an OTC market
order is 2-7 seconds.
o Order Routing Discretion o Enables investors to actively determine venue for order
execution among variety of alternatives (Island, Instinet, other
ECNs, NASDAQ, specific market makers, NYSE DOT, Company block trade
desk). Provides critical added ability to trade at the best price.
- ----------------------------------------------------------------------------------------------------------------------
o NASDAQ Level II Data o Enables access to complete range of bid/ask, volume and market
depth for variety of execution markets.
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o Realtime Data Analytics o Provides best available retail package of realtime, streaming
market data, charts and technical analysis. This suite of content
includes intraday charting, a variety of analytical studies (e.g.,
RSI, moving averages, MACD), time and sales, option quote chains,
regional exchange quotes and news.
- ----------------------------------------------------------------------------------------------------------------------
o High Utilization Capacity o Affords access to the Company's technology platform by entire client
base on simultaneous basis. Critical given consistent high level of
concurrent utilization and spikes in utilization due to highly
volatile market movements and shifts in market liquidity.
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Technology Summary
The DAVE system architecture incorporates a Sun Solaris UNIX server platform
with BEA System's Tuxedo middleware. The database system runs on Oracle Parallel
Server in conjunction with Objectivity for database object management. Through a
combination of these components and proprietary business logic, the OETP (Order
Entry and Trade Processing) component system provides a leading-edge platform to
handle vast numbers of users engaged in
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high-volume direct-access trading. The DD (Data Delivery) component system also
utilizes a Sun Solaris UNIX platform together with Vitria Communicator
middleware. For database management, the DD system utilizes an Oracle database
system for relational data and Objectivity for database object management.
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The DAVE: Open/Distributed Enterprise Architecture
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- ----------------- -----------------
Ultimate Trader B2B Partner
Client
- ----------------- ---------------- -----------------
Internet
Intranet
- ----------------- ---------------- -----------------
Web Client 3rd Party
Oracle OAS Application
- ----------------- Multiple -----------------
Redundant
Connections
- ----------- -----------
Oracle ------------------------------------ ------------------------------------- Oracle
Database ORDER ENTRY AND TRADE PROCESSING DATA DELIVERY SYSTEM Database
- ----------- -----------
Tuxedo Transaction Monitor Middlware Tuxedo Transaction Monitor Middlware
Vitria Publish/Subscribe Middleware Vitria Publish/Subscribe Middleware
Multiple Sun E4500 Servers Multiple Sun E4500 Servers
A.B. Watley Data Centers Internet Co-location Facilities
- ----------- (New York, Dallas) (UUNet, Globix) -----------
Objectivity ------------------------------------ ------------------------------------- Objectivity
Database Database
- ----------- -----------
------------------- --------------------- --------------------
Service Bureau Exchange Interfaces Market Data
Back Office NYSE, NASDAQ, PC Quote, NASDAQ,
ECN, Order Desk NYSE, OPRA
------------------- --------------------- --------------------
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Highly Scalable and Cost Efficient UNIX-based trading system
Our newly upgraded platform has been developed to run on UNIX computing
platforms, offering the benefit of unparalleled expansion and scalability. This
in turn allows for the ready "cloning" of the technology platform with minimum
modification and cost to accommodate a substantial increase in customer demand.
UNIX also contributes significantly to the efficiency of the platform by
providing superior processing capacity and thereby requiring fewer servers to
process trading activity. Fewer UNIX servers also imply lower server-related
maintenance costs relative to NT servers.
System scalability has also been enhanced by the utilization of a massive
parallel processing (MPP) architecture design. By managing transaction
processing on a "stateless" basis, our system enables increased processing power
in proportion to the addition of hardware. This
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increased processing power becomes vital as securities regulations drive the
move to decimalization (expected to increase market data volume by two to three
times) and T+1 settlement (necessitating realtime order entries to back-end or
service bureau mainframes).
Open/distributed enterprise architecture highly flexible
Both the OETP and DD systems utilize the C++/Java programming paradigm in
connection with object oriented application development and iterative
development cycles. As a result, the primary software components utilized in
both systems can be readily modified for future upgrades and projects. By
adopting an open architecture approach, moreover, our system may integrate
different protocols, application programming interfaces, third party
applications, operating systems and hardware without disrupting the enterprise
infrastructure.
The open architecture approach will also enable us to more easily integrate the
trading system with third party software developer applications, thereby
providing built-in potential scalability to alternative distribution channels
controlled by third parties. Discussions with one technical analysis software
vendor to this effect have already been initiated.
Middle and back office architecture highly fault tolerant
The middle office platform provides superior reliability by employing
transaction process monitoring that incorporates a "handshake" confirmation for
each piece of data sent to an end user or between servers, databases and
applications. In addition, effective recovery ability is provided through the
storage of information in the database prior to the transmission of any message,
data or transaction coupled with the ability to recall this data and restart
transactions.
The back-office database platform reinforces the tolerance of the system by
incorporating four Objectivity databases (one primary and one hot standby in
each data center) and an Oracle Parallel Server utilizing data replication, thus
providing complete remote backup of all database services. In this way, the
architecture can switch to the hot standby system and the alternative data
center in the event of any failure of the primary system.
