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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 001-11747
THE ASHTON TECHNOLOGY GROUP, INC.
Delaware 22-6650372
(State of incorporation) (I.R.S. ID)
1835 MARKET STREET, SUITE 420
PHILADELPHIA, PENNSYLVANIA 19103
(215) 789-3300
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Redeemable Common Stock Purchase Warrants Nasdaq National Market
(Title of class) (Name of exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference
to the price at which the stock was sold, or the average bid and asked prices
of such stock, as of a specified date within 60 days prior to the date of
filing. (See definition of affiliate in Rule 405). The approximate aggregate
market value of common stock of the Registrant was $31,982,661 as of June 29,
2001, which excludes the value of all shares beneficially owned (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934) by officers and
directors of the Company (however, this does not constitute a representation
or acknowledgment that any of such individuals is an affiliate of the
registrant).
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. As of June 29,
2001 were 33,178,830 shares of the registrant's common stock, $.01 par value
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K into which the document is incorporated: (1) Any annual
report to security holders; (2) any proxy or information statement; and (3)
any prospectus filed pursuant to Rule 424(b) or (e) under the Securities Act
of 1933. The listed documents should be clearly described for identification
purposes.
The information required by Part III of this report, to the extent not set
forth herein, is incorporated by reference from the registrant's definitive
proxy statement relating to the 2001 annual meeting of stockholders, to be
filed pursuant to regulation 14A not later than 120 days after the end of the
fiscal year to which this report relates.
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THE ASHTON TECHNOLOGY GROUP, INC.
FORM 10-K
For the Fiscal Year Ended March 31, 2001
INDEX
Page
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PART 1
ITEM 1. BUSINESS...................................................... 3
ITEM 2. PROPERTIES.................................................... 10
ITEM 3. LEGAL PROCEEDINGS............................................. 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 11
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...... 12
ITEM 6. SELECTED FINANCIAL DATA....................................... 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK..... 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................... 64
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 64
ITEM 11. EXECUTIVE COMPENSATION........................................ 64
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... 64
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 64
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K..................................................... 65
SIGNATURES.............................................................. 68
2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements included in this document constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended, Section 21E of the Securities Exchange Act of 1934, as amended,
and the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other important
factors that could cause our actual results, performance or achievements to
differ materially from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such risks,
uncertainties and other important factors include, among others: availability,
terms and deployment of capital; our ability to successfully operate and
obtain sustained liquidity in our eVWAP and other trading systems; our ability
to develop the iMATCH System and other intended products; fluctuations in
securities trading volumes, prices or liquidity; changes in foreign markets,
namely, Canada and Hong Kong; our dependence on arrangements with self-
regulatory organizations; dependence on proprietary technology; technological
changes and costs of technology; industry trends; competition; ability to
develop markets for our products; changes in business strategy or development
plans; availability of qualified personnel; changes in government regulation;
general economic and business conditions; and other factors referred to in
this Form 10-K.
In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential" or "continue" or
other forms of or the negative of those terms or other comparable terms.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
statements. We do not have a duty to update any of the forward-looking
statements after the date of this filing.
PART 1
ITEM 1. BUSINESS
In this Form 10-K, the terms "Ashton," "we," "our" and "us" refer to The
Ashton Technology Group, Inc. and its subsidiaries, unless the context
suggests otherwise.
The Ashton Technology Group, Inc. was formed as a Delaware corporation in
1994. We are an eCommerce company that develops and operates electronic
trading and intelligent matching systems for the global financial securities
industry. Our focus is to develop and operate alternative trading systems,
serving the needs of exchanges, institutional investors and broker-dealers in
the U.S. and internationally. Our target customers are securities exchanges,
institutions, money managers, broker-dealers, and other members of the
professional investment community. Our goal is to use technology to enable
these market participants to trade in an electronic global trading environment
that provides large order size, absolute anonymity, no market impact and lower
transaction fees.
During August 1999, we launched our electronic volume-weighted average price
trading system (eVWAP(TM)) for selected New York Stock Exchange-listed U.S.
stocks. eVWAP is a fully automated system that permits market participants to
trade eligible securities before the market opens at the volume-weighted
average price for the day. Our eVWAP is the average price for a stock,
weighted by the volume of shares of that stock traded "regular way" during the
day on all U.S. securities exchanges as reported to the Consolidated Tape.
We conduct our business through four operating subsidiaries and joint
ventures. Each of our subsidiaries and joint ventures contributes to our
vision of developing and operating alternative trading systems to serve the
needs of global exchanges, institutional investors and broker-dealers. These
companies comprise the primary segment of our business, intelligent matching
systems:
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. Universal Trading Technologies Corporation (UTTC)
. ATG Trading, LLC
. Ashton Technology Canada, Inc., and
. Kingsway-ATG Asia, Ltd. (KAA)
We generate revenues on a per transaction basis for each share traded
through eVWAP. We also generate commission revenue on a per transaction basis
for all orders executed through Croix Securities, Inc. Croix was formed in
February 1999 as a wholly owned subsidiary of UTTC. Through Croix, we provide
electronic trade execution services, utilizing eVWAP and other liquidity
sources to assist our clients in the execution of their trades. During the
year ended March 31, 2001, Croix commissions accounted for 82% of our
revenues, while eVWAP accounted for 18% of our revenues.
Our principal executive offices are at 1835 Market Street, Suite 420,
Philadelphia, Pennsylvania 19103. Our telephone number is (215) 789-3300. Our
website is www.ashtontechgroup.com. Information on our website does not
constitute part of this document.
Universal Trading Technologies Corporation
UTTC was incorporated in February 1995 with the business objective of
designing, developing and exploiting the Universal Trading System and future
products appropriate for the securities trading market. In September 1995,
UTTC entered into an agreement with the Philadelphia Stock Exchange to employ
the Universal Trading System, including a volume weighted average price
trading module. In October 1995, we acquired 80% of the common stock of UTTC.
Our ownership of UTTC was increased to 93% in December 1998. On March 28,
2001, our board of directors requested we develop a plan to merge UTTC into
Ashton. After review of the draft plan on April 26, 2001, our board of
directors deferred action with respect to a merger of Ashton and UTTC.
UTTC and its subsidiaries market, deploy and operate eVWAP through secure
public and private communications networks and the worldwide web. eVWAP
enables institutional customers and financial intermediaries to transact
efficiently and cost effectively in a global trading environment by providing:
. a neutral environment--with exchange-standard surveillance and
regulatory rules;
. global accessibility--through direct networks and the worldwide web;
. seamless integration--into existing investment management systems,
securities exchanges, alternate trading systems, electronic
communication networks, and broker systems;
. electronic connectivity--to post-trade clearing and settlement
mechanisms; and
. absolute trading anonymity and confidentiality--total data security
through the use of encryption, electronic authentication, and firewalls.
ATG Trading, LLC
ATG Trading is a broker-dealer engaged in proprietary trading. ATG Trading
provides limited, two-sided liquidity for clients utilizing eVWAP, by acting
as a system guarantor. ATG Trading also provides our management with real-time
experience with volume weighted average price trading and risk management
techniques. This experience enables our management to discuss alliances with
third parties to provide additional liquidity for our clients. As we form
alliances with external liquidity providers, we expect ATG Trading to develop
and provide volume-weighted average price trading techniques and analytics.
Ashton Technology Canada, Inc.
On December 20, 1999, we entered into an agreement to create Ashton Canada
to develop, market and operate intelligent matching, online transaction
systems and distribution systems for seamless use by U.S. and Canadian
financial intermediaries. On June 8, 2000, Ashton Canada entered into an
agreement with the Toronto
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Stock Exchange to market, deploy, and operate our proprietary eVWAP, as a
facility of the Toronto Stock Exchange for Canadian securities. On January 12,
2001, the Ontario Securities Commission approved an amendment to the Rules and
Policies of the Toronto Stock Exchange, allowing the implementation of eVWAP
as a facility of the Toronto Stock Exchange and allowing Participating
Organizations and eligible institutional clients access to the eVWAP facility.
We expect eVWAP trading of Canadian securities to begin on the Toronto Stock
Exchange during the fall of 2001.
Kingsway-ATG Asia, Ltd.
On December 16, 1999, we finalized a joint venture agreement with Kingsway
International to create KAA. Because we own less than 50% of the equity of
KAA, we account for our investment in KAA under the equity method of
accounting, as required by generally accepted accounting principles.
We have been working with management of KAA to develop a plan for the
deployment of our iMATCH System, including eVWAP, in the Hong Kong and Far
East markets. The plan entails deployment of the iMATCH System technologies,
products, and services to Hong Kong and the Far East, implementation of an
anonymous securities clearing process in Hong Kong for eVWAP trades, cross-
border settlement and clearing of eVWAP trades, and regulatory approval for
the systems. We have held discussions with KAA and local regulators and
exchange officials to implement the eVWAP as a facility of the Hong Kong
Exchange and Clearing Limited. On June 4, 2001, KAA received approval of a
dealer license from the Securities and Futures Commission of Hong Kong.
Other Affiliates
We formed Electronic Market Center, Inc. (eMC) as a wholly owned subsidiary
in June 1998 to develop, operate and market a global electronic distribution
channel for financial products and services. In April 2000, Ashton's board of
directors agreed to fund eMC's initial development efforts. On April 18, 2000,
eMC acquired 100% of the stock of E-Trustco.com Inc., a business-to-business
electronic trust services company. E-Trustco's plan was to offer and outsource
objective financial advisory services through a state-chartered trust company
using eMC's electronic distribution channel.
In the fourth quarter of this fiscal year, eMC completed its initial
development phase. We conducted a review of current market conditions, eMC's
strategy, and the resources and funding required to complete the development
of eMC. Due to the lack of available external funding, and the overall market
conditions which we believed would impact the demand for eMC's products and
services, our board of directors determined not to provide any additional
funding to eMC.
After being unable to find other funding sources or consummate a sale of eMC
to a third party, eMC's board of directors voted on March 29, 2001 to begin
the orderly winding down of its operations, including terminating all of its
employees, selling its assets, and negotiating the settlement of its
outstanding liabilities. We cannot provide any assurance that the liquidation
will be successful or that eMC will not be required to assign its assets for
the benefit of its creditors. eMC's results are reflected as discontinued
operations in the consolidated financial statements.
Effective September 15, 2000 we dissolved ATG International, Inc., which was
one of our wholly-owned subsidiaries. Our international activities are now
being conducted through Ashton Canada and KAA.
Gomez, Inc. was previously one of our majority-owned subsidiaries. Due to a
private placement by Gomez in December 1999, our equity interest in Gomez
decreased to less than 50%. We then began accounting for our investment in
Gomez under the equity method of accounting, rather than consolidating Gomez's
results of operations within our results. Our revenue for the fiscal year
ended March 31, 2000 was $1.4 million, substantially all of which was
generated by Gomez. We currently recognize no revenue from Gomez, and the
carrying value of our Gomez equity investment is zero.
5
Intelligent Matching Systems
The eVWAP is the initial trading product designed and developed by Ashton.
During August 1999, we launched eVWAP for New York Stock Exchange-listed U.S.
stocks. We currently operate eVWAP as a facility of the Philadelphia Stock
Exchange. We expect to commence operation of eVWAP for Canadian stocks, as a
facility of the Toronto Stock Exchange, during the fall of 2001. eVWAP is a
fully automated system that permits market participants to trade eligible
securities before the market opens at the volume-weighted average price for
the day. Our eVWAP is the average price for a stock, weighted by the volume of
shares of that stock traded "regular way" during the day on all U.S.
securities exchanges as reported to the Consolidated Tape.
Using eVWAP, participants may submit and execute large-sized trades without
market impact because of the end-to-end anonymity of the system that
electronically protects the participant's identity, order, match (trade),
residual, if any, and contra-side identity all the way through the settlement
and clearing process. We believe there are no other trading systems that
provide this degree of end-to-end anonymity. Participants are electronically
informed of their (binding) matches and residuals at approximately 9:20 AM
EST, and are informed of the eVWAP pricing at approximately 4:20 PM EST,
shortly after the eVWAP calculations are completed for the day. The pre-open
eVWAP, as provided only by eVWAP, provides "mutual satisfaction" and "best
execution" within a highly liquid, totally anonymous, electronic trading
environment, and should be distinguished from time-sliced or volume-weighted
composite prices that do not provide the same advantages. Transaction fees for
using the system are low and competitive for this fully automated, high
capacity, and highly reliable electronic matching system.
eVWAP is available to securities exchanges, broker/dealers, institutions,
money managers, and other financial intermediaries and end users. Participants
can enroll in eVWAP through our subsidiary Croix or through the Philadelphia
Stock Exchange. eVWAP matching sessions occur every trading day at 9:15 AM
EST. The system has been designed to afford a variety of electronic access
mechanisms so that participating firms and their trading room environments can
easily and securely integrate to eVWAP using eVWAP-supplied, global, secure
communications services, as well as FIX pathways and the Internet.
Participants need only read the eVWAP "shrink wrap" license agreement to
utilize eVWAP-supplied software, hardware, and communications pathways.
For all eVWAP match executions, eVWAP provides automated post-market
clearing and settlement. This is accomplished via a straight-through process
engineered to electronically provide necessary transaction data directly to
each clearing firm and to protect contra-side identity by inserting an omnibus
account number in the middle of each transaction.
We believe value-added trading features and liquidity are the two critical
success factors in deploying any electronic trading system. Further, we
believe the key factors in deploying eVWAP include:
. Functionality--the ability to provide the functions that the financial
community needs to process transactions in a global electronic
marketplace.
. Scalability--the ability to scale the system up as the number of users
and transactions increase.
. Reliability--ensuring fault-tolerant performance levels and meeting
regulatory back-up requirements.
. Extensibility--the ability to rapidly develop, test, and deploy new
systems, technology, features and functionality.
. Integration--the need to communicate with back-office systems and to
implement easy, secure, interoperability with potential participants and
business partners.
Our products compete with other electronic trading systems, including
Instinet Corporation's crossing network, Investment Technology Group Inc.'s
POSIT system, Bloomberg, L.P.'s Bloomberg Professional and Bloomberg
Tradebook, Liquidnet, and other companies that develop proprietary electronic
trading systems. Our electronic trade execution services also compete with
leading brokerage firms and various national, regional and foreign securities
exchanges. Established systems such as Instinet and ITG's POSIT have taken
years to obtain
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their current levels of liquidity. There are also a number of alternative
trading systems (including electronic communication networks) competing for
the same institutional liquidity.
In light of these factors, we believe it is necessary to ensure that early
adapters of the eVWAP experience positive results. We continue to market,
educate and integrate users to participate in eVWAP. As of March 31, 2001,
approximately 60 institutions and 55 broker-dealers have been enrolled and
integrated for use of the eVWAP. We have also integrated 11 national clearing
firms and 7 trade order management systems. Our sales force is focusing on
three segments of the equities trading market to drive eVWAP volumes: brokers,
institutions, and liquidity providers. We recognize that increased liquidity
is necessary to enhance the match efficiency of the eVWAP and to attract
active participation in the system. As such, since the beginning of 2001, we
have enrolled three proprietary trading firms and dealers willing to
facilitate eVWAP order flow by providing guaranteed commitments in the system.
As a result, the eVWAP system's liquidity has increased from a 20-day moving
average of 100,000 shares per day in January 2001 to 70 million shares per day
in July 2001. We are currently in discussions with other firms to participate
in eVWAP as liquidity providers.
We have been working with the Philadelphia Stock Exchange on several
initiatives. On April 30, 2001, the Philadelphia Stock Exchange received
immediate effectiveness of a rule filing with the SEC, which among other
things, expands the number of securities eligible to match in eVWAP, to
include any exchange-traded component issue of the Standard & Poor's (S&P) 500
Index and any listed issue designated by S&P for inclusion in the index. In
response to customer requests, we are also working with the Philadelphia Stock
Exchange to:
. introduce eVWAP on Nasdaq issues;
. introduce an eCLOSE product for listed and Nasdaq issues;
. implement a second eVWAP matching session (10:30 a.m. to 4:00 p.m.) for
both listed and Nasdaq issues, and;
. obtain the eligibility for exchange-traded funds, or ETFs on the eVWAP.
We are also exploring other venues in which to launch our products. On March
30, 2001, we filed the appropriate regulatory documents with the NASD
apprising them of our intent to operate CroixNet, an alternative trading
system, pursuant to the SEC's regulations on alternative trading systems. We
filed "Form ATS Initial Operations Report" with the SEC on April 19, 2001. We
also continue to engage in discussions with other national and international
exchanges for the introduction of the our intelligent matching system
products.
We have developed and plan to introduce our iMATCH System(TM). The iMATCH
System(TM) represents a global distribution network of independently licensed
and operated intelligent matching systems incorporating a value-added front-
end, routing services, and execution hosting capability. The execution
capability includes the eVWAP for NYSE-listed and Nasdaq stocks, market-on-
close (eCLOSE(TM)) for NYSE-listed and Nasdaq stocks, intra-day trading
products (SemiContinuousMarket(TM)), international stocks, a ticker plant with
related data services, and an interactive central limit book with blind
auction and online negotiation features. The iMatch System will be introduced
in Canada during the fall of 2001 and rolled out in the U.S. shortly
thereafter.
Regulation
Government Regulation
Our company and our transaction systems are subject to significant
government regulation, under both federal and state laws, as well as the rules
of several self-regulatory organizations, or SROs. The SEC is primarily
responsible for the administration of the federal securities laws, while SROs
are responsible for the day-to-day regulation of their broker-dealer members.
The SEC and SROs are also charged with protecting the interests of the
investing public and the integrity of the securities markets. The eVWAP has
been developed as a facility of the Philadelphia Stock Exchange, an SRO, and
its operation is subject to regulatory oversight by the SEC. On March 24,
1999, the SEC granted approval to the Philadelphia Stock Exchange to operate
eVWAP, and we launched the system on August 30, 1999. In 1998, the SEC adopted
Regulation ATS and amended Rule 19b-4
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under the Exchange Act, which will impact how we may launch new trading
systems and products, including modifications to the eVWAP. (See "Exchange
Regulation, Regulation ATS and Market Structure".)
Our common stock and redeemable common stock purchase warrants are listed on
the Nasdaq National Market system of the Nasdaq Stock Market, Inc., and we are
therefore also subject to the regulations of the Nasdaq Stock Market.
Our broker-dealer entities, Croix Securities, REB Securities, and ATG
Trading LLC, are subject to regulation by the SEC, the National Association of
Securities Dealers, Inc., a self-regulatory organization, and the Philadelphia
Stock Exchange, with respect to all aspects of the securities business,
including sales practices, record keeping, capital structure, and conduct of
directors, officers and employees. The SEC, self-regulatory organizations and
state securities commissions may conduct periodic examinations of broker-
dealers, which can result in censures, fines, orders to cease and desist, or
the suspension of broker-dealers, their officers or employees. The principal
purpose of these regulations is to protect clients of broker-dealers and the
securities markets, rather than to protect the creditors and stockholders of
the broker-dealers.
Exchange Regulation, Regulation ATS and Market Structure
We believe the business and regulatory environment for introducing new
trading systems has become more flexible based on proposals adopted by the SEC
in December 1998 regarding alternative trading systems, or ATSs, and pilot
trading systems. These new rules permit ATSs to choose whether to register as
national securities exchanges or to register as broker-dealers and comply with
additional requirements depending on their activities and trading volume.
Additionally, the Pilot Rule allows certain pilot trading systems to be
launched by registered national securities exchanges and associations without
prior approval from the SEC for a period of up to two years. The ATS
regulations and the Pilot Rule became effective on April 20, 1999.
We believe these SEC rules underscore the importance of ATS' growing
importance in executing transactions in both New York Stock Exchange-listed
and Nasdaq securities. We believe that the implications of the new regulatory
market structure include:
. Regulation ATS requirements are fewer and less burdensome for start-up
ATSs reflecting their smaller initial volume levels. ATSs with larger
volumes are now subject to regulations approaching those imposed upon
registered securities exchanges.
. Securities exchanges may now be operated as for-profit, non-member
enterprises and existing securities exchanges could relinquish their
registered exchange status to operate broker-dealer ATSs.
. The SEC expressed a clear view that new technology and global
competition are driving the new regulatory structure.
The SEC has introduced several initiatives which stand to revolutionize the
structure of the equity security and listed options markets in the United
States. We believe that many of these new initiatives are designed to
facilitate the participation of ATSs in the new market structure. Some of the
SEC's recent and proposed regulatory changes that could have a significant
impact on our business include:
. Decimalization. The SEC has ordered all SROs that allow trading in
equity securities to price those securities in decimals rather than in
fractions, no later than April 2001. While spreads have narrowed from
increments of 1/16 or 1/32 of a dollar to increments of one cent, floor
specialists are profiting by "pennying" or stepping in front of
institutions' limit orders by bidding or offering in front of such
orders by a penny. This in turn is causing fewer limit orders to be
entered with a reduction in market transparency.
. Public Disclosure of Order Routing and Execution Practices. In January
2001, new SEC rules became effective which require many market
participants to make detailed public disclosure in electronic form of
certain statistical measures of execution quality for orders in equity
securities. The new rules also require securities brokers to provide
detailed disclosure in electronic form regarding
their order routing practices. The availability of enhanced execution
data as well as information regarding the market center to which orders
are routed may raise the bar for achieving best execution.
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. Unlisted Trading Privileges. In August 2000, the SEC approved a rule
amendment that permits unlisted trading privileges (i.e., trading of a
security on a national securities exchange on which that security is not
originally listed) to commence after the first trade in that security
immediately after its initial public offering. The original rule
required the non-listing securities exchanges to wait for one day before
they could exercise unlisted trading privileges.
. Market Fragmentation. The SEC has approved the rescission of NYSE Rule
390, which prohibits certain NYSE member firms from trading in certain
NYSE-listed securities away from a national securities exchange. The SEC
also proposed a wide ranging release on market fragmentation, which is
the inefficiency that results when an investor cannot receive the best
execution of a trade across multiple markets that trade the same
security.
Each of the foregoing initiatives by the SEC may present market
opportunities for us and our eVWAP system, however, we are unable to predict
at this time what impact these initiatives will have, if any, on our products,
our business partners, or our customers.
Net Capital Requirement and Credit Risk
As registered broker-dealers, Croix Securities, REB Securities, and ATG
Trading are subject to the SEC's uniform net capital rule. The purpose of the
net capital rule is to require broker-dealers to have at all times enough
liquid assets to promptly satisfy the claims of customers if the broker-dealer
goes out of business. If we fail to maintain the required net capital, the SEC
or the NASD may suspend or revoke our broker-dealer licenses. Also, a change
in the net capital rules, the imposition of new rules or any unusually large
charge against our net capital could limit our operations. A significant
operating loss or any unusually large charge against our net capital could
adversely affect our ability to expand or even maintain our present levels of
business, which could have a material adverse effect on our business,
financial condition and operating results. Also, these net capital
requirements limit our ability to transfer funds from our broker-dealer
subsidiaries to Ashton.
Both Croix and REB are required to maintain minimum net capital of $5,000.
As of March 31, 2001, Croix had net capital of $108,410, which exceeded
minimum net capital requirements by $103,410, and REB had net capital of
$90,461, which exceeded minimum net capital requirements by $85,461. Although
REB is registered as a broker-dealer, it does not perform any traditional
broker-dealer services; it acts only as a facilities manager for the eVWAP
system. Croix does not act as a market-maker with respect to any securities or
otherwise as principal in any securities transactions; it acts only on an
agency basis. The relatively low credit risk of these businesses is evidenced
by their minimal net capital requirements.
