UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from _____ to ______
Commission file number: 1-14897
A.B. Watley Group Inc.
----------------------
(Exact name of small business issuer as specified in its charter)
Delaware 13-3911867
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
40 Wall Street, New York, N.Y.10005
-----------------------------------
(Address of principal executive offices)
(212) 422-1100
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(Issuer's telephone number)
(Former name, former address and former fiscal year, if changed since last
report)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Outstanding at
Common Stock August 8, 2000
------------ --------------
$.001 par value 8,429,487
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [x]
1
A. B. Watley Group Inc.
Index
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Statements of Financial Condition
June 30, 2000 (Unaudited) and
September 30, 1999 3
Consolidated Statements of Operations
Three months and nine months ended
June 30, 2000 and 1999 (Unaudited) 4
Consolidated Statements of Cash Flows
Nine months ended June 30, 2000
and 1999 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis
or Plan of Operation 8
PART II - OTHER INFORMATION
Item 2. Changes in Securities 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
A. B. Watley Group Inc.
Consolidated Statements of Financial Condition
June 30, September 30,
2000 1999
(Unaudited)
Assets
Cash and cash equivalents $5,831,004 $9,298,822
Restricted cash 525,485 513,753
Securities owned at market value 310,185 214,381
Receivables from clearing brokers 1,378,128 626,288
Property and equipment at cost, net of
accumulated depreciation of
$2,022,261 and $1,183,774 at
June 30, 2000 and September 30, 1999,
respectively 16,738,032 10,852,956
Loans receivable from related party 118,413 121,891
Deferred offering costs 17,917 21,667
Other assets 2,954,212 1,595,196
---------- ----------
Total assets $27,873,376 $23,244,954
=========== ===========
Liabilities and stockholders' equity
Liabilities:
Subordinated borrowings $350,000 $350,000
Subordinated borrowings from officer 180,000 180,000
Securities, sold not yet purchased 200,213 56,192
Notes payable, net of unamortized discount of
$147,612 and $221,697 at June 30, 2000 and
September 30, 1999 2,008,182 2,213,748
Notes payable to officer 1,700,000 -
Bank loan 10,000 40,000
Deferred rent incentives 1,442,212 752,512
Accounts payable and accrued liabilities 8,166,637 3,561,563
Other liabilities 594,271 247,952
---------- ----------
Total liabilities 14,651,515 7,401,967
---------- ----------
Stockholders' equity:
Common stock, $.001 par value, 20,000,000
authorized, 8,194,532 and 7,931,745 issued
and outstanding at June 30, 2000 8,195 7,932
and September 30, 1999, respectively
Additional paid-in capital 20,077,567 18,661,749
Option costs, net (100,331) (121,331)
Accumulated deficit (6,763,570) (2,705,363)
---------- ----------
Total stockholders' equity 13,221,861 15,842,987
---------- ----------
Total liabilities and stockholders' equity $27,873,376 $23,244,954
=========== ===========
3
A. B. Watley Group Inc.
Consolidated Statements of Operations
(UNAUDITED)
Three Months Ended Nine Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
Revenues:
Commissions $ 9,167,465 $ 5,071,746 $ 25,902,411 $ 11,262,118
Data service revenues 497,949 485,037 1,472,910 1,052,509
Principal transactions 1,801,964 692,112 4,437,449 1,791,906
Interest and other income 596,441 208,580 1,489,595 325,319
Interest income - related party 1,545 1,545 4,635 4,635
------------ ----------- ------------ ------------
Total revenues 12,065,364 6,459,020 33,307,000 14,436,487
Interest expense 58,511 85,382 191,898 280,939
Interest expense - related party 6,667 3,750 14,167 11,250
------------ ----------- ------------ ------------
Net revenues 12,000,186 6,369,888 33,100,935 14,144,298
Expenses:
Commissions, floor brokerage, and clearing charges 5,915,402 2,210,789 13,887,975 5,343,869
Employee compensation and related costs 3,186,768 1,546,519 8,695,960 3,610,311
Communications 480,797 348,020 1,332,246 887,925
Business development 3,094,243 584,895 6,870,166 1,007,037
Professional services 365,013 522,968 1,324,053 1,065,449