System reduces cost of market data delivery
We believe we are well positioned to capture a significant share of the market
for these services and benefit in several ways. First, we expect to capture
operating efficiencies that were unavailable to us in the past. With a
proprietary platform, we will lower or eliminate costs that we historically
associated with data and software vendors. At present, every new client costs us
approximately $267.50 in data and software costs. When we complete the migration
of our client base to our proprietary platform, we expect such costs to be
reduced to approximately $71/client. The proprietary software and associated
scale economies will allow us to be one of the lowest cost providers of
integrated real-time streaming market data. We expect significant
business-to-
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business (B-2-B) opportunities, primarily through licensing agreements, to
emerge from this capability. In addition, we are presently developing an
in-house clearing business that is expected to assist greatly in the transition
of our business model from one that is largely variable in its cost structure
one that is largely fixed in its cost structure.
The enhanced technology platform eliminates much of the effective cost of
large-scale data delivery by employing a "publish and subscribe" delivery method
that makes all market data available to all investors on an "as needed" basis.
Unlike request-reply processing, publish-subscribe is "decoupled", allowing for
asynchronous, anonymous and immediate communication without complicated
administrative overhead. In conjunction with our proprietary compression
methodology, this approach (i) ensures our ability to cope with surges in
real-time market data demand as the industry moves towards decimalization; and,
(ii) significantly reduces both the complexity of application code and the
bandwidth and hardware required for market data delivery. The enhanced
scalability of the Sun server platform further reduces the cost of data delivery
by markedly reducing the number of servers required to support a large number of
investors simultaneously receiving realtime information.
Furthermore, the new platform is capable of employing IP Multicasting and thus
can generate additional savings as the major Internet carriers deploy multicast
enabled networks. By employing IP Multicasting, the system can "broadcast" all
quotes while users subscribe to these quotes as needed - enabling information
delivery to be scaled to a nearly unlimited number of subscribers. This in turn
leads to another significant decrease in the bandwidth and in the number of
servers required to distribute market data to our clients.
Architecture allows for efficient administration
Our system incorporates a highly effective system administration function that
provides a complete window on the entire IT platform, thereby allowing system
administrators to work proactively to solve system problems before service may
be affected. This feature, in conjunction with the enhanced scalability of the
Sun server platform, improves managerial control and efficiency by reducing
systems administration staff requirements. Importantly, the remote
administrative capabilities of the software enable us to utilize any variety of
co-location facilities for further efficiencies and reliability.
Leading Technology Team
We presently maintain a dedicated in-house IT team with the expertise and
resources necessary to fully develop, test, modify, maintain and administer a
state-of-the-art online brokerage technology platform. Our technology team has
been completely integrated into our business model from inception, and consists
of 47 full-time IT professionals grouped into a development unit and a system
administration unit. Our team is led by the former Director of IT Strategies for
WorldCom. Also, several of our team members have gained experience with the U.S.
Navy,
14
Morgan Stanley Dean Witter, Goldman Sachs, American Airlines Sabre/Travelocity,
EDS and State Farm Insurance.
Importantly, the IT group engages in the full-time development of technology
designed to serve the active investor. As a result of its extensive experience,
the technology team enjoys the accumulated expertise needed to customize and
integrate requisite "best-of-class" components into a seamless and superior
trading platform.
The technology group applies our accumulated expertise through a uniform object
oriented analysis and design methodology called Rational Unified Process
("RUP"). When working in a RUP environment, detailed documentation is written
for all iterations of the software development process. By strictly adhering to
the RUP methodology for software development, we beliieve our investment in
proprietary technology development is protected from poor requirements
gathering, "feature creep" and employee turnover. In addition, we usually
benefit from faster development cycles and lower maintenance costs.
Targeted Marketing Strategy for Both Retail and Business to Business Clients
Our marketing strategy is to simultaneously target the active trading segment of
the retail customer universe and corporate clients within the banking and
brokerage communities.
Active Trading Segment
In a July 2000, Robertson Stephens stated in their Active Trading report that
the active trader market (all accounts trading 30-plus times a quarter),
represents 54% of the 1.68 million average online daily trades but only 6.3%, or
800,000, of the 12.7 million total online accounts. This translates into 910,000
trades per day from 800,000 accounts. Based on these findings, we presently have
a market share of less than a 1%.
Because very few firms have the technology and products to address this target
market, we feel that customer procurement in this market segment is still at a
very early stage. In short, we are confident that highly targeted advertising
will help increase our market share. Our cost per new account has consistently
averaged approximately $890, while revenue per client has averaged $2,900 per
year. We are committed to not only keeping our yield per new account above
industry averages, but believe opportunity exists for margin expansion and
increasing yields. We intend to continue our targeted marketing efforts in three
selected mediums: (i) newspaper (Investors Business Daily); (ii) television
(CNBC); and (iii) industry tradeshows.
We fully intend to continue to target active retail traders and other active
investors. It is our contention that our direct-access product offering is well
positioned to satisfy this "premium" market segment. We have established a very
good reputation as a market leader for direct-access trading platforms and
believe we are well positioned to benefit from both increased market demand and
by owning a superior product and service offering.
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Corporate Client Segment
Presently there are approximately 800,000 online trading retail customers making
an average of 910,000 trades per day. These 800,000 active traders represent
about 6.5 % of the entire market population. These active traders currently
reside at approximately 150 different competing brokerage firms. Besides
marketing directly to these customers, we expect to acquire clients through
strategic B-2-B alliances. Through these alliances we anticipate licensing our
products and services on a private-label or co-branded basis. Our alliance
partners will be responsible for marketing our products to their customers. We
believe we possess significant advantages over competitors. These advantages
include:
o Scalable and cost-efficient UNIX based architecture
o Highly flexible and adaptable system, allowing ease of client integration
o Proven software development support team, allowing for customized and
differentiated products.
o Cost-efficient product delivery
Based upon our experience to date, the development of an effective, scalable
direct access trading system is not only time consuming, but also expensive.