We are engaged in trading activities with ATG Trading acting as a principal,
including the purchase, sale or short sale of securities for our own account.
These activities are subject to a number of risks, including risks of price
fluctuations and rapid changes in the liquidity of markets, all of which
subjects our capital to significant risks. ATG Trading is required to maintain
minimum net capital of $100,000. At March 31, 2001, ATG Trading had net
capital of $712,505, which exceeded its minimum net capital requirements by
$612,505.
Competition
The SEC's regulations governing alternative trading systems have lowered the
barriers to entering the securities trading markets. We face competition from
traditional securities exchanges, which could establish similar trading
systems in an attempt to retain their transaction volumes. We also face
competition from other alternative trading systems and leading brokerage firms
offering similar trade execution services.
Many of our competitors have substantially greater financial, research,
development, sales, marketing and other resources than we do and many of their
products have substantial operating histories. While we believe our products
offer certain competitive advantages, our ability to maintain these advantages
will require continued
9
investment in the development of our products, and additional marketing and
customer support activities. We may not have sufficient resources to continue
to make this investment, while our competitors may continue to devote
significantly more resources to competing services.
Our products compete with other electronic trading systems, including
Instinet Corporation's crossing network, Investment Technology Group Inc.'s
POSIT system, Bloomberg, L.P.'s Bloomberg Professional and Bloomberg
Tradebook, Liquidnet, and other companies that develop proprietary electronic
trading systems. Our electronic trade execution services also compete with
services offered by leading brokerage firms offering various forms of volume-
weighted average price trade execution. We also compete with various national,
regional and foreign securities exchanges for trade execution services.
We believe our services compete on the basis of quality of trade execution,
pricing, and reliability of trade processing and settlement operations.
Although we feel eVWAP offers complete anonymity not offered by any other
service, improved trading performance, flexibility and other benefits, there
is no assurance that our products and services will be accepted by an extended
customer base. Nor can we be sure our products will adequately address all the
competitive criteria in a manner that results in a competitive advantage.
Proprietary Rights
We regard our products and the research and development that went into
developing them as our property. Unauthorized third parties could copy or
reverse engineer certain portions of our products or obtain or use information
that we regard as proprietary. In addition, our trade secrets could become
known to or be independently developed by our competitors.
We rely primarily on a combination of patent, trademark and trade secret
protection, employee and third party confidentiality and non-disclosure
agreements, license agreements, and other intellectual property protection
methods to protect these property rights. However, we have not filed any
patent applications, nor have we filed for copyright protection relating to
current product lines. While our competitive position may be adversely
affected by the unauthorized use of our proprietary information, we believe
the ability to protect fully our intellectual property is less significant to
our success than other factors, such as the knowledge, ability and experience
of our employees and our ongoing product development and customer support
activities.
Although we believe our services and products do not infringe on the
intellectual property rights of others, there can be no assurance that third
parties will not assert infringement claims against us in the future. Any such
assertions by third parties could result in costly litigation, in which we may
not prevail. Also, in such event, we may be unable to license any patents or
other intellectual property rights from third parties on commercially
reasonable terms, if at all. Litigation, regardless of its outcome, could also
result in substantial cost and diversion of our already limited resources. Any
infringement claims or other litigation against us could materially impact our
business, operating results, and consolidated financial condition.
In April, 1999, The Dover Group, Inc. assigned all right, title, and
interest to the registered mark "VWAP(R)" to UTTC for a nominal consideration.
Accordingly, UTTC has the exclusive ownership interest in the "VWAP(R)" mark.
Our products are generally licensed to customers on a "right to use" basis
pursuant to a non-transferable license that generally restricts the customer's
use to internal purposes.
Employees
As of March 31, 2001, we employed a total of 69 people, including 13
employees who were terminated by eMC in April 2001.
ITEM 2. PROPERTIES
On December 23, 1999, we entered into a ten-year lease for approximately
11,000 square feet of office space at 1835 Market Street, Suite 420,
Philadelphia, Pennsylvania 19103. Our principal executive offices are at this
location.
10
We also lease approximately 10,000 square feet of office space at 1900
Market Street, Suite 701, Philadelphia, Pennsylvania 19103, pursuant to a
lease expiring in May 2005. This is the primary location for our technology
staff.
We also have sales offices in New York and London. Each of these leases are
on a month-to-month basis.
ITEM 3. LEGAL PROCEEDINGS
The former President and Chief Operating Officer of eMC, filed an
arbitration claim against Ashton claiming improper failure and refusal of
Ashton, upon termination of his employment with eMC, to pay him severance and
other amounts and benefits due under an agreement with him dated April 18,
2000. He seeks severance pay, other amounts and benefits, other damages and
all costs and expenses incurred in connection with the claim.
On June 11, 2001, Ashton filed its response requesting the arbitration be
dismissed against Ashton with prejudice or that Ashton be removed as a
respondent to the matter. Ashton believes the claim has no merit and intends
to defend it vigorously. We cannot predict the outcome of the arbitration, nor
can we reasonably estimate a range of possible loss given the current status
of the matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The initial public offering of our stock was in May 1996, for 2,472,500
shares at an offering price of $4.50 per share. 2,472,500 redeemable common
stock purchase warrants were also offered at a price of $0.25 per warrant. The
common stock and the warrants are traded on the Nasdaq National Market under
the symbols, "ASTN" and "ASTNW", respectively. The following sets forth the
range of high and low bid prices per share for the common stock as reported on
the Nasdaq National Market:
High Low
------ -----
2000
Fourth Quarter.............................................. $ 2.88 $0.75
Third Quarter............................................... $ 4.88 $2.63
Second Quarter.............................................. $ 8.50 $2.50
First Quarter............................................... $11.56 $6.50
1999
Fourth Quarter.............................................. $ 8.25 $5.00
Third Quarter............................................... $13.81 $4.69
Second Quarter.............................................. $18.00 $3.53
First Quarter............................................... $ 4.09 $1.91
The following sets forth the range of high and low bid prices for the
warrants as reported on the Nasdaq National Market:
High Low
------ -----
2000
Fourth Quarter.............................................. $ 1.81 $0.22
Third Quarter............................................... $ 2.94 $1.38
Second Quarter.............................................. $ 5.25 $1.50
First Quarter............................................... $ 7.50 $3.33
1999
Fourth Quarter.............................................. $ 4.88 $2.50
Third Quarter............................................... $ 9.13 $2.75
Second Quarter.............................................. $12.13 $1.38
First Quarter............................................... $ 1.88 $0.63
On June 29, 2001, the closing price of the common stock was $0.98 and the
closing price of the warrants was $0.42.
As of March 31, 2001, there were approximately 329 holders of record of
common stock, and approximately 90 holders of record of warrants.
During the past three fiscal years, we issued six classes of convertible
preferred stock (See "Notes to Consolidated Financial Statements--
Stockholders' Equity").
We have never declared or paid any dividends on our common stock, and the
board of directors has no current plans to declare or pay any dividends on our
common stock in the foreseeable future.
12
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data are derived from our
consolidated financial statements. Goldstein Golub Kessler LLP, our
independent auditors, have audited the financial statements. This data should
be read in conjunction with the consolidated financial statements and related
notes, contained in Item 8., as well as "Management's Discussion and Analysis
of Financial Condition and Results of Operations", contained in Item 7.
Year Ended March 31,
---------------------------------------------
2001 2000 1999 1998 1997
-------- ------- -------- ------- -------
(In thousands, except per share amounts)
Statement of Operations Data:
Total revenues................. $ 225 $ 3,869 $ 1,434 $ 314 $ --
Total expenses................. 14,881 19,062 16,032 7,556 5,516
Loss from continuing
operations.................... (15,196) (6,232) (14,276) (8,345) (6,397)
Income (loss) from discontinued
operations.................... (2,596) -- -- 68 (205)
Loss on disposal of
discontinued operations....... (3,146) -- -- (386) --
Net loss....................... (20,938) (6,232) (14,276) (8,675) (6,842)
Net loss per common share...... $ (0.79) $ (0.32) $ (1.80) $ (1.46) $ (0.93)
Weighted average shares
outstanding................... 29,395 24,930 10,954 7,520 7,341
Balance Sheet Data:
Cash and cash equivalents...... $ 6,029 $15,365 $ 2,667 $ 816 $ 61
Securities available for sale.. 1,483 9,906 -- -- --
Investments in affiliates...... 141 1,091 -- -- --
Total assets................... 13,066 31,024 5,654 2,998 3,367
Total stockholders' equity..... $ 2,898 $17,163 $ 4,445 $ 1,237 $ 1,063
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of our results of operations and liquidity and
capital resources should be read in conjunction with the consolidated
financial statements and related notes for the years ended March 31, 2001,
2000, and 1999, contained in Item 8 of this Form 10-K.
Overview
The Ashton Technology Group, Inc. was formed as a Delaware corporation in
1994. We are an eCommerce company that develops and operates electronic
trading and intelligent matching systems for the global financial securities
industry. Our focus is to develop and operate alternative trading systems,
serving the needs of exchanges, institutional investors and broker-dealers in
the U.S. and internationally. Our target customers are securities exchanges,
institutions, money managers, broker-dealers, and other members of the
professional investment community. Our goal is to enable these market
participants to trade in an electronic global trading environment that
provides large order size, absolute anonymity, no market impact and lower
transaction fees.
We conduct our business through four operating subsidiaries and joint
ventures. Each of our subsidiaries and joint ventures contributes to our
mission of developing and operating alternative trading systems to serve the
needs of global exchanges, institutional investors and broker-dealers. These
companies comprise the primary segment of our business, intelligent matching
systems.
. Universal Trading Technologies Corporation (UTTC), which has three
subsidiaries of its own:
--Croix Securities, Inc.,
--REB Securities, Inc. and
--NextExchange, Inc.
. ATG Trading, LLC
. Ashton Technology Canada, Inc., and
. Kingsway-ATG Asia, Ltd. (KAA)
13
On March 29, 2001, after being unable to find external funding or consummate
a sale of our majority-owned subsidiary eMC to a third party, eMC's board of
directors voted to begin the orderly winding down of its operations, including
terminating all of its employees, selling its assets, and negotiating the
settlement of its outstanding liabilities. eMC incurred an operating loss of
$2,596,006 and a loss on the disposal of its operations of $3,145,926 in the
year ended March 31, 2001. These losses are reflected as discontinued
operations in our consolidated financial statements.
Effective September 15, 2000 we dissolved ATG International, Inc., which was
one of our wholly-owned subsidiaries. Our international activities are now
being conducted through Ashton Canada and KAA.
Gomez, Inc. was previously one of our majority-owned subsidiaries. Due to a
private placement by Gomez in December 1999, our equity interest in Gomez
decreased to less than 50%. We then began accounting for our investment in
Gomez under the equity method of accounting, rather than consolidating Gomez's
results of operations within our results. Gomez generated substantially all of
our revenue for the fiscal years ended March 31, 2000 and 1999. We currently
recognize no revenue from Gomez, and the carrying value of our Gomez equity
investment is zero. The results of Gomez's operations are included in our
consolidated financial statements for the year ended March 31, 1999 and the
nine months ended December 31, 1999, and are classified as a separate segment.
Since our inception we have not realized an operating profit and have
reported significant losses. Our business is subject to significant risks, as
discussed further in the section entitled "Factors That May Affect Future
Results.
Results of Operations for the Year Ended March 31, 2001 Compared to the Year
Ended March 31, 2000
We incurred a net loss from continuing operations totaling $15.2 million, or
$0.59 per share, for the year ended March 31, 2001, compared to $6.2 million,
or $0.32 per share, last year. The increase is primarily a result of a $5.6
million gain recorded last year due to the change in accounting for our Gomez
investment to the equity method, and a $2.6 million gain on the redemption of
part of our Gomez series A preferred stock.
The loss from operations for the year ended March 31, 2001 decreased 3.5% to
$14.7 million from $15.2 million last year. The loss from operations last year
is comprised of $9.8 million from the intelligent matching systems business
and $5.4 million from Gomez's results of operations; the loss from operations
in the year ended March 31, 2001 was generated entirely by the intelligent
matching systems business. Gomez's results of operations are included in our
consolidated financial statements only through December 31, 1999, when we
began accounting for our Gomez investment using the equity method. Excluding
Gomez, our loss from operations increased approximately $5.1 million, or 50%
from last year, due to increases in losses from trading activities,
depreciation, and selling, general and administrative expenses, as further
discussed below.
Revenues totaled $225,068 for the year ended March 31, 2001, and $3.9
million for the year ended March 31, 2000. The current year revenues were
generated entirely by our intelligent matching systems business through the
operation of eVWAP and securities commissions on trades executed through
Croix. In the year ended March 31, 2000, we earned $32,135 from the operation
of eVWAP, and Gomez generated the balance of the revenues. The increase in
intelligent matching system revenues this year is a result of the increase in
the number of shares traded through our system.
During the years ended March 31, 2001 and 2000, we amortized system
development costs totaling $7,461 and $95,354, respectively. The amortization
expense in the year ended March 31, 2000 was related to system development
costs for eVWAP, which we capitalized through the second quarter of fiscal
1999, when the technological feasibility of the eVWAP was obtained. The
capitalized system development costs related to eVWAP were fully amortized by
March 31, 2000. During the year ended March 31, 2001, we capitalized $19,897
in costs for financial software developed for internal use, which we are
amortizing over two years.
14
Depreciation and amortization expense is primarily depreciation of furniture
and computer equipment. Depreciation and amortization for the year ended March
31, 2001 decreased 2% to $700,484 from $715,956 in the year ended March 31,
2000. Included in last year's results is $334,171 of depreciation related to
Gomez. Excluding Gomez, our depreciation increased approximately 83% in the
year ended March 31, 2001 to $700,484 from $381,785. The increase is due to
$2,043,315 in purchases of furniture and fixtures and of computer equipment
for the development and operation of our intelligent matching systems.
We recorded non-cash compensation charges of $40,108 and $66,161 in the
years ended March 31, 2001 and 2000, respectively, for the issuance of stock
options to non-employee consultants and professional advisors. In the year
ended March 31, 2000, we recorded non-cash compensation charges of $285,208
for the amortization of deferred consulting expenses.
During the year ended March 31, 2001, we began proprietary trading through
ATG Trading to provide liquidity for participants in eVWAP, and to provide our
management with real-time experience with volume weighted average price
trading and risk management techniques. The loss on trading activities
includes $335,137 in net realized losses on trades, and $568,404 in related
broker commissions, and execution and clearing charges.
Selling, general and administrative expenses decreased from approximately
$17.3 million in the year ended March 31, 2000 to $13.2 million in the year
ended March 31, 20001. Excluding Gomez's $8.3 million in selling, general and
administrative expenses in the year ended March 31, 2000, our selling, general
and administrative expenses increased approximately 48% from $8.9 million to
$13.2 million during the year ended March 31, 2001. The increase in selling,
general and administrative expenses in the year ended March 31, 2001 was
primarily a result of hiring a full-service sales and coverage team to support
our products, and an increase in outsourced labor working on the development
of our intelligent matching systems. Salaries and benefits totaled $5.8
million and $3.6 million in the years ended March 31, 2001 and 2000,
respectively, as staff increased from 43 to 56 employees. We paid $1.6 million
and $0.3 million for outsourced labor in the years ended March 31, 2001 and
2000, respectively. Additional factors contributing to the increase in
selling, general and administrative expenses were rent related to the addition
of new facilities for our corporate offices, the opening of sales offices in
New York and London, and increased communications, professional, and marketing
and advertising expenses.
Interest income decreased slightly to $1.1 million in the year ended March
31, 2001 from $1.2 million last year. Excluding Gomez, interest income
increased $60,781 or approximately 5% in the year ended March 31, 2001 as a
result of higher average cash and cash equivalents and securities balances
during the year, in connection with the series F preferred private placement
in August 1999 (See "Notes to Consolidated Financial Statements--Stockholders'
Equity").
Other income for the year ended March 31, 2001 includes a charge of $106,875
for 30,000 shares of common stock we issued to acquire Hudson Knights
Securities LLC (renamed ATG Trading LLC) in July 2000, and income of $413,980
for the reimbursement of legal costs by Fredric W. Rittereiser, our Chairman
and Chief Executive Officer, and the Dover Group, of which Mr Rittereiser is
the sole stockholder, director and officer. In November 2000, we accepted
216,805 shares of Gomez common stock owned by Dover equal in value to the
amounts owed to us under a loan and an agreement to pay legal costs, or
$884,564, as full and complete satisfaction of the debts. Both the loan and
the agreement to pay legal costs were made in connection with the Rosensaft
lawsuit, which we settled in 1998. The price of the Gomez stock was determined
by our board based upon the price of the Gomez series D preferred stock issued
in October 2000, discounted by 20% to reflect the liquidation preference and
dividends applicable to the Gomez series D preferred. Although we valued the
Gomez stock at $884,564, since we account for our investment in Gomez using
the equity method of accounting, we recorded a corresponding loss in
affiliates for the entire amount. We recorded the loss to reduce the carrying
amount of the investment in Gomez by our share of Gomez's net losses to the
extent of our investment balance, as required under the equity method of
accounting. We currently hold 4,405 shares of Gomez Series A Preferred stock,
which are convertible into 4,405,000 shares of Gomez common stock, and 216,805
shares of Gomez common stock. The loss in affiliates offsets the $413,980 of
other income and the $470,584 reduction of the note receivable and related
accrued interest.
15
Other expense for the year ended March 31, 2000 of $416,632 reflects the
charge for the value of UTTC common stock we issued to one of our former
directors to satisfy the terms of a separation agreement we executed with him
on June 29, 1999.
Equity in loss of affiliates for the year ended March 31, 2001 totaled $2.0.
This amount includes $1.1 million, which is our share of the losses from our
joint venture, KAA, and the $0.9 million loss on our investment in Gomez,
described above. The losses from KAA are primarily a result of unrealized
losses on its trading portfolio.
Results of Operations for the Year Ended March 31, 2000 Compared to the Year
Ended March 31, 1999
We incurred a net loss from continuing operations totaling $6.2 million, or
$0.32 per share, for the year ended March 31, 2000, compared to $14.3 million,
or $1.80 per share for the year ended March 31, 1999. The decrease is
primarily a result of a $5.6 million gain recorded last year due to the change
in accounting for our Gomez investment to the equity method, and a $2.6
million gain on the redemption of part of our Gomez series A preferred stock.
The loss from operations for the year ended March 31, 2000 increased
approximately 4% to $15.2 million from $14.6 million in the previous year,
primarily as a result of increases in selling, general and administrative
expenses and depreciation expense, as further discussed below.
Our revenues totaled $3.9 million for the year ended March 31, 2000, and
$1.4 million for the year ended March 31, 1999. We generated $32,135 from the
operation of eVWAP during the year ended March 31, 2000, and Gomez generated
the balance of the revenues. We consolidated Gomez's results of operations
with ours only through December 31, 1999, when we began accounting for our
investment in Gomez using the equity method. The Gomez revenues included in
the year ended March 31, 2000 are for the nine-month period ended December 31,
1999, and the revenues in the year ended March 31, 1999 were generated
entirely by Gomez.
In the year ended March 31, 2000, $1.4 million, or 35%, of Gomez's revenues
were from subscriptions and related data and analysis services from its
GomezPro web site, which it began selling in March 1999. For the years ended
March 31, 2000 and 1999, Gomez generated $1.7 million and $448,108,
respectively, from advertising, sponsorship, and transaction-based revenues.
Consulting and advisory service revenues declined as a percentage of total
revenues due to Gomez's introduction of its GomezPro web site and Research
Station. Total consulting and advisory service revenues were $755,001 or 20%
of Gomez's revenues in the year ended March 31, 2000, compared to $941,250 or
66% of revenues in the year ended March 31, 1999.
The costs of revenues represent salaries associated with the delivery of
Gomez's consulting and advisory services, and amounts paid in connection with
transaction-based revenues. Costs of revenues for the year ended March 31,
2000 were $644,510 or 16.7% of total revenues, compared to $168,000 or 11.7%
of total revenues for the year ended March 31, 1999. The increase as a percent
of total revenues is primarily due to the increase in advertising and
sponsorship revenues and the related increase in amounts paid for transaction-
based revenues.
During the years ended March 31, 2000 and 1999, we amortized system
development costs related to the eVWAP totaling $95,354 and $190,707,
respectively. We stopped capitalizing development costs related to the eVWAP
in the second quarter of fiscal 1999, when the technological feasability of
the system was obtained. During the year ended March 31, 2000, we amortized
the balance of the capitalized development costs related to eVWAP.
Depreciation and amortization expense is primarily depreciation of furniture
and computer equipment. Depreciation and amortization for the year ended March
31, 2000 increased to $715,956 from $515,240 for the year ended March 31,
1999, due to an increase in the computer equipment purchased. Capital
expenditures increased to $2,591,268 for the year ended March 31, 2000
compared to $644,403 for the year ended March 31, 1999. The increase is
primarily due to Gomez's purchase of computer equipment and software to
accommodate additional staff and to support the increased traffic on its web
site and network servers.
16
In February 1998, we entered into a consulting agreement with Continental
Capital & Equity Corporation. We issued 300,000 shares of common stock, with a
fair value of $475,125, for promotional services provided by Continental
through February 1999. During August 1998, the agreement was amended to reduce
future payments and extend the original term of the February 1998 agreement.
As a result of the amendment, we issued 250,000 additional shares of common
stock, with a fair market value of $416,657. We recorded a deferred consulting
expense of $416,657 as a reduction to stockholders' equity during the year
ended March 31, 1999. Also, during the years ended March 31, 2000 and 1999,
non-cash compensation charges of $285,208 and $569,730, respectively, were
recorded to amortize the deferred consulting expenses. The deferred consulting
arrangement was fully amortized during the year ended March 31, 2000.
We recorded non-cash compensation charges of $66,161 and $258,327 in the
years ended March 31, 2000 and 1999, respectively, related to the issuance of
stock options to non-employee consultants and professional advisors.
In August 1998, we entered into employment agreements with certain members
of Gomez management. We granted an aggregate of 3,000,000 Gomez options at an
exercise price of $.01 per share. In addition, we granted 1,400,000 Gomez
options with an exercise price of $.01 per share to certain officers and
directors of Ashton. During the year ended March 31, 1999, we recognized a
non-cash compensation charge of $4.9 million to reflect the difference between
the estimated fair market value of the vested Gomez stock options at the date
of grant and the exercise price of those options. Those options were exchanged
for Gomez common stock on January 22, 1999.
Selling, general and administrative expenses totaled $17.3 million and $9.2
million for the years ended March 31, 2000 and 1999, respectively. For the
year ended March 31, 2000, Gomez accounted for $8.3 million, or 48%, of our
total selling, general and administrative expenses, compared to $2.3 million,
or 25%, in the year ended March 31, 1999. Although the year ended March 31,
2000 includes Gomez for a period of only nine months, or through December 31,
1999, compared to a period of twelve months in the year ended March 31, 1999,
Gomez's selling, general and administrative expenses increased by
approximately $6.0 million, or 257%. The increase in Gomez's costs was due
primarily to the growth in staff and related expenses incurred in building
their infrastructure, and increased advertising and marketing costs related to
introduction of new products and services.