Occupancy and equipment costs 1,160,136 506,577 3,578,724 1,178,447
Depreciation and amortization 296,217 173,035 734,806 433,437
Other expenses 311,263 157,935 713,799 429,932
------------ ----------- ------------ ------------
Total expenses 14,809,839 6,050,738 37,137,729 13,956,407
------------ ----------- ------------ ------------
Income (loss) before income tax and
extraordinary loss on early extinguishment of debt (2,809,653) 319,150 (4,036,794) 187,891
Income tax provision 2,453 5,858 21,413 14,158
------------ ----------- ------------ ------------
Income (loss) before extraordinary loss on early extinguishment
of debt (2,812,106) 313,292 (4,058,207) 173,733
Extraordinary loss on early extinguishment of debt 177,125 177,125
------------ ----------- ------------ ------------
Net income (loss) $ (2,812,106) $ 136,167 $ (4,058,207) $ (3,392)
============ =========== ============ ============
Basic earnings before extraordinary item per common share $ (0.35) $ 0.04 $ (0.51) $ 0.03
Diluted earnings before extraordinary item per common share $ (0.35) $ 0.04 $ (0.51) $ 0.03
Basic loss on early extinguishment of debt -- $ (0.02) -- $ (0.03)
Diluted loss on early extinguishment of debt -- $ (0.02) -- $ (0.03)
Basic earnings per common share $ (0.35) $ 0.02 $ (0.51) --
Diluted earnings per common share $ (0.35) $ 0.02 $ (0.51) --
Weighted average shares outstanding - basic 8,053,288 7,390,536 7,987,805 6,105,221
Weighted average shares outstanding - diluted 8,053,288 7,996,413 7,987,805 6,485,100
4
A. B. Watley Group Inc.
Consolidated Statements of Cash Flows
(UNAUDITED)
Nine Months Ended
June 30, 2000 June 30, 1999
--------------- -------------
Cash flows from operating activities
Net loss $(4,058,207) $ (3,392)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 734,806 433,437
Non-cash compensation / service costs 41,982 321,876
Changes in assets and liabilities:
(Increase) decrease in operating assets:
Restricted cash (11,732) (507,884)
Securities owned (95,804) (420,503)
Receivables from clearing brokers (751,840) 182,434
Loans receivable from related party 3,478 (4,635)
Other assets (1,373,848) (386,286)
Increase in operating liabilities:
Securities sold, not yet purchased 144,021 128,047
Accounts payable and accrued liabilities 3,698,195 552,552
Other liabilities 346,319 200,270
----------- ------------
Net cash provided by (used in) operating activities (1,322,630) 495,916
----------- ------------
Cash flows used in investing activities
Purchases of property and equipment, net (5,779,466) (2,882,205)
Deferred rent incentives 770,950 --
----------- ------------
Net cash used in investing activities (5,008,516) (2,882,205)
----------- ------------
Cash flows from financing activities
Proceeds from issuance of common stock -- 14,367,116
Proceeds from exercised warrants 350,000 --
Proceeds from exercised options 1,048,894 2,500
Proceeds from notes payable to officer 1,700,000
Proceeds from (Repayment of) notes payable (205,566) 150,000
Deferred offering costs -- 52,318
Repayment of bank loan (30,000) (30,000)
----------- ------------
Net cash provided by financing activities 2,863,328 14,541,934
----------- ------------
Net increase (decrease) in cash and cash
equivalents (3,467,818) 12,155,645
Cash and cash equivalents at beginning of period 9,298,822 970,308
----------- ------------
Cash and cash equivalents at end of period $ 5,831,004 $ 13,125,953
=========== ============
Supplemental non-cash financing activities
and disclosure of cash flow information
Accounts payable for purchases of property and equipment $ 906,834 $ 348,298
Issuance of non-employee stock options -- $ 16,000
Cash paid for:
Interest $ 194,815 $ 149,854
Taxes $ 48,541 $ 5,858
5
A.B. Watley Group Inc.
Notes to Consolidated Financial Statements
(UNAUDITED)
1. Organization and Basis of Presentation
A.B. Watley Group Inc. ("ABWG" or the "Company"), which was formerly known as
Internet Financial Services Inc., conducts business primarily through its
principal subsidiary, A.B. Watley, Inc. ("A.B. Watley"). A.B. Watley is a
registered broker-dealer under the Securities Exchange Act of 1934 and is a
member of the National Association of Securities Dealers, Inc. ABWG is a
Delaware corporation organized May 15, 1996.