This is further evidenced by a competitor's recent experience. Charles Schwab &
Co. recently acquired a PC-based direct access provider. Soon after the
acquisition was completed, Schwab stated that it would require 12-18 months to
fully integrate the systems. We believe our enterprise architecture and
end-to-end solution provision strategy is fully capable of delivering a private
label or co-branded product to larger brokerage firms more efficiently.
Consistent with these competitive advantages, we recently entered into a
licensing agreement with E*TRADE Group Inc. Under the terms of this agreement,
we will provide a portion of our technology to E*TRADE who will in-turn offer it
to its customers under the ETRADE brand name. Based upon ETRADE successfully
marketing and migrating their customers to our product, this agreement
represents the potential for us to earn up to $3 million per month in additional
revenue over a three-year period. We believe there are other companies like
E*TRADE who will be drawn to our products and technology.
In addition to large brokerage firms and banks, we intend to market our products
and services to the broader day-trading small order execution system (SOES)
industry. This universe of potential clients is continuously and actively
seeking to reduce costs and provide better service to their customers.
A four-person B-2-B team spearheads our B-2-B strategy. This team has been
soliciting interest from the broad brokerage market and promoting our integrated
direct-access platform
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technology. In addition, we have recently commenced servicing foreign
institutions by providing them and their clients with electronic execution
services for transactions in the U.S. securities markets. At this time, we are
actively pursuing a number of additional licensing relationships that will
provide us with a global presence.
Retail Product and Feature Set Matrix
We currently offer clients and business partners access to DAVE through two
primary access points: (i) software (UltimateTrader(R) II); and (ii) web-based
(WatleyTrader). In the near term, we will offer such access though (i) wireless;
and (ii) voice recognition. The following table illustrates the feature sets and
expected feature sets of each access point:
Product Access Points: ...........................UT II WT WAP IVR
FREE Realtime Level II Data ......................X X X
Quick buy and sell buttons with auto routing......X X X X
Detailed status report on each order entered......X X X X
Compatibility with MAC OS X.......................X X
All activity and account information..............X X X X
Links to historical P&L...........................X X X X
Dynamic Updating Quotations.......................X X X
Unlimited Customized Pages........................X X
Realtime Purchasing Power.........................X X X X
Minder View Portfolio Minder......................X X X
Position Minder...................................X X X
Scrolling Tickers.................................X X X
Alarms............................................X X X X
Quick Quotes......................................X X X X
Hot Keys..........................................X X X
Charts with Technical Studies.....................X X
Color Coded Market Maker Screens..................X X X
Time and Sales....................................X X X
Pre-Market Open and Post-Market Close Trading.....X X X X
Flagship Direct-access Product: UltimateTrader II
UltimateTrader II is our flagship and premium-level direct-access product. It
provides the user with the following feature set:
>> FREE Realtime Level II Data - continuously updated display of market maker
and electronic communication network current prices and changes.
>> Color Coded NASDAQ Market Maker Screens - designed to visually display, by a
special color in the screen, upward and downward trends in recent trades in
a security.
17
>> Charts with Technical Studies - allows clients to view live, dynamically
updating, realtime intraday chart data and historical information for
stocks, option or indices.
>> Time and Sales - reflects last and cumulative trades, prices and aggregate
daily volume in a security.
>> Pre-Market Open and Post-Market Close Trading - access to trading during
both pre-market open (8:00 AM EST to 9:30 AM EST), and post-market close
(4:00 PM EST to 5:00 PM EST) hours.
>> Auto routing - Quick buy and sell buttons with the ability to execute/cancel
trades with a simple keystroke.
>> Detailed status report on each order entered - extensive review and order
notification including date stamp, quantity, average price, market
participant and user ID.
>> Compatibility with MAC OS X - proprietary data delivery and execution
platform deliverable through the Macintosh OSX operating system.
>> All activity and account information - a detailed breakdown of order status,
historical trade information and real time positions, buying power and
realized P&L
>> Links to historical P&L - the ability to see all realized profit and losses.
>> Dynamic Updating Quotations - displays real time changes in prices and
markets as they occur.
>> Unlimited Customized Pages and screen real estate - allows clients to create
computer screen layouts to their preference with their data and to scroll
freely among these pages.
>> Realtime Purchasing Power - allows clients to view current buying power, the
value of the account as of the trading day's business morning.
>> Portfolio Minder - used to create computer windows with comprehensive price
and other data relating to a number of different securities.
>> Position Screen - displays existing open positions
>> Scrolling Tickers - displays price and trading volume information for the
symbols that a client chooses on a live basis. The quotes will move through
the ticker window as the server receives them.
>> Alarms - alerts clients by an audio or visual pop-up when target criteria
have been met for a specified security.
>> Minder View- a fully configurable quote screen that can display virtually
any information about the security selected.
>> Hot Keys - the ability to execute/cancel trades with a simple keystroke.
Additional Brokerage Services
In addition to the features listed above, we offer our clients a full range of
services through third-party relationships. These include: Managed Asset Plan,
Unlimited Checkwriting, Visa Gold Card Services, and Automatic MAP Deposit.
Customers also have access to over 5,000 mutual funds. We also offer a full
suite of research tools including access to Briefing.com, Zacks earnings
estimates and EO enabled vertical portals that gives a professional single point
of access to
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industry-focused content on the web.
Client Services
Client services for all levels of our online service, including trading,
administrative, and technical support, are among our highest priorities. Based
on our experience in the industry and based on client feedback, providing an
effective client service team to handle client needs is critical to our success.