Excluding Gomez, our selling, general and administrative expenses for the
year ended March 31, 2000 totaled $9.0 million compared to $6.9 million during
the year ended March 31, 1999. The increase is primarily a result of an
increase in salaries and benefits due to an increase in personnel, and is
partially offset by decreases in consulting and professional fees.
Interest income increased to $1.2 million for the year ended March 31, 2000
from $146,816 for the year ended March 31, 1999, as a result of the investment
of the net proceeds from the $20 million series F preferred private placement
in August 1999.
Other expense for the year ended March 31, 2000 of $416,632 reflects a
charge for the value of UTTC common stock we issued to one of our former
directors to satisfy the terms of a separation agreement we executed with him
on June 29, 1999. Other income for the year ended March 31, 1999 includes net
litigation settlements of $242,580 we received, offset by a $105,000 reduction
in the carrying value of our investment in E.Com International, Inc.
Equity in income of affiliates for the year ended March 31, 2000 totaled
$90,508. This amount represents our portion of the earnings of KAA, which were
primarily a result of unrealized gains on KAA's trading securities portfolio.
Discontinued Operations
We formed eMC as a wholly owned subsidiary in June 1998 to develop, operate
and market a global electronic distribution channel for financial products and
services. On April 18, 2000, eMC acquired 100% of
17
the stock of E-Trustco.com Inc., a business-to-business electronic trust
services company. As part of that transaction, Ashton's board of directors
agreed to fund eMC's initial development efforts. E-Trustco's plan was to
offer and outsource objective financial advisory services in the form of
multi-manager wrap accounts through a state-chartered trust company using
eMC's electronic distribution channel.
During the year ended March 31, 2001, eMC was developing a private label and
rebrandable global electronic network for financial services and products
geared primarily to the needs of small and midsize financial intermediaries.
eMC's approach was to select distribution partners with existing brands and
business models and to provide them a technology platform they could leverage
to expand their existing client relationships and attract new clients. In the
fourth quarter of this fiscal year, eMC completed its initial development
phase.
We conducted a review of current market conditions, eMC's strategy, and the
resources and funding required to complete the development of eMC. Due to the
lack of available external funding, and the overall market conditions which we
believed would impact the demand for eMC's products and services, Ashton's
board of directors determined not to provide any additional funding to eMC.
After being unable to find other funding sources or consummate a sale of eMC
to a third party, eMC's board of directors voted on March 29, 2001 to begin
the orderly winding down of its operations, including terminating all of its
employees, selling its assets, and negotiating the settlement of its
outstanding liabilities.
We recorded a loss from discontinued operations totaling $2.6 million for
the year ended March 31, 2001 related to eMC. The loss is primarily salaries
and benefits, and consulting fees for the people hired to develop the
technology platform. We also recorded a loss on the disposal of eMC, amounting
to $3.1 million, consisting primarily of write-offs of eMC's assets. The
write-offs include $2.0 million related to eMC's investment in TeamVest,
approximately $0.8 million in system development costs, and approximately $0.3
million related to software, computer equipment, prepayments and other assets.
Liquidity and Capital Resources
At March 31, 2001, we had total assets of $13.1 million compared to $31.0
million at March 31, 2000. Our current assets at March 31, 2001 totaled $8.5
million, and current liabilities of continuing operations were $979,504.
Stockholders' equity at March 31, 2001 decreased to $2.9 million from $17.2
million at March 31, 2000 primarily as a result of the $20.9 million net loss.
The decrease in stockholders' equity was offset by increases of approximately
$3 million related to the issuance of common stock for $2 million, the
issuance of common stock to acquire ATG Trading, and the issuance of common
stock to acquire shares of UTTC series TK preferred stock (See "Notes to
Consolidated Financial Statements").
At March 31, 2001, our principal source of liquidity consisted of cash and
cash equivalents of $6.0 million and securities of $1.5 million, compared to
cash and cash equivalents of $15.4 million and securities of $9.9 million at
March 31, 2000. The securities available for sale consist of highly liquid,
government agency bonds. The decrease in cash and cash equivalents is a result
of our net loss during the year ended March 31, 2001.
We currently derive all of our revenues on a per transaction basis for eVWAP
trades and orders executed through Croix Securities. During the year ended
March 31, 2002, we expect to begin generating sufficiently higher revenues
from our eVWAP and from commissions for orders executed on behalf of our
customers through Croix. Our ability to generate additional revenue depends on
the continued growth in demand for our eVWAP system and other electronic trade
execution services, the other trading systems in development, and our ability
to respond to regulatory and technological changes and customer demands.
We entered into an equity line arrangement with Jameson Drive LLC on
February 9, 2001. On April 5, 2001, we filed a registration statement on Form
S-2 with the SEC to register shares of common stock underlying the equity
line. On March 31, 2001, the SEC issued it views replacing Interpretation No.
4S in the March 1999 Supplement to the Division's Manual of Publicly Available
Telephone Interpretations. Based on comments
18
provided by the SEC and our discussions with SEC staff, we requested a
withdrawal of the Form S-2 on June 19, 2001 to enable us to modify the terms
of the equity line consistent with the views provided by the SEC. [On July 13,
2001 we entered into an amended equity line agreement with Jameson (See "Notes
to Consolidated Financial Statements--Subsequent Events").]
The amended financing arrangement, in the form of a securities purchase
agreement, provides for the purchase by Jameson of up to $15 million worth of
shares of our common stock over a 24-month period. During this period, we may,
at our sole discretion, request a draw on the equity line by selling our
common stock to Jameson. Jameson will be obligated to buy the shares, subject
to the terms of the agreement. The sales price for the shares we sell to
Jameson is not fixed, but will be based on a formula that is tied to the
market price of our common stock at the time of the sale. The shares that we
sell to Jameson will be at a 10% discount to the average of the three lowest
closing bid prices for the common stock during the 20 trading days prior to
the date of the sale. The maximum amount that we can sell over the 24-month
term of the agreement is $15 million, and we are committed to drawing a
minimum of $2.5 million. Generally, we must wait twenty trading days between
draws on the equity line, and the amount of each draw is limited to between
$100,000 and $1 million. We must satisfy certain conditions before Jameson is
obligated to buy shares from us including the registration statement covering
the shares be declared effective by the SEC and remain effective. We intend to
file a registration statement on Form S-2 to register the shares of common
stock we expect to sell to Jameson pursuant to the amended equity line.
We project that as a result of our ability to require purchases of our
common stock for up to approximately $4 million under the equity line without
obtaining stockholder approval, we will have sufficient financial resources to
enable us to continue to operate for the next 12 months. We also believe that
we could achieve profitability more rapidly through an appropriate strategic
alliance with a company that is already involved in the execution of
transactions and has substantial financial resources. While management has had
discussions with potential strategic partners and plans to continue efforts to
find appropriate strategic partners, we have not entered into any definitive
agreements.
There can be no guarantee that we will be able to draw down on any portion
of the $15 million equity line. If we are unable to draw a sufficient amount
on the equity line, our cash, cash equivalents, and securities may not be
sufficient to meet our anticipated cash needs unless we obtain alternative
financing. There can be no assurance that such financing will be available to
us.
Our series F preferred stock is subject to redemption by the holder, and is
therefore classified on our balance sheet as redeemable preferred stock
instead of as a component of stockholders' equity. Since the redemption event
is outside of our control, the series F preferred cannot be classified as
stockholders' equity under generally accepted accounting principles. As of
March 31, 2001, 15,636 shares of the series F preferred had been converted
into 4,949,770 shares of our common stock. The number of shares of common
stock issued equals 19.99% of the common stock outstanding on the issue date
of the series F preferred, and is the maximum number of shares we can issue to
the series F preferred stock investor without obtaining stockholder approval
under the Nasdaq 20% limitation. As a result of this "triggering event" as
defined in the certificate of designations, preferences, and rights of the
series F preferred, the series F investor could seek redemption of the
remaining 4,363 shares of the series F preferred.
As a result of the triggering event, we are required to seek stockholder
approval to issue additional shares to the series F investor as soon as
practicable. On July 13, 2001, the 4,363 shares of the series F preferred were
exchanged for a $5,111,526 convertible note due on August 13, 2003. (See
"Notes to Consolidated Financial Statements--Subsequent Events"). The note is
convertible into shares of our common stock following approval by our
stockholders to exceed the Nasdaq 20% limitation with respect to the series F
preferred financing. Should our stockholders fail to approve the issuance of
additional shares to the series F investors, we would be unable to issue a
sufficient number of shares of common stock to meet our obligations of the
note. In that event, the note would have a maturity of April 1, 2002.
Following the sale of shares of our common stock by certain selling
stockholders in May 2001 pursuant to an effective registration statement, we
became aware that the financial statements included in the registration
19
statement did not satisfy the requirements of Regulation S-X. Because the
registration statement incorporated by reference our Annual Report on Form 10-
K for the year ended March 31, 2000, rather than for the year ended March 31,
2001, as it should have, the registration statement did not meet the
applicable form requirements of a registration statement on Form S-2. Thus,
claims may be made that the prospectus did not meet the requirements of, and
that the sale of the shares was not properly registered pursuant to the
Securities Act of 1933. If such claims are upheld, then the sale of the shares
of common stock by these selling stockholders may have constituted a violation
of the Securities Act of 1933. In this case, the purchasers of the common
stock from the selling stockholders could have the right, for a period of one
year from the dates of their respective purchases, to recover (i) the purchase
price paid for their shares, plus interest, upon tender of their shares to us
or (ii) their losses measured by the difference (plus interest) between their
respective purchase prices and either the value of their shares at the time
they sue us or, if they have sold their shares at a loss, the sale price of
their shares. Alternatively, the purchasers of the common stock could have a
right to seek redress from the selling stockholders, in which case we may have
third party liability to the selling stockholders. We believe that these
refunds or damages could total up to approximately $2.1 million, plus
interest, in the event the purchasers of the shares suffer a total loss of
their investment during this period and seek refunds or damages. If such
liability were to occur, there is no guarantee that we would be reimbursed by
our insurance carrier, and our business, results of operations and financial
condition could suffer.
Additional Factors That May Affect Future Results
Forward-looking statements in this document and those made from time to time
by members of our senior management are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward-
looking statements concerning the expected future financial results or
concerning expected financing, business plans, product development, as well as
other estimates are only estimates, and there can be no assurance that actual
results will not materially differ from our expectations. Factors that could
cause actual results to differ materially from results anticipated in forward-
looking statements include, but are not limited to, the following:
We have a limited operating history, which makes it difficult to evaluate our
business
We have never realized any operating profit and have reported significant
losses. We were founded in 1994 as a development stage company with no
operating history. Our only meaningful sources of revenue have been from a
subsidiary, which we sold in November 1997, and Gomez, Inc., a former
subsidiary. Due to a private placement by Gomez of its securities in December
1999, our equity interest in Gomez decreased to less than 50%. We then began
accounting for our investment in Gomez under the equity method of accounting,
rather than consolidating Gomez's results of operations within our results.
We currently derive all of our revenues on a per transaction basis for eVWAP
trades and orders executed through Croix. We expect to generate future
revenues from the other intelligent matching system products we are developing
and from proprietary trading activity through ATG Trading. Our future success
will depend on continued growth in demand for our eVWAP system and other
electronic trade execution services, the other trading systems in development,
and our ability to respond to regulatory and technological changes and
customer demands. If demand for our products and services fails to grow at the
rate we anticipate and we are unable to increase revenues, then our business,
financial condition and operating results will be materially and adversely
affected.
Future sales of our common stock could depress the market price of our common
stock
We currently have commitments to issue and register an undetermined number
of shares of our common stock. We may also issue options, warrants or other
derivative securities that are convertible into our common stock. The public
sale of our common stock by our stockholders that control large blocks of our
common stock, and the conversion of our derivative securities and public sale
of the common stock underlying these derivative securities could dilute our
common stock and depress its market value.
20
Our common stockholders may suffer dilution in the future upon issuance of our
common stock to Jameson
On July 13, 2001, we entered into an amended financing arrangement with
Jameson, in the form of a securities purchase agreement, which provides for
the purchase by Jameson of up to $15 million worth of shares of our common
stock over a 24-month period. During this period, we may, at our sole
discretion, request a draw on the equity line by selling our common stock to
Jameson. Jameson will be obligated to buy the shares, subject to the terms of
the agreement. The sales price for the shares we sell to Jameson is not fixed,
but will be based on a formula that is tied to the market price of our common
stock at the time of the sale. The shares that we sell to Jameson will be at a
10% discount to the average of the three lowest closing bid prices of the
common stock during the 20 trading days prior to the date of the sale. The
maximum amount that we can sell over the 24-month term of the agreement is $15
million, and we are committed to drawing a minimum of $2.5 million. Generally,
we must wait twenty trading days between draws on the equity line, and the
amount of each draw is limited to between $100,000 and $1 million. We must
satisfy certain conditions before Jameson is obligated to buy shares from us
including the registration statement covering the shares be declared effective
by the SEC and remain effective. We intend to file a registration statement on
Form S-2 to register the shares of common stock we plan to sell to Jameson
pursuant to the amended equity line.
The future issuance of our common stock to Jameson under the equity line may
result in significant dilution to our stockholders and may depress our stock
price. Moreover, as all the shares we sell to Jameson will be available for
immediate resale, the mere prospect of our sales to Jameson could depress the
market price for our common stock. The shares of our common stock issuable to
Jameson under the equity line facility will be sold at a 10% discount to the
average of the three lowest closing bid prices of the common stock during the
20 trading days prior to the date of the sale. Because Jameson is purchasing
our shares at a discount, it will have an incentive to sell immediately so
that it can realize a gain on the difference. If our common stock market price
does decline, this could further accelerate sales of our common stock.
If we satisfy the conditions that allow us to draw down the entire $15
million available under the equity line, and we choose to do so, then
generally, as the market price of our common stock decreases, the number of
shares we will have to issue increases.
Under the equity line agreement, we have also issued warrants to purchase
1,506,024 shares of our common stock. The exercise price is $1.02. The
expiration date of the warrants is July 10, 2006.
The future issuance of additional shares of our common stock under the
equity line agreement and upon exercise of the warrants issued to Jameson will
result in dilution to our stockholders. Also, the market price for our common
stock could drop due to sales of a larger number of shares of our common stock
or the perception that the sales could occur. These factors could also make it
more difficult for us to raise funds through future offerings of common stock.
The risk of dilution of our common stock may cause third parties to engage in
short sales of our common stock
The perceived risk of dilution may cause our stockholders to sell their
shares, which would contribute to a downward movement in the stock price of
our common stock. Moreover, the perceived risk of dilution and the resulting
downward pressure on our stock price could encourage third parties to engage
in short sales of our common stock. By increasing the number of shares offered
for sale, material amounts of short selling could further contribute to
progressive price declines in our common stock.
We may need additional financing to fund our operations
We are scheduling a meeting of our stockholders during which they will
consider and vote whether to authorize us to exceed the Nasdaq 20% limitation
rule with respect to the equity line agreement with Jameson. This rule
requires a Nasdaq-listed issuer to obtain stockholder approval prior to the
issuance of securities in connection with a transaction, other than a public
offering for cash, involving the sale or issuance by us of common stock equal
to 20% or more of the common stock or 20% or more of the voting power
outstanding before the issuance. Approval of this proposal would allow us to
issue an as-yet-undetermined number of shares of common stock under the equity
line securities purchase agreement with Jameson. Should our stockholders fail
21
to approve the proposal, we would be limited in the amount of money that we
could raise under the securities purchase agreement.
As of March 31, 2001, 15,636 shares of the series F preferred had been
converted into 4,949,770 shares of our common stock. The number of shares of
common stock issued equals 19.99% of the common stock outstanding on the issue
date of the series F preferred, and is the maximum number of shares we can
issue to the series F investor without obtaining stockholder approval under
the Nasdaq 20% limitation. As a result of this "triggering event" as defined
in the certificate of designations, preferences, and rights of the series F
preferred, the series F investor could seek redemption of the remaining 4,363,
shares of series F preferred.
As a result of the triggering event, we are required to seek stockholder
approval to issue additional shares to the series F investor as soon as
practicable. On July 13, 2001, the 4,363 shares of the series F preferred were
exchanged for a $5,111,526 convertible note maturing on August 18, 2003. The
note is convertible into shares of our common stock subject to approval by our
stockholders to exceed the Nasdaq 20% limitation with respect to the series F
preferred financing. Should our stockholders fail to approve the issuance of
additional shares to the series F investors, we would be unable to issue a
sufficient number of shares of common stock to meet our obligations of the
note. In that event, the note would have a maturity of April 1, 2002.
If we fail to receive stockholder approval with respect to both the equity
line and the Series F preferred financing, our cash, cash equivalents, and
securities may not be sufficient to meet our anticipated cash needs unless we
obtain alternative financing. There can be no guarantee that such financing
will be available on terms that are acceptable to us, or at all.
We may also require financing in addition to our current arrangements to
complete our strategic plans. Such financing may take the form of equity
offerings, spin-offs, joint ventures, or other collaborative relationships
which may require us to issue shares or share revenue in the future. These
financing strategies would likely impose operating restrictions on us or be
dilutive to holders of our common stock, and may not be available on
attractive terms or at all. If such financing is available, there is no
assurance that it will be sufficient to meet our anticipated needs.
We may be unable to maintain the standards for listing on the Nasdaq National
Market, which could accelerate the maturity of certain obligations, could make
it more difficult for investors to dispose of our common stock and could
subject our common stock to the "penny stock" rules
Our common stock is listed on the Nasdaq National Market. Nasdaq requires us
to maintain standards for continued listing, including a minimum bid price of
$1.00 for shares of our common stock and a minimum tangible net worth of $4
million. If we are unable to maintain these standards, our common stock could
be delisted from the Nasdaq National Market, where our common stock currently
trades. Trading in our stock may then be conducted on the Nasdaq SmallCap
Market. The SmallCap listing requirements include, among other things, a
minimum bid price of $1.00 and net tangible assets of $2 million. We cannot
provide assurance that we will be able to continue to meet the continued
listing requirements of either the Nasdaq National Market or the SmallCap
Market. If we are unable to meet these requirements, our common stock would be
traded on an electronic bulletin board established for securities that do not
meet the Nasdaq listing requirements or in quotations published by the
National Quotation Bureau, Inc. that are commonly referred to as the "pink
sheets". As a result, it could be more difficult to sell, or obtain an
accurate quotation as to the price of our common stock.
22
In addition, if our common stock were delisted, it would be subject to the
so-called penny stock rules. The SEC has adopted regulations that define a
"penny stock" to be any equity security that has a market price of less than
$5.00 per share, subject to certain exceptions. For any transaction involving
a penny stock, unless exempt, the rules impose additional sales practice
requirements on broker-dealers subject to certain exceptions. For transactions
covered by the penny stock rules, a broker-dealer must make a special
suitability determination for the purchaser and must have received the
purchaser's written consent to the transaction prior to the sale. The penny
stock rules also require broker-dealers to deliver monthly statements to penny
stock investors disclosing recent price information for the penny stock held
in the account and information on the limited market in penny stocks. Prior to
the transaction, a broker-dealer must provide a disclosure schedule relating
to the penny stock market. In addition, the broker-dealer must disclose
commissions payable to the broker-dealer and the registered representative,
and current quotations for the security as mandated by the applicable
regulations.
If our common stock were delisted and determined to be a "penny stock," a
broker-dealer may find it to be more difficult to trade our common stock, and
an investor may find it more difficult to acquire or dispose of our common
stock in the secondary market.
Some shares of our common stock may have been offered in violation of the
Securities Act of 1933, which could give purchasers of these shares the right
to seek refunds or damages.
Following the sale of shares of our common stock by certain selling
stockholders pursuant to an effective registration statement, we became aware
that the financial statements included in the registration statement did not
satisfy the requirements of Regulation S-X. Because the registration statement
incorporated by reference our Annual Report on Form 10-K for the year ended
March 31, 2000, rather than for the year ended March 31, 2001, as it should
have, the registration statement did not meet the applicable form requirements
of a registration statement on Form S-2. Thus, claims may be made that the
prospectus did not meet the requirements of, and that the sale of the shares
was not properly registered pursuant to the Securities Act of 1933. If such
claims are upheld, then the sale of the shares of common stock by these
selling stockholders may have constituted a violation of the Securities Act of
1933. In this case, the purchasers of the common stock from the selling
stockholders could have the right, for a period of one year from the dates of
their respective purchases, to recover (i) the purchase price paid for their
shares, plus interest, upon tender of their shares to us or (ii) their losses
measured by the difference (plus interest) between their respective purchase
prices and either the value of their shares at the time they sue us or, if
they have sold their shares at a loss, the sale price of their shares.
Alternatively, the purchasers of the common stock could have a right to seek
redress from the selling stockholders, in which case we may have third party
liability to the selling stockholders. We believe that these refunds or
damages could total up to approximately $2.1 million, plus interest, in the
event the purchasers of the shares suffer a total loss of their investment
during this period and seek refunds or damages. If such liability were to
occur, our business, results of operations and financial condition could
suffer.
Our business is highly volatile and our quarterly results may fluctuate
significantly
We have experienced an increase in the volume of trades executed through our
systems, and volatility of such trading volume from session to session during
the past year. These fluctuations may have a direct impact on our operating
results and may cause significant fluctuations in our inter-day profitability.
We cannot assure you that the volatility in our daily trading volume will not
continue. Moreover, the continued volatility in the securities markets,
particularly in technology-related securities, could result in significant
proprietary trading losses. These losses could have a material adverse effect
on our business, financial condition and operating results.
Our operating results may fluctuate significantly in the future because of a
number of other factors, including:
23
. our ability to manage proprietary trading-related risks;
. changes in the volume of order flow in our trading systems;
. volatility in the securities markets;
. our ability to manage personnel, overhead and other expenses;
. changes in execution fees and clearance fees, which are fees we pay to
our clearing brokers;
. the addition or loss of sales and trading professionals;
. regulatory changes and compliance issues;
. the amount and timing of capital expenditures;
. costs associated with acquisitions; and
. general economic conditions.
If demand for our services declines and we are unable to adjust our cost
structure on a timely basis, our business, financial condition and operating
results may be materially adversely affected.
Our revenues may fluctuate due to declines in securities trading volume
Our revenues may fluctuate due to a decline in securities trading volumes,
prices or liquidity. Declines in the volume of securities transactions and in
market liquidity generally result in lower revenues from trading system
activities. Lower price levels of securities also may result in reduced
trading activity and reduce our revenues from electronic brokerage
transactions. Any decline in securities trading volumes, price or market
liquidity or any other of these factors could have a material adverse effect
on our business, financial condition and operating results.
We may be unable to acquire new businesses and maintain existing strategic
relationships that benefit our business
We have acquired or invested in companies and strategic alliances and may
seek to do so in the future. Acquisitions may entail numerous risks. We may
not be able to integrate successfully any operations, personnel, services or
products of companies that we acquire in the future. In addition, we have
established a number of strategic relationships with information providers,
clearing firms, institutional investors and other firms. These relationships
and others we may enter into in the future are and will be important to our
business and growth prospects. We may not be able to maintain these
relationships or develop new strategic alliances.
Future conversion of our securities may result in dilution
Our governing documents authorize the issuance of up to three million shares
of preferred stock without stockholder approval, with dividend, liquidation,
conversion, voting or other rights that could adversely affect the voting
power or other rights of the holders of our common stock. At March 31, 2001 we
had two classes of preferred stock outstanding, namely series B and series F
convertible preferred stock. The conversion of these classes of our preferred
stock may result in substantial dilution to the percentage ownership of
current stockholders.