A.B. Watley is an introducing broker-dealer which conducts business in
electronic trading, information and brokerage services, as well as institutional
block trading. A.B. Watley clears all transactions through two clearing brokers
on a fully disclosed basis. Accordingly, A.B. Watley is exempt from Rule 15c3-3
of the Securities and Exchange Commission ("SEC").
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended June
30, 2000 are not necessarily indicative of the results that may be expected for
the year ended September 30, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto for the fiscal year
ended September 30, 1999 included in the Company's Annual Report on Form 10-KSB.
The consolidated financial statements include the accounts of ABWG and its
wholly-owned subsidiary, A.B. Watley. All significant intercompany balances and
transactions have been eliminated. Certain prior year amounts reflect
reclassifications to conform to current year's presentations.
2. Net Capital Requirement
A.B. Watley is subject to the SEC's Uniform Net Capital Rule 15c3-1 (the "Net
Capital Rule") which requires A.B. Watley to maintain minimum net capital such
that the ratio of aggregate indebtedness to net capital, both as defined, shall
not exceed 15 to 1. The Net Capital Rule also requires that equity capital may
not be withdrawn or cash dividends paid if A.B. Watley's resulting net capital
ratio would exceed 10 to 1. At June 30, 2000, A.B. Watley had net capital, as
defined, of $1,222,062 which was $821,785 in excess of its required net capital
of $400,277. The aggregate indebtedness to net capital ratio was 4.91 to 1.
6
A.B. Watley Group Inc.
Notes to Consolidated Financial Statements
(UNAUDITED)
3. Stock Options
On March 14, 2000, the stockholders approved the adoption of the Company's 1999
stock option plan. The Company has reserved 800,000 shares of common stock for
issuance upon exercise of options granted pursuant to the 1999 stock option
plan.
4. Earnings Per Share
The Company recognized a net loss for the three months ended June 30, 2000 and
nine month periods ending June 30, 2000 and June 30, 1999,therefore these
periods diluted earnings per common share is the same as basic earnings per
common share. In calculating diluted earnings per common share for the three
month period ending June 30, 1999, the company assumed the fair value of its
common stock for the period April 1, to April 20, 1999 to be $7.00 per share and
for the period April 21, to June 30,1999, to be the daily closing market price.
5. Notes Payable to Officer
Effective May 31, 2000 and June 30, 2000, the Company issued promissory notes in
the amount of $1,200,000 and $500,000, respectively, to an officer and major
stockholder of the Company. The note bear interest at 7% per annum. The
principal is payable on the second anniversary of the issue date of the notes.
The accrued interest shall be payable in 24 equal monthly installments.
6. Warrants
On January 3, 2000 New York Small Business Venture Fund LLC ("NYSB") exercised
50,000 warrants equal to 50,000 shares. The warrants were issued as a result of
a $500,000 loan that the company obtained in October 1999 and repaid from the
proceeds of the company's initial public offering ("IPO"). The warrants were
exercised at the IPO price of $7.00 per share.
During the quarter ending June 30, 2000, Whale Securities Co., L.P. ("Whale")
exercised 124,784 underwriter's warrants, on a cashless basis, and received
59,154 shares. The warrants were issued as a result of underwriting the
Company's IPO on April 23, 1999. The warrants were exercised at the price of
$11.55 per share. Whale continues to hold warrants to purchase an additional
75,216 shares, which expire April 23, 2004.
7. Subsequent Events
On July 6, 2000 and July 17, 2000, NYSB exercised 85,000 and 56,250 warrants,
respectively, equal to 141,250 shares. The warrants were issued as a result of a
$500,000 loan that the Company obtained in October 1999 and repaid from the
proceeds of the Company's IPO. The warrants were exercised at the IPO price of
$7.00 per share.
On July 17, 2000, New York Community Investment Company LLC (NYCIC) exercised
28,750 warrants equal to 28,750 shares. The warrants were issued as a result of
a $400,000 loan that the Company obtained in January 1999. The warrants were
exercised at the IPO price of $7.00 per share. NYCIC continues to hold warrants
to purchase an additional 111,250 shares, which expire January 28, 2004.