Our Client Service department helps clients get online, handles product and
services inquiries and addresses all brokerage and technical questions. The
Client Service department also conducts various surveys to verify the
satisfaction of our clients and to learn more about client preferences and
requirements.
We provide live client support from Monday through Friday between the hours of
8:00 AM and 8:00 PM EST. Our client services department operates on a one-stop
shopping basis, meaning that clients do not typically have to be transferred
between departments to receive answers to their inquires. We currently employ 45
Client Services personnel (inclusive of management), all of whom are registered
representatives and are available to accept and execute client orders, research
past trades, discuss account information, and provide detailed technical
support. A separate technical support team helps clients with particularly
serious or persistent technical issues.
In order to provide professional and efficient client support, we have purchased
and implemented client relationship management (CRM) and computer telephony
integration (CTI) software. CRM databases are updated with each client contact
to track client service calls. A separate internal database tracks trading
patterns, changes in customer balances and compliance issues. Both databases are
used to generate periodic reports for management. Client services associates
access the latest product and account information through CRM and customer
account databases.
During the second quarter of fiscal year 1999, we launched online support and
chat services for our clients. This service currently offers an online, indexed
UltimateTrader(R) user manual and chat area. The chat area offers clients the
ability to query and chat with client services associates in realtime. Our goal
with respect to the provision of online support and chat services is to create a
sense of virtual community among prospective and existing clients and between
our company and our clients. We are planning to upgrade our online support
capabilities through a recently acquired online chat support software package.
We have created a VIP client services team to service our most active online
clients. By providing client support for all issues on an account manager basis,
we intend for the VIP team to offer much more individualized service on a
prioritized basis. By providing highly prioritized, personalized and
professional client support, especially for our niche market high volume
clients, we will further differentiate our products and services from those of
our competitors.
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Account Security
We use a combination of proprietary and industry standard security measures to
protect our clients' assets. Clients are assigned unique account numbers, user
identifications and passwords that must be used each time they log on to the
system. In accordance with standard industry practices, telephone orders require
authentication via personal identification number/password and/or other personal
information. In addition, our trade processing system is designed to compare the
Watley accounts database with the clearing firm's account information on a daily
basis to detect any discrepancies.
We rely on encryption and authentication technology, including public key
cryptography technology licensed from other parties, to provide the security and
authentication necessary to effect the secure exchange of information.
Firewalls and other software limit not only system access to the authorized
users, but also limit the authorized users to specifically approved
applications. This filter-software prevents unauthorized access to critical
areas of the system such as account information. Furthermore, public access
servers, such as e-mail, chat services and the file transfer protocol, are in a
network entirely separate from the rest of our systems.
We have implemented special policies relating to the transfer or withdrawal of
funds by clients to prevent unauthorized withdrawals. All requests for fund
withdrawal or transfer require a signed letter from the account holder. Checks
will only be made out in the account holder's name and wire transfers will only
be sent to a bank account in the account holder's name.
Operations, Clearing and Order Processing
We do not hold client funds or securities, nor do we generally execute and
process directly either our own or our clients' securities transactions. Since
October 1996, we have cleared all transactions for clients, on a fully disclosed
basis, with Penson Financial Services, Inc. for retail accounts and Weiss, Peck
& Greer, L.L.C. for institutional accounts.
Our agreement with clearing brokers provide that the clearing brokers process
all securities transactions for our account and the accounts of our clients for
a fee. Services of the clearing brokers include billing and credit control and
receipt, custody and delivery of securities, for which we pay a per ticket
charge. We have agreed to indemnify and hold the clearing brokers harmless from
certain liabilities or claims, including claims arising from the transactions of
our clients, which could be material in amount. Our clearing agreements may be
terminated by either party, upon 60 days' written notice for Penson Financial
Services, Inc., and 30 days prior written notice for Weiss, Peck & Greer, L.L.C.
We depend on the operational capacity and the ability of the clearing brokers
for the orderly processing of transactions. By engaging the processing
20
services of clearing brokers, however, we are exempt from certain capital
reserve requirements imposed by federal laws.
Clients' securities transactions are effected on either a cash or margin basis.
In connection with margin transactions, credit is extended to a client,
collateralized by securities and cash in the client's account, for a portion of
the purchase price. The client is charged for margin financing at interest rates
based on the brokers call rate plus an additional amount of up to 1.75%. The
brokers call rate is the prevailing interest rate charged by banks on secured
loans to broker-dealers.
Margin lending is subject to the margin rules of the Board of Governors of the
Federal Reserve System. Margin lending subjects us to the risk of a market
decline that would reduce the value of our collateral below the client's
indebtedness before the collateral can be sold. Under applicable rules, in the
event of a decline in the market value of the securities in a margin account,
the client is required to deposit additional securities or cash in the account.
Third-Market Institutional Sales Desk
Our third-market institutional sales and trading desk specializes in
facilitating and/or executing large-block transactions in approximating 500
thinly traded equity securities. These services are provided to clients who
often require that their purchases or sales of large positions remain anonymous.
We match buyers and sellers to execute off-exchange transactions, to minimize
the impact on the market and prevent our client's positions from being disclosed
to competing firms. Our third-market institutional sales clients include mutual
and pension funds, insurance companies, banks, corporations and independent fund
managers. Approximately 19%of our revenues for our fiscal year ended September
30, 2000 were derived from the institutional trading desk. The firm hopes to
significantly leverage our institutional market presence in the future when we
begin to create electronic, complementary products and services for this market
place.