As of March 31, 2001, 15,636 shares of the series F preferred had been
converted into 4,949,770 shares of our common stock. The number of shares of
common stock issued equals 19.99% of the common stock outstanding on the issue
date of the series F preferred, and is the maximum number of shares we can
issue to the series F investor without obtaining stockholder approval under
the Nasdaq 20% limitation. As a result of this "triggering event" as defined
in the certificate of designations, preferences, and rights of the series F
preferred, the series F investor could seek redemption of the remaining 4,363,
shares of series F preferred.
24
On July 13, 2001, the 4,363 shares of the series F preferred, plus accrued
interest were exchanged for a convertible note with a principal amount of
$5,111,526, maturing on August 18, 2003. The note is convertible into shares
of our common stock, however, the note cannot be converted into common stock
until our stockholders approve exceeding the Nasdaq 20% limitation with
respect to the series F preferred financing. Should our stockholders fail to
approve the issuance of additional shares to the series F investors, we would
be unable to issue a sufficient number of shares of common stock to meet our
obligations of the note. In that event, the note would have a maturity of
April 1, 2002. We have agreed to file a registration statement on Form S-3 to
register the shares of common stock underlying the convertible note. The
conversion of the convertible note may result in substantial dilution to the
ownership of current stockholders.
We do not expect to pay common stock dividends
We have never paid or declared any cash dividends upon our common stock, nor
do we intend to. Our board of directors has discretion to pay cash dividends
on our common stock and on our Series B preferred stock. While there are no
contractual limitations on our ability to pay cash dividends on our common
stock, based on our present financial status and contemplated future financial
requirements, we do not anticipate declaring any cash dividends on the common
stock. In determining whether to pay dividends, our board of directors
considers many factors, including our earnings, capital requirements and
financial condition. The effect of our election not to pay dividends will help
ensure that all of our resources will be reinvested in the company. However,
you will not receive payment of any dividends in the foreseeable future and
the return on your investment may be lower than anticipated.
We depend on key employees, and the loss of any of those employees may harm
our business
Our future success depends upon the continued service of certain of our
executive officers and key technology personnel. If we lost the services of
one or more of our key employees it could have a material adverse effect on
our business. In particular, the services of Fredric W. Rittereiser, Fred S.
Weingard, Arthur J. Bacci, and William W. Uchimoto, would be difficult to
replace. We have entered into multi-year employment agreements with Messrs.
Rittereiser, Weingard, and Bacci. We have obtained "key-man" life insurance on
each of these individuals. We further believe our future success will depend
upon our ability to attract and retain additional highly skilled technical,
managerial, sales and marketing personnel. Competition for such personnel in
the information technology development industry is intense. If we are unable
to attract and retain such personnel, it could have a material adverse effect
on our business, operating results, and consolidated financial operations.
Our directors and officers may be able to exert control over most of our
corporate actions
Because our Certificate of Incorporation provides no cumulative voting
rights, our directors and officers, acting together, are in a position to
exert significant influence on the election of the members of the Board of
Directors of Ashton and each of its subsidiaries and on most corporate
actions, as well as any actions requiring the approval of stockholders, such
as mergers and acquisitions. Our directors and officers beneficially own
approximately 1.8% of the outstanding shares of our common stock. In addition,
directors and officers have been granted options to purchase our common stock.
Should all the vested options be exercised and converted into common stock,
the directors and officers would own 11.5% of the outstanding shares of common
stock.
Sales or grants of stock to our employees and key individuals will reduce your
ownership percentage
We seek to attract and retain officers, directors, employees and other key
individuals in part by offering them stock options and other rights to
purchase shares of common stock. The exercise of options granted under our
stock option plans will reduce the percentage ownership in Ashton of the then-
existing stockholders. Currently, we have reserved 6,450,000 shares of our
common stock for issuance pursuant to our 1998 Stock Option Plan, 2,550,000
shares of our common stock for issuance pursuant to our 1999 Stock Option
Plan, and 3,000,000 shares of our common stock for issuance pursuant to our
2000 Incentive Plan. In the aggregate, we have already granted options to
purchase 9,058,666 shares of common stock under all three stock option plans.
25
Of the total options granted, options to purchase 8,149,127 shares remain
unexercised. The exercise of these options, the grant of additional options,
and the exercise thereof, may have a dilutive effect on our existing
stockholders and may adversely affect the market price of our common stock.
We are dependent on the continued growth of the market for eVWAP to generate
revenue
The success of eVWAP is heavily dependent upon the acceptance of the product
by broker-dealers, institutional investors and other market participants.
Failure to obtain such acceptance could result in lower volumes and a lack of
liquidity on eVWAP. Market and customer acceptance of eVWAP will depend upon,
among other things, eVWAP's operational performance and pricing. In addition,
our customers may discontinue use of eVWAP at any time. While we continue to
solicit customers to use eVWAP, there can be no assurance that we will attract
a sufficient number of customers to eVWAP.
Our revenues will depend on the volume of securities traded on our systems.
Variations in transaction volume could result in significant volatility in
operating results. Other factors that are beyond our control, including
national and international economic, political and market conditions, the
availability of funding and capital, the level and volatility of interest
rates, legislative and regulatory changes, inflation, and similar broad trends
may affect securities trading volumes. As important, acceptance of our
products by financial market participants is necessary to generate sufficient
trading volumes. Any one or all of these factors could result in lower share
volumes traded through eVWAP and our other intelligent matching systems, and
could adversely impact our results of operations.
We depend significantly on our computer and communications systems to run our
operations
Our trading systems and proprietary trading activities depend on the
integrity and performance of the computer and communications systems
supporting them. Extraordinary trading volumes or other events could cause our
computer systems to operate at an unacceptably low speed or even fail. Any
significant degradation or failure of our computer systems or any other
systems in the trading process could cause customers to suffer delays in
trading. These delays could cause substantial losses for customers and could
subject us to claims from customers for losses. We cannot assure you that our
network protections will work.
Any computer or communications system failure or decrease in computer
systems performance that causes interruptions in our operations could have a
material adverse effect on our business, financial condition and operating
results. We currently do not provide our customers with backup trading systems
or disaster recovery systems.
Our growth may place strains on our managerial, operational and financial
resources
Our current trading, communications and information systems have been
designed to perform within finite capacity parameters. Although we believe we
can accommodate a substantial increase in activity, our growth may require
implementation of new and improved trading, communications and information
systems. There can be no assurance that a significant increase in trading
volumes or the introduction of new or multiple products will not result in
systems failures or have a material adverse effect on our business, financial
condition or operating results.
Our business is characterized by rapid technological change, changing
customer demands and evolving industry standards. Our future success depends,
in part, on how we respond to these demands. These demands
26
will require us to introduce new products and services, enhance existing
products and services and adapt our technology in a timely fashion. There can
be no assurance that we will be capable of introducing new products and
services, enhancing products and services or adapting our technology.
Our compliance and risk management methods might not be fully effective in
reducing our exposure to losses
The scope of procedures for assuring compliance with applicable rules and
regulations has changed as the size and complexity of our business has
increased. In response, we have implemented and continue to revise formal
compliance procedures. Our future operating results will depend on our ability
to continue:
. to improve our systems for operations, financial control, and
communication and information management;
. to refine our compliance procedures and enhance our compliance
oversight; and
. to recruit, train, manage and retain our employee base.
There can be no assurance that our risk management and compliance procedures
will be adequate or effective to detect and deter compliance systems failures.
Nor can we assure you that we will be able to manage our systems, technology
and regulatory compliance growth successfully. Our inability to do so could
have a material adverse effect on our business, financial condition and
operating results.
We are subject to net capital requirements which could limit our operations
The SEC and the NASD have strict rules that require each of our broker-
dealer subsidiaries to maintain sufficient net capital. If we fail to maintain
the required net capital, the SEC or the NASD may suspend or revoke our
broker-dealer licenses. Also, a change in the net capital rules, the
imposition of new rules or any unusually large charge against our net capital
could limit our operations. A significant operating loss or any unusually
large charge against our net capital could adversely affect our ability to
expand or even maintain our present levels of business, which could have a
material adverse effect on our business, financial condition and operating
results. Also, these net capital requirements limit our ability to transfer
funds from our broker-dealer subsidiaries to ourselves. This means that we may
be unable to repay our debts, repurchase our stock or fund our operations.
Our brokerage operations expose us to liability for errors in handling
customer orders
We provide execution services to each of our trading system customers and
execute orders on behalf of our broker-dealer subsidiaries. In conjunction
with our clearing agent partners, we provide clearing services, which include
the confirmation, receipt, settlement and delivery functions, involved in
securities transactions. Errors in performing clearing services or execution
services, including clerical and other errors related to the handling of funds
on behalf of customers and customer orders could lead to civil penalties
imposed by applicable authorities as well as losses and liability in related
lawsuits brought by customers and others.
Software "bugs," errors and malfunctions may expose us to losses
Complex software such as ours often contains undetected errors, defects or
imperfections (often referred to as "bugs"). Despite rigorous testing, the
software used in our products could still be subject to various risks
associated with systems errors, malfunctions and employee errors. These bugs
could result in service interruptions. In addition, because our products often
work with software developed by others, including customers, bugs in others'
software could damage the marketability and reputation of our products. Given
the competitive environment for electronic equity trading execution, investors
could elect to use our competitors' products on a temporary or permanent basis
to complete their trades. Prolonged service interruptions resulting from
natural disasters could also result in decreased trading volumes and the loss
of customers.
Our networks may be vulnerable to security breaches
The secure transmission of confidential information over public networks is
a critical element of our operations. We have not in the past experienced
network security problems. However, our networks may be
27
vulnerable to unauthorized access, computer viruses and other security
problems. Persons who circumvent security measures could wrongfully use our
confidential information or our customers' confidential information or cause
interruptions or malfunctions in our operations. We may be required to expend
significant additional resources to protect against the threat of security
breaches or to alleviate problems caused by any breaches. We may not be able
to implement security measures that will protect against all security risks.
Our clearing agents may fail to provide us and our customers accurate
information about securities transactions
Our trading and information systems are coordinated with the clearing and
information systems of our clearing agents. They furnish us with the
information necessary to run our business, including transaction summaries,
data feeds for compliance and risk management, execution reports and trade
confirmations. We rely on our clearing brokers to discharge their obligations
to us and our customers on a timely basis. If they fail to do so, or
experience systems failure, interruptions or capacity constraints, our
business, financial condition and operating results may suffer.
Financial or other problems experienced by third parties could have an adverse
effect on our business and operating results
We are exposed to credit risk from third parties that owe us money,
securities, or other obligations. These parties include our customers, trading
counterparties, clearing agents, exchanges and other financial intermediaries.
Any failure by these third parties to discharge adequately their obligations
in a timely basis or any event adversely affecting these third parties could
have a material adverse effect on our business, financial condition and
operating results.
Our trading activities expose our capital to potential losses
We are engaged in trading activities predominantly through ATG Trading
acting as a principal. These activities involve the purchase, sale or short
sale of securities and derivative securities for our own account. These
activities are subject to a number of risks, including risks of price
fluctuations and rapid changes in the liquidity of markets, all of which
subjects our capital to significant risks and could have a material adverse
effect on our business, financial condition and operating results.
We may not receive accurate and timely financial data from our third-party
suppliers, which may cause us to lose customers and be subject to litigation
We receive consolidated New York Stock Exchange-listed trading information,
including real-time quotes, last sale reporting, volume and price information
and error reports from a number of third parties, including the New York Stock
Exchange, the Consolidated Tape Association and the Securities Industry
Automation Corporation. We then calculate the volume weighted average price
information for the listed securities traded on our system and distribute this
information to our customers. We also use this information for pricing matched
orders executed on our system. We depend upon these information suppliers to
accurately provide and format this data, in many cases on a real-time basis.
If these suppliers fail to supply accurate or timely information, our
customers may develop an adverse perception of our trading systems and cease
doing business with us. We may also be subject to claims for negligence or
other theories based on the nature and content of information we provide our
customers. Any liability arising from third party supplied data could have a
material adverse effect on our business, financial condition and operating
results.
We are subject to risks associated with the securities industry generally
The securities industry has undergone several fundamental changes which have
resulted in an increase in the volume of equity securities traded in the U.S.
equity markets and a general decrease in the spreads between bid and ask, or
buy and sell, prices.
We derive most of our revenue from trading in existing equity securities,
currently limited to the largest 300 issues and the stocks comprising the S&P
500 index which are listed on the New York Stock Exchange. Any
28
reduction in revenues resulting from a decline in the secondary market trading
volume for these equity securities could have a material adverse effect on our
business, financial condition and operating results. Additionally, a decline
in cash flows into the U.S. equity markets or a slowdown in equity trading
activity by broker-dealers and other institutional investors may have an
adverse effect on the securities markets generally and could result in lower
revenues from our trading system activities.
The securities business is also subject to various other risks, including
customer default, employees' misconduct, errors and omissions by traders and
order takers, and litigation. These risks are often difficult to detect
beforehand or to deter. Losses associated with these risks could have a
material adverse effect on our business, financial condition and operating
results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market Price Risk
Our cash management strategy seeks to optimize excess liquid assets by
preserving principal, maintaining liquidity to satisfy working capital and
regulatory requirements, and minimizing risk while maximizing return. For
working capital purposes, we invest primarily in money market instruments.
Cash which is not needed for normal operations is invested in instruments with
appropriate maturities and levels of risk to correspond to expected liquidity
needs. We currently have investments in government agency bonds and we do not
use derivative financial instruments in our investment portfolio. At March 31,
2001, cash and cash equivalents and securities owned totaled $7.5 million.
Although Croix and REB are registered as broker-dealers, REB generally does
not perform any traditional broker-dealer services, and Croix does not act as
market-maker with respect to any securities or otherwise as principal in any
securities transactions; it acts only on an agency basis. The relatively low
credit risk of these businesses is evidenced by their minimal net capital
requirements.
We are engaged in trading activities with ATG Trading acting as a principal,
including the purchase, sale or short sale of securities and derivative
securities for our own account. These activities are subject to a number of
risks, including risks of price fluctuations and rapid changes in the
liquidity of markets, all of which subjects our capital to significant risks.
We are currently establishing risk management processes designed to limit our
exposure to these risks. We have established approval policies that include
review by the President or his designee of daily proprietary trading activity.
Our operations department reviews all open trades intraday in an effort to
ensure that any open issues are addressed and resolved by the close of the
trading day. Additionally, our clearing broker has imposed trading limitations
based on our capital balance, and notifies us of all known trade discrepancies
on the day following the trade date.
We will from time to time, make investments that are considered strategic.
These investments require approval of executive management and the board of
directors. This component of our cash management strategy is reevaluated
periodically. At March 31, 2001, such investments totaled $1.5 million.
Interest Rate Risk
Our exposure to interest rate risk relates primarily to the interest-bearing
portion of our investment portfolio. Our policy is to invest in high quality
credit issuers and limit the amount of credit exposure to any one issuer. The
interest-bearing investment portfolio primarily consists of short-term, high-
credit quality, money market funds, and government agency bonds. These
investments totaled $1.5 million at March 31, 2001. Due to the conservative
nature of our portfolio, a sudden change in interest rates would not have a
material effect on its value.
Foreign Currency Risk
Ashton has joint ventures in Canada and in Hong Kong, which were formed to
develop, market and operate our intelligent matching trading systems, and
distribution systems for seamless use by U.S., Canadian and Asian
29
financial intermediaries. Our investments in these joint ventures expose us to
currency exchange fluctuations between the U.S. Dollar and the Canadian
Dollar, and between the U.S. Dollar and the Hong Kong Dollar. To the extent
our international activities recorded in their local currencies increase in
the future, the exposure to fluctuations in currency exchange rates will
correspondingly increase. We have not engaged in any foreign currency hedging
activities because our foreign currency cash balances are generally kept at
levels necessary to meet current operating and capitalization needs of these
foreign joint ventures. We may engage in foreign currency hedging activities
in the future as our international activities increase.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's Report.............................................. 32
Consolidated Balance Sheets at March 31, 2001 and 2000.................... 33
Consolidated Statements of Operations for the years ended March 31, 2001,
2000, and 1999........................................................... 34
Consolidated Statements of Cash Flows for the years ended March 31, 2001,
2000, and 1999........................................................... 35
Consolidated Statements of Stockholders' Equity and Comprehensive Loss for
the years ended March 31, 2001, 2000, and 1999........................... 37
Notes to Consolidated Financial Statements................................ 39
31
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
The Ashton Technology Group, Inc.