Effective August 8, 2000, the Company entered into an agreement with an
investment group providing the Company with an eighteen- month equity line of up
to $48 million. The agreement allows the Company to draw down funds in exchange
for equity. The Company is not obligated to take down any of the funds and
pricing is based upon ninety four per cent of the volume weighted average price
(VWAP) of the Company's stock for the 22 days prior to each takedown. The
Company will pay the placement agent a fee of 5% of any amount drawn down. In
addition, the Company is providing approximately 60,000 warrants each to the
investment group and placement agent at an approximate strike price of $20.00.
The Company will register the stock for resale under the Securities Act of 1933.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-KSB. The results of operations for the three and nine months ended June 30,
2000 are not necessarily indicative of the results for the entire fiscal year
ending September 30, 2000.
Results of Operations
Three months ending June 30, 2000 compared to the three months ending June 30,
1999.
REVENUES. Total revenues for the quarter ending June 30, 2000 were $12,065,364,
an increase of 87%, as compared to revenues of $6,459,020 for the quarter ending
June 30, 1999. Revenues from commissions increased by $4,095,719, or 81%, from
$5,071,746 for the June 30, 1999 quarter to $9,167,465 for the June 30, 2000
quarter due primarily to the significantly increased number of online trades
executed as well as due to the growth in our third-market institutional sales
division. During the quarter ending June 30, 2000, the Company's online
brokerage division had total billed transactions of 423,029 and average billed
transactions of 6,715 per day, an increase of 98% compared to an average daily
billed transaction rate of 3,395 per day during the June 30, 1999 quarter
totaling 210,470 billed transactions. Data service revenues increased by
$12,912, or 3%, from $485,037 for the June 30, 1999 quarter to $497,949 for the
quarter ending June 30, 2000 due to the increase in the number of online
accounts receiving free data. Revenues from principal transactions increased by
$1,109,852, or 160%, from $692,112 for the June 30, 1999 quarter to $1,801,964
for the quarter ending June 30, 2000, mainly as a function of the significantly
higher volumes of business conducted by both the online brokerage division's
trading desk and the third-market institutional sales division. Interest and
other income increased from $208,580 for the June 30, 1999 quarter to $596,441
for the quarter ending June 30, 2000.
Interest expense decreased from $85,382 for the June 30, 1999 quarter to $58,511
for the June 30, 2000 quarter as result of decreased borrowings.
As a result of the foregoing, net revenues increased by $5,630,298, or 88%, from
$6,369,888 for the June 30, 1999 quarter to $12,000,186 for the quarter ending
June 30, 2000. Nearly all of our revenues were generated by clients in the
United States and no single group of related clients accounted for 10% or more
of our revenues.
EXPENSES EXCLUDING INTEREST. Total expenses increased by $8,759,100, or 145%,
from $6,050,738 for the June 30, 1999 quarter to $14,809,839 for the quarter
ending June 30, 2000. Commissions, floor brokerage and clearing charges
represent payments to our clearing and floor brokers and to certain employees
who facilitate our clients' transactions. As a result of the large increase in
the volume of business conducted by our online clients, such expenses increased
by $3,704,613, or 168%, from $2,210,789 for the June 30, 1999 quarter to
$5,915,402 for the quarter ending June 30, 2000. Employment compensation and
related costs increased by $1,640,249, or 106%, from $1,546,519 for the June 30,
1999 quarter to $3,186,768 for the quarter ending June 30, 2000, largely due to
the hiring of 40 new employees to service the growth in our client base.
Communications expense increased by $132,777, or 38%, from $348,020 for the June
30, 1999 quarter to $480,797 for the quarter ending June 30, 2000 as a function
of the growth in our online client base. The Company expects that the foregoing
expenses will continue to increase as the Company expands its client base.
Business development costs consist primarily of advertising costs which have
mostly been for television, radio, online and print advertising to obtain new
clients. These expenses increased by $2,509,348, or 429%, from $584,895 for the
June 30, 1999 quarter to $3,094,243 for the quarter ending June 30, 2000 as the
Company increased its planned advertising and promotional efforts.