SUPPLIERS
We obtain financial information from a number of third-party suppliers of
software and information services, including PC Quote, Inc., Townsend Analytics,
Ltd., Ethos Corporation and S&P ComStock, Inc. We have a number of alternative
sources of supply of these items of software and information services available
to us at comparable cost, on a timely basis to provide adequate replacements, if
arrangements with any of our current suppliers are abrogated.
MARKETING AND ADVERTISING
We are marketing UltimateTrader by targeting active traders through print,
online, television,
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radio and other modes. We have also conducted surveys of our existing client
base to understand their media consuming habits and demographics profiles to
effectively target our advertising campaign. We have implemented a comprehensive
marketing plan to attract potential clients, as well as build market awareness,
educate the investing public and develop brand name recognition and loyalty
within the most active trading segment of the market. Our advertising efforts
include advertisements in financial publications and various other regional and
national publications that have demographics similar to our target market. In
the last six months we have emphasized advertising and promoting UtimateTrader
through television commercials, primarily on CNBC and have therefore
significantly increased our marketing expense. We may seek to broaden our
presence on the Internet through various partnerships, sponsorships and
co-branding efforts such as our agreement with U-Cool, an Internet community
site that has over 150,000 subscribers and 10 million unique monthly visitors.
Our strong rankings in various industry surveys have provided us with extremely
valuable publicity. We will continue to make investments in our online services
and offerings to maintain and even strengthen these rankings.
COMPETITION
The market for electronic brokerage services is highly competitive and rapidly
changing. We believe that we compete on the basis of speed of order execution,
processing and confirmation, quality of client service, ease of use, amount and
timeliness of information provided, price and reliability of our trading
systems. We expect that our ability to compete will also be affected by our
ability to introduce new services and enhancements to existing services into the
market on a timely basis.
We believe our competition consists of large and small brokerage firms utilizing
the Internet to transact retail brokerage business. Among these competitors are
E*Trade Group, Inc.; Charles Schwab & Co., Inc.; Quick & Reilly, Inc.;
Waterhouse Securities, Inc.; Fidelity Brokerage Services, Inc. and Datek
Securities Corp. We also face competition for clients from full commission
brokerage firms, including Merrill Lynch & Co., Inc.; Morgan Stanley Dean Witter
& Co.; PaineWebber Incorporated; and Salomon Smith Barney, as well as financial
institutions and mutual funds.
SECURITIES REGULATION
Watley is a broker-dealer registered with the SEC and NASD and is licensed as a
broker-dealer in 49 states.
The securities industry in the United States is subject to extensive regulation
under federal and state laws. In addition, the SEC, NASD, other self-regulatory
organizations, such as the various stock exchanges, and other regulatory bodies,
such as state securities commissions, require strict compliance with their rules
and regulations. As a matter of public policy, regulatory bodies are
22
charged with safeguarding the integrity of the securities and other financial
markets and with protecting the interests of clients participating in those
markets, and not with protecting the interests of our stockholders.
Broker-dealers are subject to regulations covering all aspects of the securities
business, including sales methods, trade practices among broker-dealers, use and
safekeeping of clients funds and securities, capital structure, record keeping
and the conduct of directors, officers and employees. Because of the recent
increase in the number of complaints by online traders, the SEC, NASD and other
regulatory organizations may adopt more stringent regulations for online firms
and their practices. If we fail to comply with any laws, rules or regulations we
could be censured, fined, issued a cease-and-desist order or Watley or our
officers and employees could be suspended or expelled.
In addition, significant changes in Watley's current business or practices,
including converting to self-clearing operations, require NASD and other
regulatory approval.
To expand our services internationally, we would have to comply with regulatory
controls of each specific country in which we conduct business. The brokerage
industry in many foreign countries is heavily regulated. The varying compliance
requirements of these different regulatory jurisdictions and other factors may
limit our ability to expand internationally.
We intend to initiate a comprehensive marketing campaign to bring greater brand
name recognition to our products and services. All marketing activities by
Watley are regulated by the NASD. The NASD can impose penalties, including
censure, fine, suspension of all advertising, the issuance of cease-and-desist
orders or the suspension or expulsion of a broker-dealer and its officers or
employees for violations of the NASD's advertising regulations.
23
NET CAPITAL REQUIREMENTS
The SEC, NASD and various other regulatory agencies have stringent rules
requiring the maintenance of specific levels of net capital by securities
brokers, including the SEC's uniform net capital rule which governs Watley. Net
capital is defined as assets minus liabilities, plus other allowable credits and
qualifying subordinated borrowings less mandatory deductions that result from
excluding assets that are not readily convertible into cash and from valuing
other assets, such as a firm's positions in securities, conservatively. Among
these deductions are adjustments in the market value of securities to reflect
the possibility of a market decline prior to disposition.
As of June 30, 2001, Watley was required to maintain minimum net capital, in
accordance with SEC rules, of $180,072 and had total net capital of $830,089 or
$650,017 in excess of minimum net capital requirements.
If Watley fails to maintain the required net capital Watley may be subject to
suspension or revocation of registration by the SEC and suspension or expulsion
by the NASD and other regulatory bodies, which ultimately could require Watley's
liquidation. In addition, a change in the net capital rules, the imposition of
new rules, a specific operating loss, or any unusually large charge against net
capital could limit those operations of Watley that require the intensive use of
capital and could limit our ability to expand our business. The net capital
rules also could restrict our ability to withdraw capital from Watley, which
could limit our ability to pay dividends, repay debt and repurchase shares of
our outstanding stock.