We have audited the accompanying consolidated balance sheets of The Ashton
Technology Group, Inc. and Subsidiaries as of March 31, 2001 and 2000 and the
related consolidated statements of operations, stockholders' equity and
comprehensive loss, and cash flows for each of the three years in the period
ended March 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Ashton
Technology Group, Inc. and Subsidiaries as of March 31, 2001 and 2000 and the
results of their operations and their cash flows for each of the three years
in the period ended March 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Goldstein Golub Kessler LLP
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
June 1, 2001,
except for Note 18,
as to which the date
is July 13, 2001
32
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
--------------------------
2001 2000
------------ ------------
Assets
Cash and cash equivalents.......................... $ 6,028,883 $ 15,365,439
Securities available for sale...................... 1,483,350 9,906,220
Accounts receivable and other current assets....... 854,335 446,066
Due from broker-dealer............................. -- 2,000,000
Current portion of notes receivable................ 131,700 121,845
------------ ------------
Total current assets........................... 8,498,268 27,839,570
Notes receivable, net of current portion........... 94,012 605,172
Property and equipment, net of accumulated
depreciation...................................... 2,319,080 944,292
Exchange memberships............................... 356,652 266,652
Investments in and advances to affiliates.......... 141,144 1,090,508
Intangible assets, net of accumulated
amortization...................................... -- 19,521
Other investments.................................. 1,500,000 --
Other assets....................................... 156,622 258,196
------------ ------------
Total assets................................... $ 13,065,778 $ 31,023,911
============ ============
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses.............. $ 979,504 $ 861,304
Net liabilities of discontinued operations......... 806,030 --
Other liabilities.................................. 18,438 --
------------ ------------
Total liabilities.............................. 1,803,972 861,304
Minority interest.................................. 4,000,000 5,000,000
Commitments and contingencies
Series F redeemable convertible preferred stock
$.01 par value--(redemption value equals
$8,253,124 at March 31, 2001); shares authorized:
20,000; shares issued and outstanding: 4,364 and
8,000............................................. 4,363,717 8,000,000
Preferred stock--shares authorized: 3,000,000
250,000 shares designated as Series A; shares
issued and outstanding: none.................... -- --
590,000 shares designated as Series B--
(liquidation preference equals $442,000 and
$642,000); shares issued and outstanding: 44,200
and 64,200...................................... 442,000 642,000
105,000 shares designated as Series C $.01 par
value; shares issued and outstanding: none...... -- --
10 shares designated as Series D $.01 par value;
shares issued and outstanding: none............. -- --
10 shares designated as Series E $.01 par value;
shares issued and outstanding: none............. -- --
Common stock--par value: $.01; shares authorized:
100,000,000 and 60,000,000; shares issued and
outstanding: 33,228,830 and 28,118,594............ 332,288 281,186
Additional paid-in capital......................... 73,358,849 64,294,258
Accumulated deficit................................ (71,186,197) (47,981,286)
Accumulated other comprehensive loss............... (48,851) (73,551)
------------ ------------
Total stockholders' equity..................... 2,898,089 17,162,607
------------ ------------
Total liabilities and stockholders' equity..... $ 13,065,778 $ 31,023,911
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
33
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended March 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
Revenues............................ $ 225,068 $ 3,869,084 $ 1,434,438
------------ ------------ ------------
Expenses:
Costs of revenues................. -- 644,510 168,000
Development costs................. 7,461 95,354 190,707
Depreciation and amortization..... 700,484 715,956 515,240
Non-cash compensation charges..... 40,108 351,369 5,932,466
Loss on trading activities........ 903,541 -- --
Selling, general and
administrative................... 13,229,646 17,255,007 9,225,551
------------ ------------ ------------
Total costs and expenses........ 14,881,240 19,062,196 16,031,964
------------ ------------ ------------
Loss from operations.............. (14,656,172) (15,193,112) (14,597,526)
------------ ------------ ------------
Interest income................... 1,135,078 1,169,910 146,816
Interest expense.................. (12,156) (797) --
Gain on deconsolidation of Gomez.. -- 5,568,475 --
Gain on redemption of Gomez
preferred stock.................. -- 2,550,000 --
Other income/(expense)............ 300,809 (416,632) 133,222
Equity in income/(loss) of
affiliates....................... (1,963,976) 90,508 --
Minority interest in loss of
subsidiaries..................... -- -- 41,003
------------ ------------ ------------
Net loss from continuing
operations......................... (15,196,417) (6,231,648) (14,276,485)
------------ ------------ ------------
Loss from discontinued operations of
eMC................................ (2,596,006) -- --
Loss from disposal of discontinued
operations of eMC.................. (3,145,926) -- --
------------ ------------ ------------
Total discontinued operations of
eMC................................ (5,741,932) -- --
------------ ------------ ------------
Net loss............................ $(20,938,349) $ (6,231,648) $(14,276,485)
============ ============ ============
Dividends attributed to preferred
stock.............................. (1,868,705) (1,259,757) (1,113,277)
Beneficial conversion feature of
preferred stock.................... -- -- (4,270,435)
Dividends in arrears on preferred
stock.............................. (397,857) (456,075) (33,447)
------------ ------------ ------------
Net loss applicable to common
stock.............................. $(23,204,911) $ (7,947,480) $(19,693,644)
============ ============ ============
Basic and diluted net loss per share
from continuing operations......... $ (0.59) $ (0.32) $ (1.80)
Basic and diluted net loss per share
from discontinued operations....... (0.20) -- --
------------ ------------ ------------
Basic and diluted net loss per
common share....................... $ (0.79) $ (0.32) $ (1.80)
============ ============ ============
Weighted average number of common
shares outstanding, basic and
diluted............................ 29,394,565 24,929,977 10,953,818
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
34
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
---------------------------------------
2001 2000 1999
------------ ----------- ------------
Cash Flows from Operating Activities
Net loss from continuing operations.. $(15,196,417) $(6,231,648) $(14,276,485)
Adjustments to reconcile net loss
from continuing operations to net
cash used for continuing operations:
Depreciation and amortization...... 707,945 811,310 705,947
Minority interest in loss of
subsidiaries...................... -- -- (41,003)
Non-cash compensation charge for
common stock options.............. 40,108 66,161 5,362,736
Amortization of discount on
securities available for sale..... (20,229) -- --
Common stock issued for consulting
services.......................... -- 285,208 569,730
Non-cash reimbursement of legal
expenses.......................... (413,980) -- --
Common stock issued for Hudson
Knights acquisition............... 106,875 -- --
Write-down of investment........... -- -- 105,000
UTTC common stock issued in
connection with separation
agreement......................... -- 416,632 --
Gain on deconsolidation of Gomez... -- (5,568,475) --
Gain on redemption of Gomez
preferred stock................... -- (2,550,000) --
Equity in (income)/loss of
affiliates........................ 1,963,976 (90,508) --
Changes in operating assets and
liabilities:
Receivables and prepayments........ (498,852) (2,170,835) (177,406)
Due from broker-dealer............. 2,000,000 -- --
Advances to affiliates............. (130,049) -- --
Stock subscriptions receivable..... -- -- 245,000
Other assets....................... 101,574 165,436 (415,009)
Accounts payable and accrued
expenses.......................... 113,078 1,981,293 (1,440,637)
Other liabilities.................. 18,438 (432,532) 532,918
------------ ----------- ------------
Net cash used in continuing
operations...................... (11,207,533) (13,317,958) (8,829,209)
Net cash used in discontinued
operations...................... (1,789,976) -- --
------------ ----------- ------------
Net cash used in operating
activities...................... (12,997,509) (13,317,958) (8,829,209)
------------ ----------- ------------
Cash Flows from Investing Activities
Purchase of securities available for
sale................................ (1,500,000) (9,968,771) --
Proceeds from maturities and sales of
securities available for sale....... 10,000,000 -- --
Purchase of property and equipment... (2,043,315) (2,591,268) (644,403)
Purchase of exchange membership...... (90,000) (69,752) --
Increase in notes receivable......... -- (2,000,000) (380,000)
Cash received from notes receivable.. 121,305 102,766 111,876
Capitalized software development
costs............................... (19,897) -- (61,375)
Investment in affiliates............. -- (1,000,000) --
Purchase of other investments........ (1,500,000) -- --
Effect of deconsolidation of Gomez... -- 2,554,511 --
Proceeds from redemption of Gomez
preferred stock..................... -- 2,550,000 --
Loss from disposal of discontinued
operations of eMC................... (3,145,926) -- --
------------ ----------- ------------
Net cash provided by (used in)
investing activities............ 1,822,167 (10,422,514) (973,902)
============ =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
35
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year Ended March 31,
-------------------------------------
2001 2000 1999
----------- ----------- -----------
Cash Flows from Financing Activities
Line of credit borrowings............... $ 4,109,360 $ -- $ --
Line of credit repayments............... (4,109,360) -- --
Preferred stock dividends paid in cash.. (53,753) (535,829) (319,062)
Issuance costs for common stock......... (155,884) (575,000) (725,000)
Proceeds from issuance of common stock.. 2,000,000 5,750,000 7,250,000
Proceeds from exercise of stock options
and warrants to purchase common stock.. 65,624 2,855,027 --
Net proceeds from issuance of stock by
subsidiaries........................... 15,000 9,626,929 36,840
Issuance costs for preferred stock and
notes payable.......................... -- (682,563) (863,000)
Proceeds from issuance of preferred
stock.................................. -- 20,000,000 6,275,000
----------- ----------- -----------
Net cash provided by financing
activities......................... 1,870,987 36,438,564 11,654,778
----------- ----------- -----------
Foreign currency translation
adjustment............................. (32,201) -- --
Net (decrease) increase in cash and cash
equivalents............................ (9,336,556) 12,698,092 1,851,667
Cash and cash equivalents, beginning of
year................................... 15,365,439 2,667,347 815,680
----------- ----------- -----------
Cash and cash equivalents, end of year.. $ 6,028,883 $15,365,439 $ 2,667,347
=========== =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the year for
interest............................. $ 12,156 $ 797 $ 147,388
=========== =========== ===========
Supplemental schedule of non-cash
investing and financing activities:
Issuance of common stock for purchase
of UTTC preferred stock.............. $ 1,000,000 $ -- $ --
=========== =========== ===========
Receipt of Gomez common stock for
repayment of Dover note and
reimbursement of legal costs......... $ 884,563 $ -- $ --
=========== =========== ===========
Non-cash and accrued dividends on
preferred stock...................... $ 2,212,809 $ 1,177,285 $ 794,215
=========== =========== ===========
Conversion of preferred stock to
common stock......................... $ 3,836,283 $16,785,188 $ 8,841,450
=========== =========== ===========
Purchase of exchange membership and
www.VWAP.com......................... $ -- -- $ 255,463
=========== =========== ===========
Issuance of warrants in connection
with Series F preferred stock........ $ -- $ 645,000 $ --
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
36
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
Year ended March 31,
-----------------------------------------------------------------------
2001 2000 1999
--------------------- ----------------------- -----------------------
Shares Amount Shares Amount Shares Amount
---------- --------- ---------- ----------- ---------- -----------
Common stock
Balance at beginning of
year................... 28,118,594 $ 281,186 20,569,172 $ 205,692 8,143,571 $ 81,436
Issue common stock in
connection with puts... -- -- 696,570 6,966 4,810,788 48,108
Issue common stock for
cash................... 1,333,333 13,333 -- -- -- --
Conversion of preferred
stock to common stock.. 2,877,358 28,774 5,563,148 55,631 7,062,421 70,624
Issue common stock for
consulting services.... 50,000 500 -- -- 250,000 2,500
Issue costs in
connection with
preferred stock........ -- -- -- -- 20,000 200
Issue common stock for
purchase of UTTC
preferred stock........ 733,945 7,339 -- -- -- --
Exercise of stock
options and warrants... 85,600 856 1,289,704 12,897 -- --
Issue common stock for
asset acquisitions..... 30,000 300 -- -- 100,000 1,000
Preferred stock
dividends.............. -- -- -- -- 182,392 1,824
---------- --------- ---------- ----------- ---------- -----------
Balance at end of year.. 33,228,830 332,288 28,118,594 281,186 20,569,172 205,692
---------- --------- ---------- ----------- ---------- -----------
Series A preferred stock
Balance at beginning of
year................... -- -- 125,219 1,252,188 250,000 2,500,000
Preferred stock
dividends.............. -- -- -- -- 1,969 19,688
Conversion of series A
into common stock...... -- -- (125,219) (1,252,188) (126,750) (1,267,500)
---------- --------- ---------- ----------- ---------- -----------
Balance at end of year.. -- -- -- -- 125,219 1,252,188
---------- --------- ---------- ----------- ---------- -----------
Series B preferred stock
Balance at beginning of
year................... 64,200 642,000 417,500 4,175,000 460,000 3,188,875
Issue series B preferred
stock.................. -- -- -- -- 127,500 1,275,000
Issue costs in
connection with
preferred stock........ -- -- -- -- 5,000 50,000
Recognition of
beneficial conversion
feature of preferred
stock.................. -- -- -- -- -- 1,411,125
Conversion of series B
to common stock........ (20,000) (200,000) (353,300) (3,533,000) (175,000) (1,750,000)
---------- --------- ---------- ----------- ---------- -----------
Balance at end of year.. 44,200 442,000 64,200 642,000 417,500 4,175,000
---------- --------- ---------- ----------- ---------- -----------
Series C preferred stock
Balance at beginning of
year................... -- -- -- -- 55,000 550,000
Conversion of series C
to common stock........ -- -- -- -- (55,000) (550,000)
---------- --------- ---------- ----------- ---------- -----------
Balance at end of year.. -- -- -- -- -- --
---------- --------- ---------- ----------- ---------- -----------
Series D preferred stock
Balance at beginning of
year................... -- -- -- -- -- --
Issue series D preferred
stock.................. -- -- -- -- 3.00 3,000,000
Issue costs in
connection with
preferred stock........ -- -- -- -- 0.15 150,000
Preferred stock
dividends.............. -- -- -- -- 0.02 23,950
Conversion of series D
to common stock........ -- -- -- -- (3.17) (3,173,950)
---------- --------- ---------- ----------- ---------- -----------
Balance at end of year.. -- -- -- -- -- --
---------- --------- ---------- ----------- ---------- -----------
Series E preferred stock
Balance at beginning of
year................... -- -- -- -- -- --
Issue series E preferred
stock.................. -- -- -- -- 2.00 2,000,000
Issue costs in
connection with
preferred stock........ -- -- -- -- 0.10 100,000
Conversion of series E
to common stock........ -- -- -- -- (2.10) (2,100,000)
---------- --------- ---------- ----------- ---------- -----------
Balance at end of year.. -- -- -- -- -- --
---------- --------- ---------- ----------- ---------- -----------
Deferred consulting
expense
Balance at beginning of
year................... -- (285,208) (438,281)
Issue common stock for
consulting services.... -- -- (416,657)
Amortization of deferred
consulting expense..... -- 285,208 569,730
---------- --------- ---------- ----------- ---------- -----------
Balance at end of year.. -- -- (285,208)
---------- --------- ---------- ----------- ---------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
37
THE ASHTON TECHNOLOGY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(Continued)
Year ended March 31, 2001
------------------------------------------------------------
2001 2000 1999
------------------- ------------------ -------------------
Shares Amount Shares Amount Shares Amount
------ ------------ ------ ----------- ------ ------------
Additional paid-in
capital
Balance at beginning of
year................... 64,294,258 39,133,830 15,730,870
Issue common stock in
connection with puts... -- 5,743,034 7,201,892
Issue common stock for
cash................... 1,986,667 -- --
Issue common stock for
consulting services.... (500) -- 414,157
Issue common stock for
purchase of UTTC
preferred stock........ 992,661 -- --
Issue common stock and
stock options for asset
acquisitions........... 106,575 -- 254,463
Issue common stock
options................ 40,108 73,661 497,876
Issue costs in
connection with common
stock.................. (155,886) (575,000) (725,000)
Issue Gomez common stock
options................ -- -- 4,864,860
Conversion of preferred
stock to common stock.. 3,807,509 16,729,557 8,770,826
Issue costs in
connection with
preferred stock........ -- (1,556,135) (1,163,199)
Preferred stock
dividends.............. 2,207,687 1,493,448 427,775
Recognition of
beneficial conversion
feature of preferred
stock.................. -- -- 2,859,310
Exercise of stock
options and warrants... 64,770 2,834,631 --
Common stock issued in
connection with
termination agreement.. -- 416,632 --
Issue common stock of
subsidiaries to third
parties................ 15,000 600 --
------------ ----------- ------------
Balance at end of year.. 73,358,849 64,294,258 39,133,830
------------ ----------- ------------
Accumulated deficit
Balance at beginning of
year................... (47,981,286) (40,036,524) (20,376,327)
Recognition of
beneficial conversion
feature of preferred
stock.................. -- -- (4,270,435)
Preferred stock
dividends.............. (2,266,562) (1,713,114) (1,113,277)
Net loss................ (20,938,349) (6,231,648) (14,276,485)
------------ ----------- ------------
Balance at end of year.. (71,186,197) (47,981,286) (40,036,524)
------------ ----------- ------------
Accumulated other
comprehensive loss
Balance at beginning of
year................... (73,551) -- --
Unrealized loss on
securities available
for sale............... 50,605 -- --
Reclassification
adjustment............. 6,296 (73,551) --
Foreign currency
translation
adjustment............. (32,201) -- --
------------ ----------- ------------
Other comprehensive
income (loss).......... 24,700 (73,551) --
------------ ----------- ------------
Balance at end of year.. (48,851) (73,551) --
------------ ----------- ------------
Total stockholders'
equity................. $ 2,898,089 $17,162,607 $ 4,444,978
============ =========== ============
Comprehensive loss
Net loss................ $(20,938,349) $(6,231,648) $(14,276,485)
Other comprehensive
income (loss) per
above.................. 24,700 (73,551) --
------------ ----------- ------------
Total comprehensive
loss................... $(20,913,649) $(6,305,199) $(14,276,485)
============ =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
38
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Company
The Ashton Technology Group, Inc. was formed as a Delaware corporation in
February 1994. We are an eCommerce company that develops and operates
electronic trading and intelligent matching systems for the global financial
securities industry. Our focus is to develop and operate alternative trading
systems, serving the needs of exchanges, institutional investors and broker-
dealers in the U.S. and internationally. Our target customers are securities
exchanges, institutions, money managers, broker-dealers, and other members of
the professional investment community. Our goal is to enable these market
participants to trade in an electronic global trading environment that
provides large order size, absolute anonymity, no market impact and lower
transaction fees.
As of March 31, 2001, our operating subsidiaries and joint ventures
included:
. Universal Trading Technologies Corporation ("UTTC"), and its three
subsidiaries, Croix Securities, Inc., REB Securities, Inc., and
NextExchange, Inc.
. ATG Trading, LLC
. Ashton Technology Canada, Inc., and
. Kingsway-ATG Asia, Ltd. ("KAA").
Electronic Market Center, Inc. (eMC) is also one of our majority-owned
subsidiaries. On March 29, 2001, after being unable to find external funding
or consummate a sale of eMC to a third party, its board of directors voted to
begin the orderly winding down of its operations, including terminating all of
its employees, selling its assets, and negotiating the settlement of its
outstanding liabilities. eMC incurred an operating loss of $2,596,006 and a
loss on the disposal of its operations of $3,145,926 in the year ended March
31, 2001. These losses are reflected as discontinued operations in our
consolidated financial statements.
Gomez, Inc. was previously one of our majority-owned subsidiaries. Due to a
private placement by Gomez in December 1999, our equity interest in Gomez
decreased to less than 50%. We then began accounting for our investment in
Gomez under the equity method of accounting, rather than consolidating Gomez's
results of operations within our results. Gomez generated substantially all of
our revenue for the fiscal years ended March 31, 2000 and 1999. We currently
recognize no revenue from Gomez, and the carrying value of our Gomez equity
investment is zero. The results of Gomez's operations are included in our
consolidated financial statements for the year ended March 31, 1999 and the
nine months ended December 31, 1999, and are classified as a separate segment.
Effective September 15, 2000 we dissolved ATG International, Inc., which was
then one of our wholly owned subsidiaries. Our international activities are
now being conducted through Ashton Canada and KAA.
Basis of Presentation
The accounts of each of our majority-owned subsidiaries, UTTC, ATG Trading,
and Ashton Canada are consolidated with those of Ashton in our consolidated
financial statements. We generally account for investments in businesses which
we own between 20% and 50% using the equity method. Ashton's interests in KAA
and Gomez are accounted for using the equity method. Under this method, the
investment balance, originally recorded at cost, is adjusted to recognize our
share of net earnings or losses of the affiliate as they occur, limited to the
extent of our investment in and advances to the investee. These adjustments
are included in "equity in loss of affiliates" in our consolidated statements
of operations. Other investments in which our interest is less than 20% and
which are not classified as available-for-sale securities are carried at the
lower of cost or net
39
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
realizable value. We assess the need to record impairment losses on
investments and record such losses when the impairment is determined to be
more than temporary in nature.
The results of operations for each of our subsidiaries and equity method
investees are accounted for from their dates of formation. All significant
intercompany accounts and transactions are eliminated in consolidation.
Discontinued Operations
Electronic Market Center
We formed eMC as a wholly owned subsidiary in June 1998 to develop, operate
and market a global electronic distribution channel for financial products and
services. On April 18, 2000, eMC acquired 100% of the stock of E-Trustco.com
Inc., a business-to-business electronic trust services company. As part of
that transaction, Ashton's board of directors agreed to fund eMC's initial
development efforts. E-Trustco's plan was to offer and outsource objective
financial advisory services in the form of multi-manager wrap accounts through
a state-chartered trust company using eMC's electronic distribution channel.
During the year ended March 31, 2001, eMC was developing a private label and
rebrandable global electronic network for financial services and products
geared primarily to the needs of small and midsize financial intermediaries.
eMC's approach was to select distribution partners with existing brands and
business models and to provide them a technology platform they could leverage
to expand their existing client relationships and attract new clients.
On August 9, 2000, eMC agreed to lend TeamVest, Inc., a Delaware corporation
based in Charlotte, North Carolina, $2,000,000 under a convertible loan
agreement. eMC, E-Trustco and TeamVest also entered into an operating
agreement on that date. Under the operating agreement, eMC gained the right to
access, distribute and rebrand TeamVest's electronic investment advice and
Internet-based 401(k) investment advice programs, which eMC planned to offer
as part of its global electronic distribution channel. The TeamVest loan and
accrued interest were convertible into shares of TeamVest common stock at a
conversion price of $2.553 at eMC's option at any time prior to December 31,
2000, or automatically, thirty days after all proceeds of the loan were drawn
down and expended by TeamVest. On October 31, 2000, TeamVest created TeamVest
Retirement Plan Services, LLC, a North Carolina limited liability company, to
which it contributed its defined contribution services business. On November
30, 2000, the TeamVest loan, plus accrued interest, was converted into 796,352
shares of TeamVest, Inc. common stock. In addition, eMC received a 7.376%
membership interest in TeamVest Retirement Plan Services, LLC.
In March 2001, eMC completed its initial development phase. At that time, we
conducted a review of current market conditions, eMC's strategy, and the
resources and funding required to complete the development of eMC. Due to the
lack of available external funding, and the overall market conditions which we
believed would impact the demand for eMC's products and services, Ashton's
board of directors determined not to provide any additional funding to eMC.
After being unable to find other funding sources or consummate a sale of eMC
to a third party, eMC's board of directors voted on March 29, 2001 to begin
the orderly winding down of its operations, including terminating all of its
employees, selling its assets, and negotiating the settlement of its
outstanding liabilities.
The March 31, 2001 consolidated financial statements reflect eMC's
operations as discontinued operations in accordance with APB Opinion No. 30--
Reporting the Effects of Disposal of a Segment, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. We recorded a loss from
discontinued operations totaling $2,596,006 for the year ended March 31, 2001
related to eMC. The loss is primarily salaries and benefits, and consulting
fees for the people hired to develop the technology platform. We also recorded
a loss on the
40
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
disposal of eMC, amounting to $3,145,926, including $63,423 in severance
payments, and $3,082,503 in write-offs of eMC's assets. The write-offs include
$2,033,088 related to eMC's investments in TeamVest, approximately $796,000 in
system development costs, and approximately $254,000 related to software,
computer equipment, prepayments and other assets. Also included in the March
31, 2001 consolidated balance sheet are eMC's net liabilities of $806,030,
which generally consist of accounts payable and accrued expenses, none of
which have been guaranteed by Ashton. eMC's board of directors is currently
negotiating the settlement of these obligations.
Computer Science Innovations, Inc.
On November 4, 1997, Ashton sold its majority-owned subsidiary, Computer
Science Innovations, Inc. ("CSI(R)"). CSI(R) was sold to a trust created by
the CSI(R) leveraged ESOP for $1,723,000. We received $600,000 in cash, a
$594,125 five-year 8 1/4% note, and the forgiveness of $528,875 due to CSI(R),
which included $28,875 of accrued interest. As of March 31, 2001 and 2000, the
outstanding balance of the note was $225,712 and $347,017, respectively.
Use of Estimates
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period. See
"Management's Discussion and Analysis--Additional Factors That Could Affect
Future Results" in Item 7 of this Form 10-K for a discussion of some of the
factors that could cause our actual results to differ from those estimates.
Reclassifications
Certain reclassifications have been made in the consolidated financial
statements to prior year amounts to conform to the current year's
presentation.
Fair Value of Financial Instruments
Substantially all of our financial instruments are carried at fair value or
amounts approximating fair value. The fair values of investment securities are
based upon quoted market prices. Notes receivable are carried at a value that
approximates fair value based upon the short period to maturity and the rates
of return currently available for investments with similar terms and
maturities. Our marketable securities are classified as available for sale in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115.
Securities available for sale are recorded at fair value, with unrealized
gains and losses reported as a component of accumulated other comprehensive
loss. Other investments which are not classified as available for sale
securities are carried at the lower of cost or net realizable value.
Revenue Recognition
During the year ended March 31, 2001, our revenues consists of commissions
from customers' use of our intelligent matching systems. We collect revenue
for each side of a trade matched on eVWAP. We also generate commission revenue
from our customers on a per transaction basis for all orders executed through
Croix.
Transactions in securities, commission revenues and related expenses are
recorded on a trade-date basis. eVWAP revenues are recorded net of amounts
paid to the Philadelphia Stock Exchange pursuant to our September 1995
agreement. Under this agreement, the Philadelphia Stock Exchange employs the
eVWAP on its
41
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
equity-trading floor in exchange for a portion of the revenues eVWAP
generates. The Philadelphia Stock Exchange bills our customers for eVWAP
trades, and remits the net payments to us. eVWAP fees paid to the Philadelphia
Stock Exchange by Croix and ATG Trading and the related revenues are
eliminated in consolidation.
Gomez generated substantially all of the revenues in the years ended March
31, 2000 and 1999. Consulting revenues were recognized by Gomez when the
services were completed and the client was billed for the services rendered.
Subscription revenue was generated by Gomez from the sale of subscriptions to
its website, and recorded ratably over the period of service. Lead generation
and transaction-based revenues were generated by Gomez by facilitating contact
between Gomez members and online businesses that contracted with Gomez. These
revenues were recognized by Gomez upon the members' completion of a
transaction, and only when there were no further conditions or obligations to
the online business.
Cash and Cash Equivalents
We consider all cash and highly liquid investments with maturities of three
months or less to be cash equivalents. Cash equivalents, which consist
primarily of money market accounts, are carried at cost, which approximates
market value.
Accounts Receivable and Concentration of Credit Risk
Accounts receivable and other current assets generally consist of prepaid
expenses at March 31, 2001 and 2000. Accounts receivable included accrued
interest of $68,377 at March 31, 2000 on the note receivable from The Dover
Group, Inc. The note was repaid in November 2000. (See Related Party
Transactions).
In the normal course of business, we are involved in the execution of
various customer securities transactions. Securities transactions are subject
to the credit risk of counter party or customer nonperformance. However,
transactions are collateralized by the underlying security, thereby reducing
the associated risk to changes in the market value of the security through the
settlement date. Therefore, the settlement of these transactions is not
expected to have a material effect on our financial position. Additionally, it
is our policy to review, as necessary, the credit worthiness of each counter
party and customer.
Capitalized Software Development Costs
In accordance with AICPA Statement of Position ("SOP) No. 98-1 Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use, the
costs of software developed for internal use incurred during the preliminary
project stage are expensed as incurred. Direct costs incurred during the
application development stage are capitalized. Costs incurred during the post-
implementation/operation stage are expensed as incurred. During the year ended
March 31, 2001, we capitalized $19,897 in costs for financial software
developed for internal use, which we are amortizing over two years. Related to
eMC, internal-use software costs of $795,767 were capitalized in the year
ended March 31, 2001, however, these costs were entirely written off as a
component of eMC's loss on disposal during the year.
We account for the costs of software to be marketed in compliance with SFAS
No. 86 (FAS 86), Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed. Software development costs are expensed as
incurred until technological feasibility of the product is obtained.
Development costs incurred subsequent to technological feasibility are
capitalized and amortized on a straight-line basis over the estimated economic
life of the product. Capitalization of computer software costs is discontinued
when the computer software product is available to be sold, leased or
otherwise marketed. Amortization begins when the product is available for
release to customers. We amortized software costs related to the eVWAP using
the straight-line method over the estimated economic useful life of 18 months.
Amortization of the eVWAP development costs
42
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
totaled $95,354 and $190,707 for the years ended March 31, 2000 and 1999,
respectively. We have not capitalized software development costs in accordance
with FAS 86 since the second quarter of fiscal 1999 when the technological
feasibility of the eVWAP was obtained, and all such costs were expensed by
December 31, 1999.
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets (generally
three to seven years). Leasehold improvements are amortized over the lesser of
the term of the lease or the estimated useful life of the leasehold
improvements.
Intangible Assets
At March 31, 2000 intangible assets consisted of the fair market value of
stock options issued to purchase the rights to the domain name www.vwap.com in
March 1999. Amortization of intangible assets is provided on a straight-line
basis over the estimated useful life of the asset, which was estimated at 18
months. Amortization expense of $19,521 and $39,042 was recognized during the
years ended March 31, 2001 and 2000, respectively.