8
Professional services decreased from $522,968 for the June 30, 1999 quarter to
$365,013 for the quarter ending June 30, 2000 due to the hiring of additional
staff, resulting in less dependency on outside consultants. Occupancy and
equipment costs increased by $653,559, or 129%, from $506,577 for the June 30,
1999 quarter to $1,160,136 for the quarter ending June 30, 2000, primarily due
to the addition of 24,000 square feet at 40 Wall Street and the leasing of
additional equipment to increase our capacity and to facilitate the relocation
efforts. Depreciation and amortization increased by $123,182, or 71%, from
$173,035 for the June 30, 1999 quarter to $296,217 for the quarter ending June
30, 2000 for similar reasons. Other expenses increased by $153,328, or 97%, from
$157,935 for the June 30, 1999 quarter to $311,263 for the quarter ending June
30, 2000 due to the Company's overall growth.
The income tax provision decreased from $5,858 for the June 30, 1999 quarter to
$2,453 for the quarter ending June 30, 2000.
As a consequence of the foregoing, our operating loss increased from a net
income of $136,167 for the June 30, 1999 quarter to a net loss of $2,812,106 for
the quarter ending June 30, 2000.
Nine months ended June 30, 2000 compared to nine months ended June 30, 1999.
NET REVENUES. Total revenues for the nine months ended June 30, 2000 were
$33,307,000, an increase of $18,870,513, or 131%, as compared to revenues of
$14,436,487 for the nine months ended June 30, 1999. Revenues from commissions
increased by $14,640,293, or 130%, from $11,262,118 for the nine months ended
June 30, 1999 to $25,902,411, due primarily to the significantly increased
number of online trades executed as well as the growth in our third-market
institutional sales division. During the nine months ending June 30, 2000, the
Company's online brokerage division had total billed transactions of 1,176,715
and average billed transactions of 6,193 per day, an increase of 164% compared
to an average daily billed transaction rate of 2,346 per day during the nine
months ending June 30, 1999, totaling 443,341 billed transactions. Data service
revenues also increased by $420,401, or 40%, from $1,052,509 for the nine months
ending June 30, 1999 to $1,472,910 for the nine months ending June 30, 2000, due
to the increase in the number of online accounts. Revenues from principal
transactions increased by $2,645,543, or 148%, from $1,791,906 for the nine
month period ending June 30, 1999 to $4,437,449 for the nine month period ending
June 30, 2000, mainly as a function of the significantly higher volumes of
business conducted by both the online brokerage division's trading desk and the
third-market institutional sales division. Interest and other income increased
from $325,319 for the nine month period ending June 30, 1999 to $1,489,595 for
the nine months ending June 30, 2000.
Interest expense decreased from $280,939 for the nine months ended June 30, 1999
to $191,898 for the nine months ending June 30, 2000 primarily as a result of
decreased borrowings.
As a result of the foregoing, net revenues increased by $18,956,637, or 134%,
from $14,144,298 for the nine months ending June 30, 1999 to $33,100,935 for the
nine months ending June 30, 2000. Nearly all of our revenues were generated by
clients in the United States and no single client or group of related clients
accounted for 10% or more of our revenues.
EXPENSES EXCLUDING INTEREST. Total expenses increased by $23,181,322, or 166%,
from $13,956,407 for the nine months ending June 30, 1999 to $37,137,729 for the
nine months ending June 30, 2000. Commissions, floor brokerage and clearing
charges represent payments to our clearing and floor brokers and to certain
employees who facilitate our clients' transactions. As a result of the large
increase in the volume of business conducted by our online clients, such
expenses increased by $8,544,106, or 160%, from $5,343,869 for the nine months
ending June 30, 1999 to $13,887,975 for the nine months ending June 30, 2000.
Employment compensation and related costs increased by $5,085,649, or 141%, from
$3,610,311 for the nine months ending June 30, 1999 to $8,695,960 for the nine
months ending June 30, 2000, largely due to the hiring of 40 new employees to
service the growth in our client base. Communications expense increased by
$444,321, or 50%, from $887,925 for the nine months ending June 30, 2000 to
$1,332,246 for the nine months ending June 30, 2000 as a function of the growth
in our online client base. We expect that the foregoing expenses will continue
to increase as we expand our client base.
9
Business development costs consist primarily of advertising costs to obtain new
clients, which costs have mostly been for television, radio, online and print
advertising. These expenses increased by $5,863,129, or 582%, from $1,007,037
for the nine months ending June 30, 1999 to $6,870,166 for the nine months
ending June 30, 2000 as the Company increased its planned advertising and
promotional efforts.