INTELLECTUAL PROPERTY RIGHTS
We rely on a combination of copyright, trademark and trade secrets laws and
non-disclosure agreements to protect our proprietary technologies, ideas,
know-how and other proprietary information. We hold a United States trademark
registration for the UltimateTrader name. We have no patents or registered
copyrights. Third parties may copy or otherwise obtain and use our proprietary
technologies, ideas, know-how and other proprietary information without
authorization or independently develop technologies similar or superior to our
technologies. In addition, the confidentiality and non-competition agreements
between us and our key employees, distributors and clients may not provide
meaningful protection of our proprietary technologies or other intellectual
property in the event of unauthorized use or disclosure. Policing unauthorized
use of our technologies and other intellectual property is difficult,
particularly because the global nature of the Internet makes it difficult to
control the ultimate destination or security of software or other data
transmitted.
24
There has been substantial litigation in the software industry involving
intellectual property rights. We believe that our technologies and trading
systems have been developed independent of others. Third parties may assert
infringement claims against us and our technologies and trading systems may be
determined to infringe on the intellectual property rights of others.
RESEARCH AND DEVELOPMENT
During the year ended September 30, 2000, we spent approximately $5,000,000 for
software development. These development efforts are related to the creation of
proprietary direct access online trading and market information software. These
software development efforts are related to the creation of proprietary direct
access online trading and market information software. The software development
efforts will allow our company to transition our UltimateTrader customers from
vendor software to our proprietary software system which is expected to reduce
our company's operating costs by up to approximately $1,200,000 per month.
PROPERTIES
Our principal offices are located at 40 Wall Street, New York, New York, where
we occupy approximately 43,000 square feet at an annual cost of approximately
$1,400,000, or $116,000 per month, plus escalations. The initial term of the
lease for such office space expires in June 2009. We also occupy approximately
16,000 square feet at an annual cost of $204,000 in Allen, Texas. The initial
term of the lease for such space expires in June 2004.
PERSONNEL
As of July 1, 2001, we employed a total of 111 persons, of whom 8 are engaged in
executive management, 20 in trading activities, 36 in information technology, 19
in client service and sales and marketing, 17 clerical and back office
personnel, as well as 11 other employees. All but one of these persons are
employed on a full-time basis. We believe our relations with our employees are
generally good and we have no collective bargaining agreements with any labor
unions.
Our registered representatives are required to take examinations administered by
the NASD and state authorities to be qualified to transact business, and are
required to enter into agreements with Watley obligating them to adhere to
Watley's supervisory procedures and not to solicit customers in the event of
termination of employment. Watley's agreements with registered representatives
do not obligate these representatives to be associated with Watley for any
length of time.
Our success will depend, in part, on our ability to hire and retain additional
qualified marketing, industry, technical and financial personnel. Qualified
personnel are in high demand. We face considerable competition from other
brokerage and financial service firms and other Internet and
25
online service companies for these personnel, many of which have significantly
greater resources that we have.
Our principal executive offices are located at 40 Wall Street, New York, New
York, and our telephone number is 212/422-1100.
SELLING STOCKHOLDERS
The shares being offered for resale by the selling stockholders were acquired
pursuant to (i) a Stock Purchase Agreement, dated as of March 29, 2001, by and
among our company and the selling stockholders, (ii) a placement fee paid to
Keefe Bruyette & Woods, Inc. in connection with such agreement, and (iii) upon
the exercise of warrants to purchase shares of our common stock held by the
selling stockholders pursuant to such stock purchase agreement and placement
fee. We have agreed to keep the registration statement, of which this prospectus
is a part, effective until the earlier of the date that all of such shares (a)
have been sold pursuant to the registration statement and (b) may be sold
without registration. We agreed to pay the expenses of registering the shares
under the Securities Act, including registration and filing fees, but not any
commissions, underwriting commissions or similar charges relating to the sale of
shares.
The following table sets forth the name of each selling stockholder, the number
of shares of common stock beneficially owned by such selling stockholder as of
June 1, 2001, the number of shares being offered by each selling stockholder and
the percentage ownership of each such selling stockholder. The shares being
offered by this prospectus are being registered to permit public secondary
trading, and the selling stockholders may offer all or part of the shares for
resale from time to time. However, such selling stockholders are under no
obligation to sell all or any portion of such shares nor are such selling
stockholders obligated to sell any shares immediately under this prospectus. All
information with respect to share ownership has been furnished to us by the
selling stockholders. Because the selling stockholders may sell all or part of
their shares, no estimates can be given as to the number of shares that will be
held by any selling stockholder upon termination of any offering made hereby.
Shares Beneficially Shares to be Shares Percentage Percentage
Owned Prior to the Sold in the Owned After the Owned Prior to Owned After
Name of Selling Stockholder Offering Offering Offering (1) the Offering the Offering (1)
- --------------------------- -------- -------- ------------ ------------ ----------------
Mutual Discovery Fund 546,000 546,000 0 4.9 0
Mutual Financial Services
Fund 546,000 546,000 0 4.9 0
Mutual Qualified Fund 546,000 546,000 0 4.9 0
Franklin Mutual Beacon Fund 205,595 205,595 0 1.9 0
Prism Partners I, L.P. 234,000 234,000 0 2.1 0
Prism Partners II
Offshore Fund 117,000 117,000 0 1.1 0
26
Prism Partners Offshore
Fund 39,000 39,000 0 .4 0
Weiss Peck & Greer Tudor
Fund LLP 137,092 137,092 0 1.2 0
Weiss Peck & Greer Small
Cap Growth Fund 4,727 4,727 0 .04 0
The Alan W. Steinberg L.P. 82,727 82,727 0 .8 0
Riviera-Enid L.P. 35,455 35,455 0 .3 0
Joseph J. Spalluto 23,637 23,637 0 .2 0
Keefe Bruyette & Woods, Inc. 118,182 118,182 0 1.1 0
Total to be sold: 2,635,415
---------
(1) Assumes all shares offered hereby are sold in the Offering.