Net Loss per Share
Net loss per share is computed in accordance with SFAS No 128, Earnings per
Share. SFAS 128 requires companies to present basic and diluted earnings per
share. Basic earnings per share excludes the dilutive effect of outstanding
stock options, warrants and convertible securities, whereas diluted earnings
per share includes the effect of such items. The effect of potential common
stock is not included in diluted earnings per share for the years ended March
31, 2001, 2000 and 1999, because we have incurred net losses; therefore, the
effect of the dilutive securities is anti-dilutive in those years.
Advertising Expenses
All advertising costs are expensed as incurred. Advertising expenses for the
years ended March 31, 2001, 2000 and 1999 amounted to approximately $672,332,
$79,700 and $385,992, respectively. Advertising is included in selling,
general and administrative expense on the consolidated statements of
operations.
UTTC Common Stock Reverse Split
On April 7, 2000, the Board of Directors of UTTC approved a three-for-four
reverse stock split, effective April 10, 2000. All references in the
consolidated financial statements to UTTC common shares and common stock
options have been adjusted retroactively for the split.
2. INVESTMENTS IN SUBSIDIARIES AND AFFILIATED COMPANIES
ATG Trading LLC
On March 31, 2000, we agreed to purchase the assets of a broker-dealer,
Hudson Knights Securities, LLC, a proprietary trading firm and member of the
Philadelphia Stock Exchange. As part of the agreement, we advanced $2,000,000
to Hudson Knights Securities, LLC under a revolving subordinated loan
agreement. The proceeds of the loan were used to establish a trading account
under our control to provide liquidity on a neutral basis to clients using
eVWAP. The loan balance of $2,000,000 is reported as due from broker-dealer on
the March 31, 2000 consolidated balance sheet. The net loss in the trading
account for the period from April 1, 2000 through July 24, 2000 was allocated
to Ashton through the reduction of the loan balance due from Hudson Knights
Securities, LLC.
43
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On July 25, 2000, we completed the purchase of Hudson Knights Securities,
LLC, and formed ATG Trading, LLC. Since the acquisition date, the results of
ATG Trading are consolidated with those of Ashton. As a result, the revolving
subordinated loan is eliminated in consolidation, and the balance in the
trading account is included in cash and cash equivalents on the March 31, 2001
consolidated balance sheet. We issued 30,000 shares of our common stock to
effect the acquisition and recorded a charge of $106,875 for the issuance of
the shares.
Ashton Technology Canada, Inc.
In December 1999, we entered into an agreement to create Ashton Canada to
develop, market and operate intelligent matching, online transaction systems
and distribution systems for seamless use by U.S. and Canadian financial
intermediaries.
On December 20, 1999, we funded Ashton Canada with $333,400 in cash for
equity in the class A common shares, and agreed to provide an additional
$666,600 as and when required, by way of either equity or debt. As of March
30, 2001, we have funded our $1,000,000 commitment in full to Ashton Canada.
We own 51% of the voting equity of Ashton Canada. In connection with the
agreement to form Ashton Canada, we issued a series K warrant to purchase
500,000 shares of our common stock at an exercise price of $2.50 per share to
TK Holdings, Inc. The warrants are exercisable for a period of two years
beginning on June 4, 2000. On December 20, 2000, the series K warrant began
vesting in quarterly installments of 125,000 shares, and will vest in full on
September 30, 2001. During the year ended March 31, 2001, we recorded a
dividend of $1,024,900 upon vesting of 250,000 of the series K warrants. The
remaining series K warrants will be recorded as dividends when they vest
during the fiscal year ending March 31, 2002.
On June 8, 2000, Ashton Canada entered into an agreement with the Toronto
Stock Exchange to market, deploy, and operate our proprietary eVWAP, as a
facility of the Toronto Stock Exchange for Canadian securities. We expect
eVWAP trading of Canadian securities to begin on the Toronto Stock Exchange
during the fall of 2001.
Kingsway-ATG Asia, Ltd.
On December 16, 1999, we finalized a joint venture agreement with Kingsway
International to create KAA. On January 13, 2000, Ashton purchased 47,000,000
shares of KAA's voting common stock for $1,000,000 for a 47% interest in KAA.
Because we own less than 50% of the equity of KAA, we account for our
investment in KAA under the equity method. Our investment in KAA, originally
recorded at cost, has been adjusted to recognize our share of KAA's net
losses.
We have been working with management of KAA to develop a plan for the
deployment of our iMATCH System, including eVWAP, in the Hong Kong and Far
East markets. The plan entails deployment of the iMATCH System technologies,
products, and services to Hong Kong and the Far East, implementation of an
anonymous securities clearing process in Hong Kong for eVWAP trades, cross-
border settlement and clearing of eVWAP trades, and regulatory approval for
the systems. We have held discussions with KAA and local regulators and
exchange officials to implement the eVWAP as a facility of the Hong Kong
Exchange and Clearing Limited. On June 14, 2001, KAA received approval of a
dealer license from the Securities and Futures Commission of Hong Kong.
Gomez, Inc.
Gomez, which was one of our majority-owned subsidiaries through December
1999, was our primary source of revenues since Gomez's inception in May 1997.
In September 1999, Gomez commenced a private placement of its series C
convertible preferred stock. As a result of Gomez's sale of a portion of its
series C convertible
44
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
preferred stock on December 30, 1999, our ownership percentage in Gomez was
reduced to below 50%. As of December 31, 1999, we began accounting for our
investment in Gomez under the equity method of accounting due to the decrease
in ownership our reduced representation on Gomez's board. As a result, we
consolidated Gomez's operating results only through December 31, 1999.
Pursuant to the equity method of accounting, the carrying amount of our
remaining investment in Gomez was increased to zero. The increase of
$5,568,475 was reported as a gain during the year ended March 31, 2000. We
will not report any future losses of Gomez which would reduce the carrying
amount to below zero. In the event Gomez has future earnings, we will
recognize our share of those earnings only after they exceed our share of net
losses not recognized.
We also realized a gain of $2,550,000 during the year ended March 31, 2000
from the redemption of 500 shares of our Gomez series A preferred stock. As of
March 31, 2001 and 2000, our investment in Gomez consists of 4,405 shares of
Gomez series A preferred stock, which are convertible into 4,405,000 shares of
Gomez common stock, and 216,805 shares of Gomez common stock (See "Related
Party Transactions").
4. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44 (FIN 44), Accounting for Certain Transactions involving
stock Compensation, an Interpretation of APB Opinion No. 25. FIN 44 clarifies
the application of APB No. 25 for certain issues, including the definition of
an employee, the treatment of the acceleration of stock options and the
accounting treatment for options assumed in business combinations. FIN 44
became effective on July 1, 2000, but is applicable for certain transactions
dating back to December 1998. The adoption of FIN 44 did not have a material
impact on our financial position or results of operations.
In November 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 100
Restructuring and Impairment Charges. In December 1999, the SEC issued SAB No.
101 Revenue Recognition in Financial Statements. SAB No. 100 expresses the
views of the SEC staff regarding the accounting for and disclosure of certain
expenses not commonly reported in connection with exit activities and business
combinations. This includes the accrual of exit and employee termination costs
and the recognition of impairment charges. SAB No. 101 expresses the views of
the SEC staff in applying generally accepted accounting principles to certain
revenue recognition issues. SAB No. 100 became effective in November 1999 and
SAB No. 101 is effective for periods beginning after March 15, 2000. The
Company believes that the adoption of the guidance provided in SAB No. 100 and
SAB No.101 did not have a material impact on its consolidated financial
position or results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging
Activities. In June 1999, the FASB's SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133, extended the pronouncement's effective date to all fiscal
quarters of all fiscal years beginning after June 15, 2000. In June 2000 the
FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities--An Amendment of FASB Statement No. 133, which
addressed several implementation issues that arose as a result of SFAS 133.
The statement requires recognition of all derivatives on our balance sheet at
their fair value. Derivatives which are not hedges must be adjusted to fair
value through income. If a derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of the derivative either will be offset
against the change in fair value of the hedged assets, liabilities or firm
commitments through earnings, or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be recognized in earnings immediately.
The impact of the adoption of SFAS 133, 137 and 138 on our financial position,
results of operations and cash flows will depend on our financial position at
the time and the nature and purpose of the derivative instruments if and when
we elect to use derivatives, however the impact is not expected to be
material.
45
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consist of the following as of March 31,
2001 and 2000:
March 31,
------------------------ Estimated
2001 2000 Useful Life
----------- ----------- -------------
Office equipment..................... $ 255,954 $ 169,092 3 - 5 years
Computer equipment................... 2,514,047 1,468,891 3 years
Computer software.................... 233,310 -- 3 years
Furniture and fixtures............... 708,208 270,045 7 years
Leasehold improvements............... 381,648 122,154 Term of lease
----------- -----------
4,093,167 2,030,182
Less accumulated depreciation........ (1,774,087) (1,085,890)
----------- -----------
Property and equipment, net........ $ 2,319,080 $ 944,292
=========== ===========
Depreciation and amortization expense related to property and equipment for
the years ended March 31, 2001, 2000 and 1999 was approximately $688,000,
$677,000 and $477,000, respectively. Depreciation and amortization expense for
the years ended March 31, 2000 and 1999 includes $334,171 and $89,679,
respectively, of depreciation expense recorded on property and equipment of
Gomez.
6. SECURITIES AVAILABLE FOR SALE AND OTHER INVESTMENTS
As of March 31, 2001, our securities available for sale have maturities
ranging from three to eight years. The balance of securities available for
sale as of March 31, 2001 and 2000 consist of the following:
2001 2000
--------------------- ---------------------
Market Market
Cost Value Cost Value
---------- ---------- ---------- ----------
US government & government
agency obligations........... $1,500,000 $1,483,350 $7,975,794 $7,919,360
Corporate debt obligations.... -- -- 2,003,977 1,986,860
---------- ---------- ---------- ----------
$1,500,000 $1,483,350 $9,979,771 $9,906,220
========== ========== ========== ==========
Gross unrealized losses on securities available for sale amounting to
$16,650 and $73,551 at March 31, 2001 and 2000, respectively, have been
excluded from earnings and included in accumulated other comprehensive loss,
which is a component of stockholders' equity. The specific identification
method is utilized in determining the cost of a security that has been sold.
Realized gains and losses are included in other income (expense) on the
consolidated statements of operations.
On February 6, 2001, we made a $1,500,000 equity investment in JAGfn
Broadband, LLC. JAGfn is a leading provider of internet-based financial news
and information through its website, which offers subscribers access to timely
financial data, reports, and commentary from industry analysts and other
professionals. In October 2000, JAGfn began an advertising-based live
webcasting service covering current financial news during the trading day. We
expect to gain exposure to financial professionals for our eVWAP and other
intelligent matching system products on the JAGfn website and webcasts as a
result of this relationship. Our investment in JAGfn represents a 5% interest
in the company. This investment is recorded at its cost on the consolidated
balance sheet.
46
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 1997, we entered into a strategic relationship with E.Com International,
Inc. to support its goal of providing remote wireless access to its family of
online transaction systems. We purchased E.Com common stock and warrants in a
private placement for $105,000. In 1998, E.Com reported that it was exploring
various alternative financing strategies, including private and public
financing, selling assets and bank borrowings. We wrote off the investment
during the year ended March 31, 1999. The loss is recorded as a component of
other income (expense) in the March 31, 1999 consolidated statement of
operations.
7. EXCHANGE MEMBERSHIPS
We own three Philadelphia Stock Exchange memberships through ATG Trading,
Croix and REB. In July 2000, we acquired Hudson Knights Securities, LLC, and
renamed it ATG Trading, LLC. At the time of the acquisition, we purchased an
exchange membership with options trading privileges for $90,000 in cash. In
January 2000, Croix purchased a regular exchange membership for $69,752 in
cash. In March 1999, we purchased a membership seat with options trading
privileges for REB at a value of $196,900. We issued 100,000 restricted shares
of common stock as consideration for the seat. All exchange memberships are
recorded at cost and are evaluated periodically for impairment in value. If an
other than temporary impairment is considered to have occurred, the membership
will be recorded at a value that reflects our estimate of the impairment.
8. SERIES F REDEEMABLE CONVERTIBLE PREFERRED STOCK
On August 18, 1999, we completed a private placement for the sale of 20,000
shares of series F convertible preferred stock with a par value of $.01 and a
stated value of $1,000 per share, and warrants to purchase an aggregate of
200,000 shares of our common stock, for gross proceeds of $20,000,000. Each
share of the series F preferred is convertible into a number of shares of our
common stock based on a formula. The formula is the stated value of the series
F preferred plus a premium of 9% per annum, divided by a conversion price. The
conversion price is the lesser of $10.79 or the average of the five lowest
closing bid prices of our common stock during the 22 trading days preceding
conversion. Beginning on February 18, 2000, the series F preferred is not
subject to a minimum conversion price, but may be redeemed at our option, if
the market price of our common stock is below $7.35 on any conversion date.
Since the series F preferred is also subject to redemption by the investor
upon the occurrence of certain events which are outside of our control, it is
classified as redeemable preferred stock instead of stockholders' equity.
During the year ended March 31, 2001, 3,636 shares of the series F preferred
were converted into 2,757,358 shares of our common stock, including 290,304
shares for the 9% premium, which we recorded as dividends. During the year
ended March 31, 2000, 12,000 shares of the series F preferred were converted
into 2,192,412 shares of our common stock, including 70,884 shares recorded as
dividends. We also accrued dividends in arrears of $638,866 and $448,767 to
reflect the 9% premium on the remaining series F preferred from the issue date
through March 31, 2001 and 2000, respectively.
The warrants are immediately exercisable for a period of five years, ending
August 18, 2004, at an exercise price of $12.26 per share. The fair value of
the warrants, or $645,000, was recorded as a dividend in August 1999 at the
time of issuance.
On January 25, 2001, the series F preferred investors converted shares of
the series F preferred stock into shares of our common stock, resulting in a
"triggering event" as defined in the certificate of designations, preferences,
and rights of the series F preferred stock. A triggering event occurs when the
number of shares of our common stock issued upon prior conversions of the
series F preferred and exercise of the series F warrants, plus the number of
shares of common stock issuable upon conversion of the remaining series F
preferred and the series F warrants at the current conversion price, exceeds
19.99% of the total shares outstanding on August 18, 1999, the series F
preferred issue date. As a result of the triggering event, the series F
investor could seek redemption of the remaining 4,363 shares of the series F
preferred.
47
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On July 13, 2001, the 4,363 shares of the Series F Preferred, plus accrued
interest were exchanged for a convertible note with a principal amount of
$5,111,526 maturing on August 18, 2003 (See "Subsequent Events").
9. STOCKHOLDERS' EQUITY
Increase in Authorized Common Stock
On September 21, 2000, our stockholders voted to increase the authorized
shares of our common stock from 60,000,000 to 100,000,000.
Equity Line of Credit Agreement
We entered into an equity line of credit arrangement with Jameson Drive LLC
on February 9, 2001. On April 5, 2001, we filed a registration statement on
Form S-2 with the SEC to register shares of common stock underlying the equity
line. On March 31, 2001, the SEC issued it views replacing Interpretation No.
4S in the March 1999 Supplement to the Division's Manual of Publicly Available
Telephone Interpretations. Based on comments provided by the SEC and our
discussions with SEC staff, we requested a withdrawal of the Form S-2 on June
19, 2001 to enable us to modify the terms of the equity line consistent with
the views provided by the SEC. On July 13, 2001 we entered into an amended
equity line agreement with Jameson (See "Subsequent Events").
CALP II Limited Partnership Common Stock Issue
On February 5, 2001, we sold 1,333,333 shares of our common stock to CALP II
Limited Partnership, for $1.50 per share, for an aggregate purchase price of
$2,000,000 in a private placement. In May 2001, we registered the resale of
the common stock sold under the Securities Act of 1933, on Form S-3. (See
Commitments and Contingencies). The proceeds of the private placement were
used to fund our investment in JAGfn, and for general corporate purposes at
Ashton Canada.
UTTC Series TK Convertible Preferred Stock
On June 4, 1999, UTTC completed a private placement with TK Holdings, Inc.
of 145,700 shares of its series TK convertible preferred stock and series T
warrants to purchase 200,000 shares of Ashton common stock at $10.00 per
share. Gross proceeds received by UTTC from the sale of the series TK
preferred and the warrants amounted to $2,000,000. Between May 2001 and April
2004, each share of UTTC Series TK preferred stock is convertible into 7.5
shares of UTTC common stock.
The series T warrants vest in quarterly installments beginning in June 2000
and ending in March 2002. The fair value of the warrants is being recorded as
dividends over the vesting period. During the year ended March 31, 2001, we
recorded dividends of $608,600 upon vesting of 100,000 of the series T
warrants.
On March 9, 2001, we issued 733,945 shares of our common stock with a value
of $1,000,000 to TK Holdings in a private placement, in exchange for its
72,850 shares of UTTC series TK convertible preferred stock. The UTTC series
TK preferred stock is presented as a minority interest on the consolidated
balance sheet at its liquidation preference of $1,000,000 and $2,000,000 as of
March 31, 2001 and 2000, respectively. As a result of the liquidation
preference, the balance has not been reduced by any portion of UTTC's net
losses.
48
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
UTTC Series KW Convertible Preferred Stock
On January 12, 2000, UTTC completed a private placement of 123,240 shares of
its series KW convertible preferred stock, resulting in gross proceeds of
$3,000,000. The series KW preferred has an aggregate liquidation value of
$3,000,000. Upon the completion of an initial public offering of the common
stock of UTTC or upon a change in control, and until December 2004, each share
of series KW preferred is convertible into 7.5 shares of UTTC common stock. If
UTTC has not completed an initial public offering by December 31, 2001,
holders of the series KW preferred may exchange up to 41,080 shares, each for
3.477 shares of Ashton common stock, and up to 41,080 shares, at an exchange
ratio equal to the liquidation value per share ($24.34275) divided by the
average closing price of the Ashton common stock for the twenty trading days
preceding such conversion. Additionally, we agreed that if, within thirty days
of KAA completing an initial public offering of its securities, UTTC has not
filed to register UTTC's common stock to engage in an underwritten initial
public offering, the holders of the series KW preferred may then, and at any
time thereafter for so long as UTTC has not filed to register its common stock
in an initial public offering of its securities, exchange up to 41,080 shares
of series KW preferred for shares of Ashton common stock at an exchange ratio
equal to the liquidation value per share divided by the average closing price
of the Ashton common stock for the twenty trading days preceding such
conversion. The UTTC series KW preferred stock is presented as a minority
interest on the March 31, 2001 and 2000 consolidated balance sheets at its
liquidation preference of $3,000,000. As a result of the liquidation
preference, the balance has not been reduced by any portion of UTTC's net
losses.
Private Equity Agreement, Series D and E Preferred Stock
On April 3, 1998 we entered into a private equity line of credit agreement,
which provided for an aggregate commitment of $18,000,000, with a group of
accredited investors. Under the agreement, the investors purchased three
shares of our series D convertible preferred stock, with a liquidation
preference of $1,000,000 per share, for an aggregate purchase price of
$3,000,000. On July 15, 1998, the investors also purchased two shares of our
series E convertible preferred stock with a liquidation preference of
$1,000,000 per share for an aggregate purchase price of $2,000,000. The
conversion price of the series D preferred was equal to 75% of the average
closing bid price per share over the five days preceding the conversion date
(the defined market price). The conversion price of the series E preferred was
equal to 80% of the defined market price. Each share of the series D preferred
and series E preferred (i) ranked pari passu with our other authorized
preferred stock issuances, and (ii) was entitled to a cumulative dividend of
8% per annum on its respective liquidation preference. During the fiscal year
ended March 31, 1999 all of the outstanding shares of the series D preferred
were converted into 2,863,521 shares of common stock, and the shares of the
series E preferred were converted into 1,567,058 shares of common stock.
Also on April 3, 1998, the private equity investors received warrants to
purchase up to an aggregate of 250,000 shares of common stock and on July 15,
1998, received additional warrants to purchase up to an aggregate of 100,000
shares of common stock. The fair value of the warrants, or $230,800 was
recorded as a dividend on the issue dates. The warrants, which were
exercisable for a period of five years, were exercised in May 1999. As a
result of the exercise, we received gross proceeds of $1,601,450 and issued
350,000 shares of common stock.
Following the purchase of the series E preferred and subject to the
satisfaction of certain other conditions, we were entitled to "put" to the
private equity investors shares of our common stock for an aggregate price of
$13,000,000. The put price per share was equal to 85% of the average of the
lowest bid prices of such common stock over the seven day period beginning
three days before and ending three days after we gave notice of a Put. During
the year ended March 31, 2000, we exercised four puts in the aggregate amount
of $5,750,000, and issued 696,570 shares of common stock. During the fiscal
year ended March 31, 1999, we exercised six puts in the
49
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
aggregate amount of $7,250,000, and issued 4,810,788 shares of common stock.
The $13,000,000 commitment was fulfilled by the investors during the year
ended March 31, 2000.
In connection with the private equity line of credit agreement, we paid the
placement agent a fee of $150,000 in cash, 0.15 shares of our series D
preferred, a five-year warrant to purchase up to 190,000 shares of our common
stock, 20,000 shares of our common stock, and attorneys' fees of $30,000. On
July 15, 1998, we paid the placement agent $100,000 and 0.1 share of our
series E preferred, and a warrant to purchase up to 60,000 shares of common
stock. In addition, on the completion of each put, we paid the placement agent
an amount equal to 5% of the proceeds. Payments of $287,500 and $362,500 were
made in the years ended March 31, 2000 and 1999, respectively in connection
with the agreement. Of the total 250,000 warrants issued to the placement
agent in connection with the series D and E preferred, 30,000 were exercised
in August 1999 for total proceeds of $137,400.
Series C Preferred Stock
On January 27, 1998, we completed the sale to a group of foreign investors
of 100,000 shares of series C convertible preferred stock, with a liquidation
preference of $10.00 per share, for an aggregate purchase price of $1,000,000.
Holders of shares of series C preferred had the right to convert each share
into one share of Ashton common stock at the defined floating conversion
price, which amounted to an average of $1.68 per share. The series C investors
also received warrants to purchase an aggregate of 100,000 shares of our
common stock at an average exercise price of $1.71 for a period of five years.
We paid fees to the placement agent of the series C preferred as follows:
5,000 series C preferred shares, $50,000 in cash, and a warrant to purchase
100,000 shares of our common stock at $1.70. During the year ended March 31,
1998, 50,000 shares of the series C preferred were converted into 281,071
shares of common stock. In April 1998, the remainder of the shares series C
preferred shares were converted into 314,342 shares of common stock. The
200,000 warrants issued in connection with the series C preferred were
exercised in April and July 1999, resulting in proceeds to us of $342,568, and
the issuance of 200,000 shares of common stock.
Series A and B Preferred Stock
On September 18, 1997, we offered to certain investors (i) shares of our
series A convertible PIK preferred stock (with a liquidation preference of
$10.00 per share); (ii) shares of our series B convertible preferred stock
(with a liquidation preference of $10.00 per share); and (iii) the opportunity
to exchange up to $3,000,000 of convertible and non-convertible notes
previously issued by UTTC for up to 300,000 shares of series B preferred. The
series A preferred paid cumulative dividends semi-annually at an annual rate
of $0.50 per share and was payable in cash or additional shares of series A
preferred until February 15, 2000. Each holder of shares of series A preferred
had the right to convert each share into: (i) ten shares of Ashton common
stock; and (ii) one warrant to purchase 2.25 shares of UTTC common stock, with
an exercise price of $1.00 per share, subject to adjustment. The series B
preferred pays cumulative dividends semi-annually at an annual rate of $0.90
per share. Each holder of series B preferred has the right to convert each
share into: (i) six shares of Ashton common stock; and (ii) one warrant to
purchase 1.5 shares of UTTC common stock, at an exercise price of $1.00 per
share, subject to adjustment.
We sold 250,000 shares of our series A preferred at $10.00 per share, and
realized gross proceeds of $2,500,000. The Series A preferred offering closed
on January 15, 1998. We closed the exchange offer transaction after receiving
the tender of $2,975,000 of the UTTC notes, for which we issued 297,500 shares
of series B preferred stock. We also sold 290,000 shares of our series B
preferred stock at $10 per share during the years ended March 31, 1999 and
1998, realizing total gross proceeds of $2,900,000.
50
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
We issued a total of 1,969 additional shares of series A preferred as PIK
dividends during the year ended March 31, 1999, and paid cash dividends of
$83,223 and $59,507 on the series A preferred during the years ended March 31,
2000 and 1999, respectively. We paid cash dividends of $58,877, $452,606 and
$259,555 on the series B preferred during the years ended March 31, 2001, 2000
and 1999, respectively. As of March 31, 2001, 2000, and 1999, dividends in
arrears included $5,122, $0, and $7,308, respectively, for the Series B
Preferred.
During the years ended March 31, 2000 and 1999, 125,219 and 126,750 shares
of the series A preferred, respectively, were converted into a total of
2,518,440 shares of our common stock. By August 1999, all shares of the series
A preferred stock had been converted into common stock. In the years ended
March 31, 2001, 2000 and 1999, 20,000, 353,300 and 175,000 shares,
respectively, of the series B preferred were converted into a total of
3,289,800 shares of common stock.
During the years ended March 31, 1999 and 1998, we realized gross proceeds
of $9,425,000 from the sale of the series A preferred, the series B preferred
and the series C preferred. After deducting issue costs of approximately
$1,445,000, we received net proceeds of $7,980,000.
Beneficial Conversion Feature of Preferred Stocks
At the time of issuance, the series A, series B, series C, series D, and
series E preferred stock was convertible at prices below the market value of
the underlying common stock. The beneficial conversion feature represented by
the intrinsic value is calculated as the difference between the conversion
price and the market price of the underlying common stock, multiplied by the
number of shares to be issued upon conversion. The beneficial conversion
feature is recognized as a return to the preferred stockholders over the
minimum period in which the preferred stockholders can realize that return. At
March 31, 1999, the beneficial conversion feature amounted to $1,643,900,
$2,695,436, $349,943, $1,180,549, and $607,087 for the series A preferred,
series B preferred, series C preferred, series D preferred, and series E
preferred, respectively. No additional beneficial conversion features were
recognized in the years ending after March 31, 1999.
Deferred Consulting Expense
In February 1998, we entered into a consulting agreement with Continental
Capital & Equity Corporation. We issued 300,000 shares of common stock, with a
fair value of $475,125, for promotional services provided by Continental
through February 1999. During August 1998, the agreement was amended to reduce
future payments and extend the original term of the February 1998 agreement.
As a result of the amendment, we issued 250,000 additional shares of common
stock, with a fair market value of $416,657. We recorded a deferred consulting
expense of $416,657 as a reduction to stockholders' equity during the year
ended March 31, 1999. The consulting cost was amortized over the revised one-
year term of the agreement. During the years ended March 31, 2000 and 1999,
non-cash compensation charges of $285,208 and $569,730, respectively, were
recorded to amortize the deferred consulting expenses. The deferred consulting
arrangement was fully amortized during the year ended March 31, 2000.
Underwriters' Warrants
Warrants that were issued to the underwriters in our initial public offering
in May 1996 were exercised on a cashless basis during June 1999, and we issued
100,555 shares of common stock.
Redeemable Common Stock Purchase Warrants
We have registered an aggregate of 3,232,500 publicly tradable warrants. The
holders of each of these warrants is entitled, upon payment of the exercise
price of $5.85, to purchase one share of our common stock.
51
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unless previously redeemed, the warrants are exercisable at any time during
the five-year period ending May 2, 2002, provided that a current prospectus
relating to the underlying common stock is in effect and the shares are
qualified for sale or exempt from qualification under applicable securities
laws.
On May 2, 1997, the warrants became redeemable by us at a price of $.25 per
warrant, if the trading price for the common stock on The Nasdaq National
Market is equal to or exceeds $6.75 per share (the redemptive trading price)
for twenty consecutive trading days. We must give each warrant holder thirty
days notice if we intend to redeem any or all of the warrants. If we give
notice of our intention to redeem any of the warrants, the warrant holders'
right to exercise their warrants will be forfeited unless they exercise them
prior to the date on the notice of redemption. The decision to redeem the
warrants is at the discretion of our board of directors. During the year ended
March 31, 2000, 5,200 of the public warrants were exercised for proceeds to us
of $30,420.
In 2000, we solicited the consent of the redeemable common stock purchase
warrant holders to amend the warrant agreement between us and our transfer
agent to reduce the redemptive trading price of the warrants from $6.75 per
share to $5.50 per share. The consent of holders of two-thirds of the
redeemable common stock purchase warrants was required for the authorization
and approval of the proposed amendment. On January 8, 2001, at the conclusion
of the consent solicitation period, an insufficient number of consents were
received from warrant holders to amend the warrant agreement.
Gomez Exchange Agreement
On January 22, 1999, we entered into an exchange agreement with Gomez.
Pursuant to the exchange agreement, we exchanged all of our Gomez common stock
for 4,905 shares of Gomez series A preferred stock, each of which is
convertible into 1,000 shares of Gomez common stock. Additionally, certain
members of Gomez's management exchanged their options to purchase 2,000,000
shares of Gomez common stock for options to purchase 3,003,000 shares of Gomez
common stock at $.011 per share, pursuant to the Gomez 1999 Long-Term
Incentive Plan. Each of the options were granted at less than the deemed fair
value at the date of grant. During the year ended March 31, 1999, we
recognized a non-cash compensation charge of $4,864,860 to reflect the
difference between the estimated fair market value of the vested Gomez stock
options at the date of grant and the exercise price of those options.
10. RELATED PARTY TRANSACTIONS
The Dover Group, Inc.
We have utilized the Dover Group, Inc. for consulting services related to
our financing and product development efforts. Fredric W. Rittereiser, the
Company's Chairman and Chief Executive Officer, is the sole shareholder,
director and officer of Dover. For the years ended March 31, 2001, 2000 and
1999, the Company paid consulting fees to Dover amounting to $75,000, $180,000
and $235,000, respectively. Effective September 1, 2000, Ashton and Mr.
Rittereiser entered into an employment agreement, pursuant to which Mr.
Rittereiser is compensated by Ashton and UTTC directly, and the consulting
arrangement with Dover was terminated.
On January 14, 1998, we entered into an agreement with Dover and Mr.
Rittereiser, whereby they agreed to reimburse us for $413,980 in legal costs
associated with a lawsuit brought by David N. Rosensaft against Ashton and
UTTC, to the extent such costs were not covered by our directors' and
officers' liability insurance carrier. Dover and Mr. Rittereiser pledged
250,001 shares of UTTC common stock as collateral in support of their
agreement to pay the legal costs. On March 4, 1998, the U.S. District Court
for the Southern District of New York entered an order awarding damages
against Dover and Mr. Rittereiser in the Rosensaft lawsuit in the amount of
$1.2 million. We were previously dismissed as a party to the Rosensaft
lawsuit. On April 7, 1998, our
52
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
board of directors, after due deliberation, concluded that Ashton and UTTC
both derived mutual benefit from the Rosensaft settlement entered into by
Dover and Mr. Rittereiser. Ashton's board resolved to fund one-third of the
$1.2 million settlement amount, and, UTTC agreed to fund one-third of the
Rosensaft settlement. On April 8, 1998, we loaned $380,000 to Dover and Mr.
Rittereiser at an annual interest rate of 9% for thirty months to satisfy
their one-third portion of the Rosensaft settlement. In exchange for the loan,
Dover initially pledged 300,000 shares of Ashton common stock which it owned.
On April 3, 2000, our board of directors determined that it would not
receive any payments from its insurance carrier in connection with the claim
it filed for the Rosensaft lawsuit. At that time, the board resolved to accept
from Dover and Mr. Rittereiser shares of Gomez common stock owned by Dover
equivalent in value to the amounts due under the loan agreement and for the
legal costs, or approximately $884,564, as full and complete satisfaction of
the debts. On November 23, 2000, we agreed to accept 216,805 shares of Gomez
common stock. The price of the Gomez stock was determined by our board based
upon the price of the Gomez series D preferred stock issued in October 2000,
discounted by 20% to reflect the liquidation preference and dividends
applicable to the Gomez series D preferred.
During the year ended March 31, 2001, we recorded other income of $413,980
for the reimbursement of legal costs. We recorded the amount as other income
instead of a reduction to selling, general and administrative expenses because
the legal costs that were reimbursed were originally paid by us during 1997.
As a result of the acceptance of the Gomez common stock, we recorded an
investment in Gomez equal to the value of the stock received, or $884,564.
However, due to our equity method of accounting for Gomez, we recorded a
corresponding loss in affiliates for the entire amount. We recorded the loss
to reduce the carrying amount of the investment in Gomez by our share of
Gomez's net losses to the extent of our investment balance, as required under
the equity method of accounting. The loss in affiliates offsets the $413,980
of other income and the $470,584 reduction of the note receivable and related
accrued interest.
In April 2000, Mr. Rittereiser entered into an agreement with Morgan Stanley
Dean Witter, whereby he pledged certain shares of his Ashton common stock in
exchange for a loan in the amount of $500,000. Morgan Stanley requested that
we provide additional credit enhancements to secure the Rittereiser loan, in
the form of a guarantee by Ashton. We agreed to guarantee the Rittereiser loan
up to $500,000, on the condition that Mr. Rittereiser secure our guarantee
with sufficient personal collateral pledged to us, and on the condition that
the guarantee shall only extend until such time that Mr. Rittereiser either
repays the Rittereiser loan or locates other collateral to substitute for our
guarantee. Mr. Rittereiser agreed to secure our guarantee of the Rittereiser
loan with a first lien on certain real estate that he owns, which is valued in
excess of $500,000, and has agreed to repay the Rittereiser loan and/or locate
substitute collateral for our guarantee within a reasonable period of time.
Adirondack Capital, LLC
In 1997, we retained Adirondack Capital, LLC to provide investment banking
and financial advisory services. K. Ivan F. Gothner, a member of our board of
directors, is the managing director of Adirondack. We paid consulting fees to
Adirondack amounting to $120,000 in each of the years ended March 31, 2001,
2000 and 1999. We also paid Adirondack a fee of $75,000 in September 2000 to
terminate a fee agreement for advisory services provided by Adirondack to eMC.
In April 1999, Gomez paid a fee of $50,000 to Adirondack for its assistance in
structuring the private placement of the Gomez series B preferred stock. We
paid Adirondack $287,500 and $362,500 in the years ended March 31, 2000 and
1999, respectively, pursuant to the private equity line of credit agreement.
Additionally, we paid Adirondack $300,000 (an amount equal to 5% of the
proceeds from the sale of the series C preferred, the series D preferred and
the series E preferred) and an option to purchase 600,000 shares of common
stock at $1.875 per share. Effective April 1, 1999, Mr. Gothner also began
receiving a monthly board retainer.
53
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the equity line of credit agreement with Jameson we
executed in February 2001, we agreed to pay Adirondack 5% of the proceeds of
each sale of our common stock to Jameson, and have issued 50,000 restricted
shares of our common stock to Adirondack for its assistance in structuring the
agreement. (See "Subsequent Events".)
Richard E. Butler
In 1997, we retained Richard E. Butler, a member of our board of directors,
to provide strategic marketing services. For the year ended March 31, 1999, we
paid $90,000 in consulting fees to Richard Butler under that arrangement.
Effective April 1, 1999, the arrangement was terminated, and Mr. Butler began
receiving a monthly board retainer.
Wyndham Capital Corporation
In 1997, we retained Wyndham Capital Corporation to provide investment
banking and financial advisory services. Thomas G. Brown, a member of our
board of directors, is the President and managing director of Wyndham. The
Company paid $25,000 in consulting fees to Wyndham during the year ended March
31, 2000, and $60,000 in consulting fees and $120,000 pursuant to the sale of
equity in the year ended March 31, 1999 under this agreement. Effective
September 1, 1999, Wyndham's consulting fees were terminated and Mr. Brown
began receiving a monthly board retainer.
Kronish, Lieb, Weiner & Hellman LLP
Kronish, Lieb, Weiner & Hellman LLP, the law firm of which Herbert Kronish,
a member of our board of directors, is a senior partner, acted as counsel to
us in various matters since 1998. We paid aggregate fees of $65,071, $118,479
and $205,189 during the years ended March 31, 2001, 2000 and 1999,
respectively, to Kronish, Lieb, Weiner & Hellman LLP for legal services. Mr.
Kronish also began receiving a monthly board retainer in September 2000, upon
his election to the board.
11. STOCK OPTION PLANS
Ashton Stock Option Plans
In July 1998, our board of directors adopted the 1998 Stock Incentive Plan.
A total of 6,450,000 shares for which options may be granted were reserved
pursuant to the 1998 Plan. In November 1998, our board of directors adopted
the 1999 Stock Incentive Plan. A total of 2,550,000 shares for which options
may be granted were reserved pursuant to the 1999 Plan. In September 2000, our
stockholders approved the 2000 Incentive Plan. A total of 3,000,000 shares for
which options may be granted were reserved pursuant to the 2000 Plan. Under
the 1998 Plan, the 1999 Plan and the 2000 Plan, stock options have been
granted to officers, directors, employees and others who provided services to
us. In the aggregate, we have already granted options to purchase 9,625,000,
shares of common stock under all three stock option plans, and options to
purchase 291,250 shares under separate agreements. As of March 31, 2001,
32,500, 357,334, and 2,551,500 shares remain available for grant under the
1998 Plan, the 1999 Plan and the 2000 Plan, respectively.
All Ashton stock options include provisions for: (i) forfeiture in the event
the employee dies or ceases to be in the employment of Ashton or one of its
subsidiaries during the first year of employment; and (ii) immediate vesting
upon a merger, consolidation or change of control of the Company. In January
2000, we filed Forms S-8 to register 774,009 and 266,027 shares under the 1998
Plan and the 1999 Plan, respectively.
54
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the status of Ashton's stock options outstanding as of March
31, 2001, 2000 and 1999 is as follows:
March 31, 2001 March 31, 2000 March 31, 1999
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
Outstanding Price Outstanding Price Outstanding Price
----------- -------- ----------- -------- ----------- --------
Outstanding at beginning
of year................ 7,903,166 $3.15 7,682,500 $2.19 1,790,000 $2.99
Cancelled during the
year................... (397,834) 5.25 (166,000) 3.93 (2,500) 1.88
Exercised during the
year................... (147,955) 2.03 (761,584) 2.05 -- --
Granted during the
year................... 1,083,000 6.75 1,148,250 8.82 5,895,000 1.95
--------- ----- --------- ----- --------- -----
Outstanding at end of
year................... 8,440,377 $3.53 7,903,166 $3.15 7,682,500 $2.19
========= ===== ========= ===== ========= =====
The following table summarizes information about Ashton's stock options
outstanding and exercisable at March 31, 2001:
Options Outstanding Options Exercisable
------------------------------------- --------------------
Weighted Weighted
Range of Weighted Average Average Average
Exercise Options Remaining Exercise Options Exercise
Prices Outstanding Contractual Life Price Exercisable Price
-------- ----------- ---------------- -------- ----------- --------
$ 0.01 - 1.42.......... 11,000 4.9 Years $ 1.24 -- --
$ 1.43 - 2.85.......... 5,869,627 2.3 Years 1.89 5,697,127 $ 1.89
$ 2.86 - 4.27.......... 920,000 4.0 Years 3.64 430,000 3.71
$ 4.28 - 5.70.......... 187,500 4.0 Years 5.02 20,000 5.50
$ 5.71 - 7.12.......... 70,000 3.6 Years 6.33 14,000 6.33
$ 7.13 - 8.55.......... 175,000 3.6 Years 7.84 35,000 7.84
$ 8.56 - 9.97.......... 421,250 3.8 Years 9.55 117,250 9.29
$ 9.98 - 11.40.......... 686,000 4.1 Years 10.48 631,200 10.49
$11.41 - 14.25.......... 100,000 5.2 Years 14.25 100,000 14.25
--------- --------- ------ --------- ------
8,440,377 2.8 Years $ 3.53 7,044,577 $ 3.12
========= ========= ====== ========= ======
Stock options granted to non-employees generally vest immediately and have a
maximum exercise term of five years. We recognize a non-cash compensation
charge for options granted to non-employees in compliance with SFAS No. 123,
Accounting for Stock-Based Compensation. No Ashton stock options were granted
to third parties during the year ended March 31, 2001. Non-cash compensation
charges were recognized during the year ended March 31, 2001 related to the
vesting of options that were issued during the year ended March 31, 2000, and
which vested over a period of fifteen months. During the years ended March 31,
2001, 2000 and 1999, we recognized non-cash compensation expense of $38,552,
$324,252 and $497,876, respectively, for Ashton options granted to non-
employees.
55
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SFAS No. 123 Disclosures
We have elected to apply APB Opinion No. 25 and related interpretations in
accounting for stock options issued to employees. If we had elected to
recognize compensation cost based on the fair value of the options granted to
directors and employees at the grant date as prescribed by SFAS No. 123, net
loss per share would have been adjusted to the pro forma amounts indicated in
the table below:
As Reported
----------------------------------------
For the year ended March 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
Net loss......................... $(20,938,349) $ (6,231,648) $(14,276,485)
Loss per share................... $ (0.79) $ (0.32) $ (1.80)
============ ============ ============
Pro Forma
----------------------------------------
For the year ended March 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
Net loss......................... $(22,143,274) $(10,322,983) $(21,755,046)
Loss per share................... $ (0.83) $ (0.48) $ (2.48)
============ ============ ============
The fair value of Ashton options granted during the years ended March 31,
2001 and 2000 was $382,583 and $5,803,652, respectively. The assumptions we
used to calculate the fair values of options issued to employees include: (i)
a risk-free interest rate of 7.5%, (ii) an expected life of five years, (iii)
expected stock volatility of 9%, and (iv) expected stock dividends of zero.
UTTC Stock Option Plan
In October 1999, UTTC's board of directors adopted the 1999 UTTC Stock
Option Plan, pursuant to which UTTC issued stock options to its employees and
third parties. A summary of the status of the UTTC stock options outstanding
as of March 31, 2001, 2000 and 1999 is as follows:
March 31, 2001 March 31, 2000 March 31, 1999
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
Outstanding Price Outstanding Price Outstanding Price
----------- -------- ----------- -------- ----------- --------
Outstanding at beginning
of year................ 6,678,188 $2.14 1,676,250 $1.45 300,000 $2.00
Cancelled during the
year................... (758,250) 2.70 -- -- -- --
Exercised during the
year................... -- -- -- -- -- --
Granted during the
year................... 789,813 2.95 5,001,938 2.37 1,376,250 1.33
--------- ----- --------- ----- --------- -----
Outstanding at end of
year................... 6,709,751 $2.17 6,678,188 $2.14 1,676,250 $1.45
========= ===== ========= ===== ========= =====
56
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about UTTC stock options
outstanding and exercisable at March 31, 2001:
Options Outstanding Options Exercisable
------------------------------------- --------------------
Weighted Weighted
Weighted Average Average Average
Options Remaining Exercise Options Exercise
Range of Exercise Prices Outstanding Contractual Life Price Exercisable Price
------------------------ ----------- ---------------- -------- ----------- --------
$1.33-1.50.............. 1,380,000 2.2 years $1.33 930,000 $1.33
$2.00................... 3,958,500 3.6 years 2.00 1,031,000 2.00
$3.50................... 1,371,251 4.0 years 3.49 199,000 3.46
--------- --------- ----- --------- -----
6,709,751 3.4 years $2.17 2,160,000 $1.85
========= ========= ===== ========= =====
UTTC stock options granted to non-employees generally vest immediately and
have a maximum exercise term of five years. UTTC recognized a non-cash
compensation charge for options granted to third parties in compliance with
SFAS No. 123. No UTTC stock options were granted to non-employees during the
year ended March 31, 2001. Non-cash compensation charges were recognized
during the year ended March 31, 2001 related to the vesting of options that
were issued during the year ended March 31, 2000, and which vested over a
period of fifteen months. During the years ended March 31, 2001, 2000 and
1999, UTTC recognized non-cash compensation expense of $1,556, $27,117 and $0,
respectively, for UTTC options granted to non-employees.
12. BENEFIT PLANS
We maintain a defined contribution plan under Section 401(k) of the Internal
Revenue Code covering all qualified employees. Certain officers of Ashton
serve as trustees of the plan. We may make discretionary contributions,
however, we made no contributions during the years ended March 31, 2001, 2000
and 1999.
We maintain life insurance policies on our key officers and employees in the
aggregate amount of $15,000,000.
13. SEGMENT INFORMATION
Ashton, UTTC and its subsidiaries, ATG Trading, Ashton Canada and KAA each
contributes to our mission of developing and operating alternative trading
systems to serve the needs of global exchanges, institutional investors and
broker-dealers. These companies comprise the primary segment of our business,
intelligent matching systems. This segment was previously reported as trading
systems.
eMC, previously a separate segment, is reflected separately as discontinued
operations in our consolidated financial statements.
Gomez, Inc. was previously one of our majority-owned subsidiaries. Due to a
private placement by Gomez in December 1999, our equity interest in Gomez
decreased to less than 50%. We then began accounting for our investment in
Gomez under the equity method of accounting, rather than consolidating Gomez's
results of operations within our results. Gomez generated substantially all of
our revenue for the fiscal years ended March 31, 2000 and 1999. The results of
Gomez's operations are included in our consolidated financial statements for
the year ended March 31, 1999 and the nine months ended December 31, 1999, and
are classified as a separate segment.