Mutual Discovery Fund, Mutual Financial Services Fund, Mutual Qualified Find and
Franklin Mutual Beacon Fund, collectively referred to hereinafter as the "Mutual
Holders", purchased the shares of common stock offered by them by this
prospectus in the ordinary course of their respective businesses and at the time
of such purchases had no direct or indirect agreement or understanding
concerning the distribution of such shares.
Pursuant to an engagement letter, dated November 28, 2000, Keefe Bruyette &
Woods, Inc. acts as financial advisor to our company. Joseph J. Spalluto is a
Managing Director of Keefe Bruyette & Woods, Inc.
USE OF PROCEEDS
We will not receive any proceeds from the sales of the shares of common stock.
All of the shares of common stock being offered are beneficially owned by the
selling stockholders named in this prospectus and the proceeds of sale will go
to them. However, we will receive the proceeds from the exercise of warrants
held by selling stockholders that pay the exercise price in cash. We expect to
use the proceeds of any such sales for general working capital purposes.
PLAN OF DISTRIBUTION
The shares may be sold or distributed from time to time by the selling
stockholders or by pledgees, donees or transferees of, or successors in interest
to, the selling stockholders, directly to one or more purchasers (including
pledgees) or through brokers, dealers or underwriters who may act solely as
agents or may acquire shares as principals, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices, at negotiated
prices or at fixed prices, which may be changed. The distribution of the shares
may be made in one or more of the following methods: (i) ordinary brokers
transactions, which may include long or short sales, (ii)
27
transactions involving cross or block trades or otherwise on the Nasdaq National
Market, (iii) purchase by brokers, dealers or underwriters as principal and
resale by such purchasers for their own accounts pursuant to this prospectus,
(iv) "at the market" to or through market makers or into an existing market for
the common stock, (v) in other ways not involving market makers or established
trading markets, including direct sales to purchasers or sales effected through
agents, (vi) through transactions in options, swaps or other derivatives
(whether exchange listed or otherwise),or (vii) any combination of the
foregoing, or by any other legally available means. In addition, the selling
stockholders or their successors in interest may enter into hedging transactions
with broker-dealers who may engage in short sales of shares of common stock in
the course of hedging the positions they assume with the selling stockholders.
The selling stockholders or their successors in interest may also enter into
option or other transactions with broker-dealers that require that delivery by
such broker-dealers of the shares, which shares may be resold thereafter
pursuant to this prospectus. The Mutual Holders may also engage in market making
transactions themselves. Accordingly, an indeterminate number of shares of
common stock are also being registered by the registration statement of which
this prospectus forms a part to allow such market making transactions.
Brokers, dealers, underwriters or agents participating in the distribution of
the shares may receive compensation in the form of discounts, concessions or
commissions from the selling stockholders and/or the purchasers of shares for
whom such broker-dealers may act as agent or to whom they may sell as principal,
or both (which compensation as to a particular broker-dealer may be in excess of
customary commissions). The selling stockholders and any broker-dealers acting
in connection with the sale of the shares hereunder may be deemed to be
underwriters within the meaning of section 2(11) of the Securities Act, and any
commissions received by them and any profit realized by them on the resale of
shares as principals may be deemed underwriting compensation under the
Securities Act. Neither we nor any selling shareholder can presently estimate
the amount of such compensation. We know of no existing arrangements between any
selling shareholder and any other shareholder, broker, dealer, underwriter or
agent relating to the sale or distribution of the shares. Furthermore, we may
act as a broker-dealer for the selling stockholders in selling any of the shares
offered by this prospectus.
Each selling shareholder and any other persons participating in a distribution
of securities will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation, Regulation
M, which may restrict certain activities of, and limit the timing of purchases
and sales of securities by, selling stockholders and other persons participating
in a distribution of securities. Furthermore, under Regulation M, persons
engaged in a distribution of securities are prohibited from simultaneously
engaging in market making and certain other activities with respect to such
securities for a specified period of time prior to the commencement of such
distributions subject to specified exceptions or exemptions. All of the
foregoing may affect the marketability of the securities offered hereby.
Any securities covered by this prospectus that qualify for sale pursuant to rule
144 under the Securities Act may be sold under that rule rather than pursuant to
this prospectus.
28
There can be no assurance that the selling stockholders will sell any or all of
the shares of common stock offered by this prospectus.
LEGAL MATTERS
The validity of the shares of common stock being offered hereby will be passed
upon for us by Hartman & Craven LLP, 460 Park Avenue, New York, New York 10022.
EXPERTS
The financial statements incorporated in this prospectus that are contained in
our annual Report on Form 10-KSB for the year ended September 30, 2000 have been
audited by Ernst & Young LLP, independent accountants, 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 in giving said
report.
29
------------------------------------ ---------------------------------
You should rely only on the 2,635,415 Shares
information contained or incorporated
by reference in this prospectus. We
have not and the selling stockholders A.B. WATLEY GROUP INC.
have not authorized any other person
to provide you with different
information. If anyone provides you Common Stock
with different or inconsistent
information you should not rely on
it. The selling stockholders are not
making an offer to sell these
securities in any jurisdiction where
the offer or sale is not permitted.
You should assume that the information
appearing in this prospectus is
accurate only as of the date on the
front cover of this prospectus.
Our business, financial condition,
results of operation and prospectus
may have changed since that date.