57
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Year ended March 31, Matching Discontinued
2001 Systems Operations Gomez Total
-------------------- ----------- ------------ ---------- -----------
Revenues................ 225,068 -- -- 225,068
Interest income......... 1,135,078 -- -- 1,135,078
Depreciation and
amortization........... 700,484 -- -- 700,484
Non-cash compensation
charges................ 40,108 -- -- 40,108
Other income/expense.... 300,809 -- -- 300,809
Loss on trading
activities............. (903,541) -- -- (903,541)
Equity in loss of
affiliates............. (1,963,976) -- -- (1,963,976)
Loss from continuing
operations............. (15,196,417) -- -- (15,196,417)
Loss from discontinued
operations of eMC...... -- (2,596,006) -- (2,596,006)
Loss from disposal of
discontinued
operations............. -- (3,145,916) -- (3,145,916)
Current assets.......... 8,498,268 -- -- 8,498,268
Total assets............ 13,065,778 -- -- 13,065,778
Total stockholders'
equity................. 2,898,089 -- -- 2,898,089
Year ended March 31, Matching Discontinued
2000 Systems Operations Gomez Total
-------------------- ----------- ------------ ---------- -----------
Revenues................ 32,135 -- 3,836,949 3,869,084
Interest income......... 1,075,094 -- 94,816 1,169,910
Depreciation and
amortization........... 381,785 -- 334,171 715,956
Non-cash compensation
charges................ 351,369 -- -- 351,369
Other income/expense.... (416,632) -- -- (416,632)
Equity in loss of
affiliates............. 90,508 -- -- 90,508
Loss from continuing
operations............. (859,333) -- (5,372,315) (6,231,648)
Current assets.......... 27,839,570 -- -- 27,839,570
Total assets............ 31,023,911 -- -- 31,023,911
Total stockholders'
equity................. 17,162,607 -- -- 17,162,607
Year ended March 31, Matching Discontinued
1999 Systems Operations Gomez Total
-------------------- ----------- ------------ ---------- -----------
Revenues................ -- -- 1,434,438 1,434,438
Interest income......... 140,266 -- 6,550 146,816
Depreciation and
amortization........... 425,564 -- 89,676 515,240
Non-cash compensation
charges................ 1,067,606 -- 4,864,860 5,932,466
Other income/expense.... 133,222 -- -- 133,222
Loss from continuing
operations............. (8,433,564) -- (5,842,921) (14,276,485)
14. INCOME TAXES
We have net operating loss carryforwards at March 31, 2001 of approximately
$50,178,000, which will expire between 2011 and 2021, available to reduce
future federal taxable income. Additionally, the income tax basis of
intangibles and non-qualified options exceeds the basis for financial
reporting purposes by approximately $8,532,000. The carryforwards and the
temporary difference result in a deferred tax asset of approximately
$23,938,000 and $16,819,000 at March 31, 2001 and 2000, respectively, for
which we have has provided a full valuation allowance due to the uncertainty
about the future realization of this tax benefit.
58
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 31, 2001 March 31, 2000
-------------- --------------
Net operating loss carryforward.............. $20,071,000 $12,952,000
Basis of intangible asset.................... 540,000 540,000
Grant of non-qualified options............... 3,327,000 3,327,000
Valuation allowance.......................... (23,938,000) (16,819,000)
----------- -----------
Deferred tax asset......................... $ -- $ --
=========== ===========
The difference between the income tax benefit computed at the federal
statutory rate and the actual provision for income taxes is accounted for as
follows:
Year ended March 31,
-------------------------------------
2001 2000 1999
----------- ----------- -----------
Tax benefit computed at the
federal statutory rate of 34%... $(7,119,000) $(2,119,000) $(4,854,000)
Permanent difference:
tax effect of Gomez............. -- (3,586,000) --
Change in valuation allowance.... 7,119,000 5,705,000 4,854,000
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
Ashton, UTTC, REB and Croix filed a consolidated federal income tax return
for the years ended March 31, 2000 and 1999, and will file a consolidated
federal income tax return for the year ended March 31, 2001 during fiscal
2002. Gomez and eMC file separate federal tax returns. In 1999, Ashton entered
into an agreement with UTTC and its subsidiaries which provides that any
member of the group, which has taxable income, must compensate any other
member for the use of net operating losses and tax credits.
15. COMMITMENTS, CONTINGENCIES AND SETTLEMENTS
Lease Commitments
On December 23, 1999, we entered into a ten-year lease for approximately
11,000 square feet of office space in Philadelphia, Pennsylvania. This
location is our corporate headquarters.
We lease approximately 10,000 square feet of office space in Philadelphia,
Pennsylvania pursuant to a lease expiring in May 2005. This location
accommodates our technology group.
The leases are subject to escalation for our share of increases in real
estate taxes and other operating expenses. In addition, we lease office
facilities in other cities on a month-to-month basis. Future minimum operating
lease payments under those agreements are as follows:
Year ending March 31,
2002........................................ $ 388,059
2003........................................ 393,975
2004........................................ 399,891
2005........................................ 405,807
2006........................................ 291,723
Thereafter.................................. 1,056,096
----------
Total..................................... $2,935,551
==========
59
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rent expense for the years ended March 31, 2001, 2000 and 1999 totaled
approximately $687,557, $493,993 and $265,000, respectively, including rent
for the Gomez office location in Lincoln, Massachusetts through December 31,
1999.
Revolving Line of Credit Agreement
In December, 1999, we entered into a $1,500,000 revolving line of credit
agreement with Merrill Lynch Business Financial Services, Inc. Under the terms
of the loan agreement, interest on outstanding balances is paid monthly at an
annual rate equal to 2.65% plus the 30-Day Dealer Commercial Paper Rate as
published by the Wall Street Journal. In March 2001, we reduced the line of
credit agreement to $450,000. We pledged securities with market values of
$675,000 and $2,561,649 at March 31, 2001 and 2000, respectively, as
collateral for the line of credit. There was no outstanding balance under the
agreement at March 31, 2001 or 2000.
Alliant Techsystems, Inc
On October 22, 1997, we filed a complaint against Alliant Techsystems, Inc.
in the Court of Common Pleas, County of Philadelphia, Pennsylvania for damages
and Alliant's failure to perform its obligations under a contract with us. We
also filed a second complaint against Alliant for breach of warranty for
additional problems it encountered while testing the products Alliant produced
under that contract. In November 1998 judgements were rendered in our favor
and we recorded other income of $290,000 related to the settlement. The
settlement resolved both of the complaints we filed against Alliant, and
dismissed Alliant's counterclaims against us.
16. NET CAPITAL REQUIREMENTS
As registered broker-dealers, Croix, REB and ATG Trading are subject to the
SEC's uniform net capital rule. The net capital rule is designed to measure
the general integrity and liquidity of a broker-dealer and requires that at
least a minimum part of its assets be kept in a relatively liquid form.
Both Croix and REB are required to maintain minimum net capital of $5,000.
ATG Trading is required to maintain minimum net capital of $100,000.
As of March 31, 2001, Croix had net capital of $108,410, which exceeded
minimum net capital requirements by $103,410, REB had net capital of $90,461,
which exceeded minimum net capital requirements by $85,461 and ATG Trading had
net capital of $712,505, which exceeded minimum net capital requirements by
$612,505.
17. SUMMARIZED QUARTERLY DATA (UNAUDITED)
Quarter Ended
--------------------------------------------------
September
March 31 December 31 30 June 30
----------- ----------- ----------- -----------
Year ended March 31,
2001
Revenues................ $ 90,580 $ 50,593 $ 37,778 $ 46,117
Net loss from continuing
operations............. (4,897,227) (5,288,311) (4,096,608) (3,180,833)
Net loss from
discontinued
operations............. (954,494) (837,020) (517,792) (286,700)
Loss on disposal of
discontinued
operations............. (3,145,926) -- -- --
Net loss per share from
continuing operations
per share from
continuing operations.. (0.16) (0.18) (0.14) (0.11)
Net loss per share from
discontinued
operations............. (0.14) (0.03) (0.02) (0.01)
Net loss per common
share.................. (0.30) (0.21) (0.16) (0.12)
60
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Quarter Ended
----------------------------------------------
December September
March 31 31 30 June 30
---------- ---------- ---------- ----------
Year ended March 31,
2000
Revenues................ 518 2,012,693 1,057,508 798,365
Net income (loss) from
continuing operations.. 123,608 1,115,292 (4,695,074) (2,775,474)
Net income (loss) per
share from continuing
operations............. 0.00 0.03 (0.23) (0.13)
Year ended March 31,
1999
Revenues................ 354,602 427,884 208,390 443,562
Net loss from continuing
operations............. (3,255,573) (1,978,003) (7,229,723) (1,813,186)
Net loss per share from
continuing operations.. (0.48) (0.20) (0.99) (0.13)
18. SUBSEQUENT EVENTS
Equity Line of Credit Agreement
We entered into an equity line of credit arrangement with Jameson Drive LLC
on February 9, 2001. On April 5, 2001, we filed a registration statement on
Form S-2 with the SEC to register shares of common stock underlying the equity
line. On March 31, 2001, the SEC issued it views replacing Interpretation No.
4S in the March 1999 Supplement to the Division's Manual of Publicly Available
Telephone Interpretations. Based on comments provided by the SEC and our
discussions with SEC staff, we requested a withdrawal of the Form S-2 on June
19, 2001 to enable us to modify the terms of the equity line consistent with
the views provided by the SEC. On July 13, 2001 we entered into an amended
equity line agreement with Jameson.
The amended financing arrangement is in the form of a securities purchase
agreement and provides for the purchase by Jameson of up to $15 million worth
of shares of our common stock over a 24-month period. During this period, we
may, at our sole discretion, request a draw on the equity line by selling our
common stock to Jameson. Jameson will be obligated to buy the shares, subject
to the terms of the agreement. The sales price for the shares we sell to
Jameson is not fixed, but will be based on a formula that is tied to the
market price of our common stock at the time of the sale. The shares that we
sell to Jameson will be at a 10% discount to the average of the three lowest
closing bid prices of our common stock for the 20 trading days prior to the
date of the sale. The minimum amount that we can draw at any one time is
$100,000. The maximum amount that we can sell at any one time cannot be more
than $1,000,000. The maximum amount that we can sell over the 24-month term of
the agreement is $15 million, and we are committed to drawing a minimum of
$2.5 million.
Generally, we must wait twenty trading days between draws on the equity
line. Unless Jameson agrees, we may not deliver a notice to sell to Jameson if
following the purchase of our common stock at any one time, Jameson or its
affiliates would beneficially own more than 9.99% of our common stock then
outstanding. Also, we may not sell our common stock to Jameson without
stockholder approval if the result would be that the number of shares issued,
when aggregated with all previously issued shares, would exceed 19.99% of our
common stock then outstanding. The following are some of the conditions that
we must meet before Jameson is obligated to buy our shares:
. a registration statement covering the resale of the shares purchased by
Jameson must be declared effective by the SEC and remain effective;
. our representations and warranties given to Jameson must be true and
correct, and we must comply with the provisions of the agreement with
Jameson;
. our common stock must remain traded on the Nasdaq National Market,
Nasdaq Small Cap Market, American Stock Exchange, New York Stock
Exchange or OTC Bulletin Board.
61
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
There is no guarantee that we will be able to meet these or any other
conditions under the securities purchase agreement or the registration rights
agreement, or that we will be able to draw on any portion of the $15 million
equity line. We have not drawn any funds or issued any shares under the equity
line agreement to date.
Jameson also received a five-year warrant to purchase 1,506,024 shares of
common stock at an exercise price of $1.02.
Because there is no way to determine how many shares, if any, we will
eventually sell and issue to Jameson, and because the rules of the Nasdaq
National Market require that we obtain stockholder approval prior to issuing
20% or more of the shares of common stock outstanding, we will seek our
stockholders' approval to issue the necessary number of shares, should the
need arise. If we do not receive stockholder approval, we may nonetheless
issue shares up to such 20% amount under the equity line agreement, which
currently would amount to approximately $4 million.
We project that as a result of the equity line and our ability to require
additional purchases of our common stock for up to approximately $4 million,
without obtaining stockholder approval, we will have sufficient financial
resources to enable us to continue to operate for the next 12 months.
Related Party Transaction
In connection with the amended equity line agreement executed on July 13,
2001, Adirondack agreed to return the 50,000 restricted shares it received for
its assistance in structuring the original agreement. Adirondack will not be
paid any fees in connection with either the original or the amended equity
line agreement.
Series F Preferred Stock
As of January 25, 2001, 15,636 shares of the series F preferred had been
converted into 4,949,770 shares of our common stock. The number of shares of
common stock issued equals 19.99% of the common stock outstanding on the issue
date of the series F preferred, and is the maximum number of shares we can
issue to the series F investor without obtaining stockholder approval under
the Nasdaq 20% limitation. As a result of this "triggering event" as defined
in the certificate of designations, preferences, and rights of the series F
preferred, the series F investor could seek redemption of the remaining 4,363
shares of series F preferred.
As a result of the triggering event, we are required to seek stockholder
approval to issue additional shares to the series F investor as soon as
practicable. On July 13, 2001, the 4,363 shares of the series F preferred,
plus accrued premium, were exchanged for a convertible note with a principal
amount of $5,111,526, maturing on August 18, 2003.
The following are some of the terms of the convertible note:
. The principal amount of the note represents the par value of the series
F preferred stock of $4,363,717 plus accrued premium of $747,809.
. Interest on the note is 9% per year, the same rate as the premium on the
series F preferred stock.
. The note is convertible into shares of our common stock at the lower of
the five lowest closing bid prices during the 22 trading days preceding
conversion and $1.00 per share.
. The note cannot be converted into common stock until our stockholders
approve exceeding the Nasdaq 20% limitation with respect to the series F
preferred financing.
62
THE ASHTON TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. We have agreed to file a registration statement on Form S-3 to register
shares of common stock underlying the note.
. The note is secured certain of our intellectual property.
Should our stockholders fail to approve the issuance of additional shares to
the series F investor, we would be unable to issue a sufficient number of
shares of common stock to meet our obligations of the note. In that event, the
note would have a maturity of April 1, 2002.
Potential Violation of the Securities Act of 1933
Following the sale of 2,067,278 shares of our common stock by certain
selling stockholders pursuant to an effective registration statement, we
became aware that the financial statements included in the registration
statement did not satisfy the requirements of Regulation S-X of the Securities
and Exchange Commission. Because the registration statement incorporated by
reference our Annual Report on Form 10-K for the year ended March 31, 2000,
rather than for the year ended March 31, 2001, as it should have, the
registration statement did not meet the applicable form requirements of a
registration statement on Form S-2. Thus, the prospectus used by the selling
stockholders did not meet the requirements of, and the sale of the shares was
not properly registered pursuant to the Securities Act of 1933. Consequently,
the purchasers of the common stock from the selling stockholders could have
the right, for a period of one year from the date of their respective
purchases of common stock, to recover from us (i) the purchase price paid for
their shares, plus interest, upon tender of their shares to us or (ii) their
losses measured by the difference (plus interest) between their respective
purchase prices and either the value of their shares at the time they sue us
or, if they have sold their shares at a loss, the sale price of their shares.
Alternatively, the purchasers of the common stock could have a right to seek
redress from the selling stockholders, in which case we may have third party
liability to the selling stockholders. These refunds or damages could total up
to approximately $2.1 million, plus interest, in the event that investors
suffer a total loss of their investment during this period and seek refunds or
damages.
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item will be contained in the Proxy
Statement for the 2001 Annual Meeting of Stockholders, which is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item will be contained in the Proxy
Statement for the 2001 Annual Meeting of Stockholders, which is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item will be contained in the Proxy
Statement for the 2001 Annual Meeting of Stockholders, which is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item will be contained in the Proxy
Statement for the 2001 Annual Meeting of Stockholders, which is incorporated
herein by reference.
64
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit # Description*
--------- ------------
2 Agreement and Plan of Reorganization, dated as of October 25, 1995,
among Ashton, Universal Trading Technologies Corp. ("UTTC"), Robert
A. Eprile ("Eprile"), David N. Rosensaft ("Rosensaft"), The Dover
Group, Inc. ("Dover") and Medford Financial Inc.(1)
3 Certificate of Incorporation of Ashton filed February 16, 1994.(1)
3.1 Certificate of Amendment of Ashton filed October 27, 1995.(1)
3.1A Certificate of Amendment of Ashton filed December 7, 1995.(1)
3.2 Certificate of Amendment of Ashton filed February 1996.(1)
3.2A Certificate of Amendment of Ashton filed October 17, 2000.
3.3 The Ashton Technology Group, Inc. Bylaws, as Amended and Restated
June 20, 2000.
3.7 Certificate of Designation for Series B Convertible Preferred
Stock.(2)
3.11 Certificate of Correction to Certificate of Designation of
Preferences and Rights of the Series A Cumulative PIK Preferred
Stock. (6)
3.12 Certificate of Correction to Certificate of Designation of
Preferences and Rights of the Series B Cumulative Preferred
Stock.(6)
3.13 Certificate of Increase to Authorized Number of Shares of Series B
Cumulative Preferred Stock.(6)
3.14 Certificate of Retirement of Series A Cumulative PIK Preferred
Stock, Certificate of Retirement of Series C Cumulative Preferred
Stock, Certificate of Retirement of Series D Cumulative Preferred
Stock, and Certificate of Retirement of Series E Cumulative
Preferred Stock.(6)
3.15 Certificate of Designation for UTTC(TM)Series TK Convertible
Preferred Stock.(7)
3.16 UTTC(TM) Certificate of Designation for Series KW Convertible
Preferred Stock.(13)
3.17 Operating Agreement between and among ATG Trading, LLC, The Ashton
Technology Group, Inc. and Thomas L. Rittereiser dated as of August
21, 2000.(11)
4 Specimen of Common Stock.(1)
4.1 Form of Representative's Warrant Agreement (including Specimen of
Redeemable Common Stock Purchase Warrant).(1)
4.2 Form of Warrant Agreement (including Specimen of Redeemable Common
Stock Purchase Warrant).(1)
4.3 Certificate of Designations, Preferences, and Rights of Series F
Convertible Preferred Stock.(8)
4.4 Series F Preferred Stock Purchase Warrant.(8)
10 Agreement, dated as of September 18, 1995, between UTTC(TM) and the
Philadelphia Stock Exchange.(1)
10.25 Employment Agreement, dated as of July 13, 1998, between Arthur J.
Bacci and Ashton.(3)
10.31 Second Addendum to Employment Agreement, dated as of June 24, 1999
between Fred S. Weingard, Ashton and UTTC(TM).(4)
10.32 Executive Deferred Compensation Plan Agreement dated July 1, 1999
and Form of Split Dollar Insurance Agreement.(4)
10.33 Agreement between Ashton and Robert Eprile dated June 29, 1999.(5)
10.34 Severance Agreement between Ashton and John A. Blohm, dated
September 22, 1999.(6)
10.35 Stock Purchase Agreement between TK Holdings, Inc. and UTTC(TM),
dated as of June 4, 1999.(7)
65
Exhibit # Description*
--------- ------------
10.36 Joint Venture Agreement by and between The Ashton Technology Group,
Inc. and Kingsway Electronic Services, Ltd. dated as of December 16,
1999.(7)
10.37 Unanimous Shareholder Agreement between The Ashton Technology Group,
Inc., 3690822 Canada, Inc. and Ashton Technology Canada, Inc. dated
as of December 20, 1999.(7)
10.38 Amended Stockholders Agreement of Gomez Advisors, Inc. dated as of
December 30, 1999.(7)
10.39 Tax Allocation Agreement by and among The Ashton Technology Group,
Inc. and UTTC(TM) dated as of October 27, 1999.(7)
10.40 Management Services Agreement between The Ashton Technology Group,
Inc. and UTTC(TM) dated as of October 27, 1999.(7)
10.41 Form of Stock Purchase K Warrants.(7)
10.42 Stock Purchase Agreement between Kingsway, UTTC(TM) and The Ashton
Technology Group, Inc.(13)
10.43 Lease Agreement between UTTC(TM) and Federal National Mortgage
Association for 1900 Market St., Philadelphia, PA.(13)
10.44 Lease Agreement between The Ashton Technology Group, Inc. and Eleven
Colonial Penn Plaza Associates for 11 Penn Center, Philadelphia,
PA.(13)
10.45 Employment Agreement between and among Matthew Saltzman, The Ashton
Technology Group, Inc., and Electronic Market Center, Inc. and
UTTC(TM).(9)
10.46 Stockholders Agreement of Electronic Market Center, Inc.(9)
10.47 Stock Exchange and Acquisition Agreement between and among
Electronic Market Center, Inc., The Ashton Technology Group, Inc.,
E-Trustco.com Inc., Matthew Saltzman and Allen Whitehead.(9)
10.48 Securities Purchase Agreement dated as of August 18, 1999 between
The Ashton Technology Group, Inc. and RGC International Investors,
LDC.(8)
10.49 Registration Rights Agreement dated as of August 18, 1999 between
The Ashton Technology Group, Inc. and RGC International Investors,
LDC.(8)
10.50 Toronto Stock Exchange Integration Agreement(13)
10.51 Employment Agreement, effective as of September 1, 2000, by and
between The Ashton Technology Group, Inc., Universal Trading
Technologies Corporation and Frederic W. Rittereiser.(10)
10.52 Convertible Loan Agreement between and among TeamVest, Inc. and
Electronic Market Center, Inc. dated as of August 9, 2000.(11)
10.53 TeamVest, Inc. Convertible Promissory Note dated as of August 9,
2000.(11)
10.54 Operating Agreement between and among TeamVest, Inc., Electronic
Market Center, Inc. and E-Trustco.com, Inc. dated as of August 9,
2000.(11)
10.55 Lease Agreement between The Ashton Technology Group, Inc. and
Electronic Data Systems dated as of August 1, 2000.(11)
10.56 Confirmatory Agreement between The Ashton Technology Group, Inc. and
Electronic Market Center, Inc., dated as of August 1, 2000.(11)
10.57 Memorandum of Understanding between The Ashton Technology Group,
Inc. and K. Ivan F. Gothner dated May 2, 1997.(11)
10.60 Common Stock Purchase Agreement, dated as of February 5, 2001,
between The Ashton Technology Group, Inc. and CALP II Limited
Partnership.(12)
21 Subsidiaries of Ashton.
23 Independent Auditor's Consent
66
- --------
* Incorporated by reference as indicated in the applicable footnote.
(1) Incorporated by reference to the Company's Form SB-2 Registration
Statement No. 33-1182.
(2) Incorporated by reference to Form 10-KSB, for the period ended March 31,
1998.
(3) Incorporated by reference to Form 10-QSB, for the period ended June 30,
1998.
(4) Incorporated by reference to Form 10-KSB, for the period ended March 31,
1999
(5) Incorporated by reference to Form 10-Q, for the period ended June 30,
1999.
(6) Incorporated by reference to Form 10-Q, for the period ended September 30,
1999.
(7) Incorporated by reference to Form 10-Q, for the period ended December 31,
1999.
(8)Incorporated by reference to Form 8-K, dated August 24, 1999.
(9)Incorporated by reference to Form 8-K, dated April 26, 2000.
(10)Incorporated by reference to Form 10-Q, for the period ended June 30, 2000.
(11)Incorporated by reference to Form 10-Q, for the period ended September 30,
2000.
(12)Incorporated by reference to Form S-3, dated May 22, 2001.
(13)Incorporated by reference to Form 10-K, for the period ended March 31, 2000
(b) Reports on Form 8-K
None.
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized as of July 16,
2001.
The Ashton Technology Group, Inc.
/s/ Fredric W. Rittereiser
By: _________________________________
Fredric W. Rittereiser
Chief Executive Officer
/s/ Jennifer L. Andrews
By: _________________________________
Jennifer L. Andrews
Senior Vice President and Chief
Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant, in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Fredric W. Rittereiser Director and Chief July 16, 2001
______________________________________ Executive Officer
Fredric W. Rittereiser (Principal Executive
Officer)
/s/ Arthur J. Bacci Director, President and July 16, 2001
______________________________________ Chief Operating Officer
Arthur J. Bacci
/s/ Fred S. Weingard Director and Executive July 16, 2001
______________________________________ Vice President
Fred S. Weingard
/s/ William W. Uchimoto Director and Executive July 16, 2001
______________________________________ Vice President
William W. Uchimoto
/s/ K. Ivan F. Gothner Director July 16, 2001
______________________________________
K. Ivan F. Gothner
/s/ Richard E. Butler Director July 16, 2001
______________________________________
Richard Butler
/s/ Thomas G. Brown Director July 16, 2001
______________________________________
Thomas G. Brown
/s/ Herbert Kronish Director July 16, 2001
______________________________________
Herbert Kronish
68