---------------------------------
PROSPECTUS
------------------------------------ ---------------------------------
August 8, 2001
---------------------------------
------------------------------------
TABLE OF CONTENTS
Where You Can Find More Information.....2
Incorporation of Certain Documents
By Reference..........................2
Forward-Looking Statements..............4
Risk Factors............................4
The Company.............................6
Selling Stockholders....................26
Use of Proceeds.........................27
Plan of Distribution....................27
Legal Matters...........................29
Experts.................................29
------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Securities and Exchange Commission registration fee.............. $ 7,023.38
NASD listing fee................................................. 17,500.00*
Printing and edgarization........................................ 1,000.00*
Legal fees and disbursements..................................... 50,000.00*
Accounting fees.................................................. 5,000.00*
Miscellaneous expenses........................................... 1,000.00*
Total...................... $ 81,523.38*
============
- ------------
*Estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware
provides for the indemnification of officers and directors under certain
circumstances against expenses incurred in successfully defending against a
claim and authorizes Delaware corporations to indemnify their officers and
directors under certain circumstances against expenses and liabilities incurred
in legal proceedings involving such persons because of their being or having
been an officer or director.
Section 102(b) of the Delaware General Corporation Law permits a
corporation, by so providing in its certificate of incorporation, to eliminate
or limit a director's liability to the corporation and its stockholders for
monetary damages arising out of certain alleged breaches of their fiduciary
duty. Section 102(b)(7) provides that no such limitation of liability may affect
a director's liability with respect to any of the following: (i) breaches of the
director's duty of loyalty to the corporation or its stockholders; (ii) acts or
omissions not made in good faith or which involve intentional misconduct or a
knowing violation of laws; (iii) liability for dividends paid or stock
repurchased or redeemed in violation of the Delaware General Corporation Law; or
(iv) any transaction from which the director derived an improper personal
benefit. Section 102(b)(7) does not authorize any limitation on the ability of
the Registrant or its stockholders to obtain injunctive relief, specific
performance or other equitable relief against directors.
Article Eighth of the Registrant's Certificate of Incorporation
provides that the personal liability of the directors of the Registrant be
eliminated to the fullest extent permitted under Section
II-1
102(b) of the Delaware General Corporation Law.
Article Ninth of the Registrant's Certificate of Incorporation and the
Registrant's By-laws provides that all persons who the Registrant is empowered
to indemnify pursuant to the provisions of Section 145 of the Delaware General
Corporation Law (or any similar provision or provisions of applicable law at the
time in effect), shall be indemnified by the Registrant to the full extent
permitted thereby. The foregoing right of indemnification shall not be deemed to
be exclusive of any other rights to which those seeking indemnification may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors, or otherwise.
At present, there is no pending litigation or other proceeding
involving a director or officer of the Registrant as to which indemnification is
being sought, nor is the Registrant aware of any threatened litigation that may
result in claims for indemnification by any officer or director.
ITEM 16. EXHIBITS.
EXHIBIT NO.
- --------------
2.1 Stock Purchase Agreement, dated as of March 29, 2001, by and
among the company and the purchasers listed on Schedule A
thereto.*
4.1 Restated Certificate of Incorporation of the Company and form of
amendment thereto.**
4.2 Amendment to Certificate of Incorporation, filed on February 5,
1999.***
4.3 By-laws of the Company, as amended.**
4.4 Registration Rights Agreement, dated as of April 2, 2001, by and
among the company and the purchasers listed on Schedule A
thereto.*
4.5 Form of Stock Purchase Warrant.*
5 Opinion of Hartman & Craven LLP with respect to the legality of
the securities being registered hereby.*
23.1 Consent of Ernst & Young LLP.*
23.2 The consent of Hartman & Craven LLP is contained in its opinion
filed as Exhibit 5 to this registration statement.*
24 Power of Attorney (on signature page of this Registration
Statement).*
- --------------
* Previously filed.
** Incorporated by reference from the Company's Registration Statement on Form
SB-2 (Reg. No. 333-71783).
***Incorporated by reference from the Company's Registration Statement on Form
8-A.
II-2
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
Provided, however, that paragraphs (a)(l)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or Section l 5(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) For purposes of determining any liability under the 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(b)
under the Act shall be deemed to be part of this registration statement as of
the time it was declared effective.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 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
II-3
controlling person in connection with the securities being registered, 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 whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement 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-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York on August 8, 2001.
A.B. WATLEY GROUP INC.
By: /s/ Steven Malin
-------------------------------------
Steven Malin
Chairman of the Board and Chief
Executive and Operating Officer
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 TITLE DATE
/s/Steven Malin Chairman of the Board, Chief Executive and Operating
- --------------- Officer and Director (Principal Executive Officer)
Steven Malin
August 8, 2001
/s/ * President and Director August 8, 2001
- -----------------
Anthony G. Huston
Senior Vice President and Chief Financial Officer
s/ * (Principal Financial Officer and Principal Accounting August 8, 2001
- -------------------- Officer)
Joseph M. Ramos, Jr.
/s/ * Director
- ----------------
Robert Malin August 8, 2001
/s/ Leon Ferguson Executive Vice President, Chief Information Officer and
- ----------------- Director
Leon Ferguson August 8, 2001
/s/ * Director
- ------------------
Michael B. Kraines August 8, 2001
/s/ * Director
- ---------------
Mark Chambre August 8, 2001
/s/ * Director
- -----------------
Stanley Weinstein August 8, 2001
/s/ Steven Malin
- ----------------
Steven Malin August 8, 2001
(Attorney-in-fact)
*By Attorney-in-fact