Professional services increased from $1,065,449 for the nine months ended June
30, 1999 to $1,324,053 for the nine months ending June 30, 2000 due to the
overall growth of the business. Occupancy and equipment costs increased by
$2,400,277, or 204%, from $1,178,447 for the nine months ending June 30, 2000 to
$3,578,724 for the nine months ending June 30, 2000, primarily due to the
addition of 24,000 square feet at 40 Wall Street and the leasing of additional
equipment to increase our capacity and to facilitate the relocation efforts.
Depreciation and amortization increased by $301,369, or 70%, from $433,437 for
the nine months ending June 30, 1999 to $734,806 for the nine months ending June
30, 2000 for similar reasons. Other expenses increased by $283,867, or 66%, from
$429,932 for the nine months ending June 30, 1999 to $713,799 for the nine
months ending June 30, 2000 due to overall growth.
The income tax provision increased from $14,158 for the nine months ended June
30, 1999 to $21,413 for the nine months ending June 30, 2000.
As a consequence of the foregoing, our net loss increased from a net loss of
$3,392 for the nine months ending June 30, 1999 to a net loss of $4,058,207 for
the nine months ending June 30, 2000.
Liquidity and Capital Resources
Prior to our initial public offering ("IPO"), our capital requirements exceeded
our cash flow from operations as we built our business. Since the IPO, the
proceeds from the IPO, the exercise of employee stock options and warrants of
$1,400,000, the loan from an officer of the Company of $1,700,000 and cash flow
from operations have been able to satisfy our cash needs as we continued to
build our business. To continue our growth the Company has entered into an
equity line facility of $48,000,000 (see Note 7 of the Notes to Consolidated
Financial Statements contained herein).
During the nine months ended June 30, 2000, the Company spent approximately
$4,000,000 for software development. We are expecting to incur an additional
$500,000 in software development costs to complete our current projects. The
Company plans to complete the current project in August 2000. These software
development efforts are related to the creation of proprietary direct access
online trading and market information software. The software development efforts
will allow the Company to transition its Ultimate Trader customers from vendor
software to our proprietary software system which is expected to reduce the
Company's operating costs by approximately $1,200,000 per month to be realized
on an incremental basis over the next six month.
Cash used in operating activities during the nine months ending June 30, 2000
was $1,322,630. The Company had a net loss of $4,058,207, other assets of
$1,373,848, and receivables from clearing brokers of $751,840, which was offset
by an adjustment for depreciation and amortization of $734,806 and an increase
in other liabilities of $346,319 and an increase in accounts payable and accrued
liabilities of $3,698,195.
Cash used in investing activities was $5,008,516 during the nine months ended
June 30, 2000 compared to $2,882,205 during the nine months ending June 30,
1999. Uses of cash in the nine months ending June 30, 2000 related to purchases
of equipment, software and leasehold improvements made in the Company's new
facility at 40 Wall Street. In addition to the cash used in investing activities
during the nine months ended June 30, 2000, the Company accrued accounts payable
relating to purchases of property and equipment and leasehold improvements of
$696,253 during this period.
Cash provided by financing activities was $2,863,328 during the nine months
ending June 30, 2000 compared to $14,541,934 during the nine months ended June
30, 1999. Cash provided by financing activities during the nine months ending
June 30, 2000 consisted primarily of the exercise of employee options and
issuance of note payables.
Net Operating Loss Carryforward
The Company's net operating loss carryforward expires beginning in the year
2013. The issuance of additional equity securities, together with the Company's
public offering, and certain potential financing arrangements, could result in
an ownership change and thus could limit our use of the Company's prior net
operating losses. If the Company achieves profitable operations, any significant
limitation on the utilization of our net operating losses would have the effect
of increasing our tax liability and reducing net income and available cash
reserves. We are unable to determine the availability of these net operating
losses since this availability is dependent upon profitable operations, which we
have not achieved in periods prior to the most recent four quarters.
10
Relevant Accounting Standards
We generally grant stock options to employees and consultants with an exercise
price not less than the fair market value at the date of grant. We account for
stock option grants to employees in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly,
recognize no compensation expense related to option grants. In cases where we
grant options below the fair market value of the stock at the date of grant, the
difference between the strike price and the fair market value is treated as
compensation expense and amortized over the vesting period of the option, if
any. Stock options granted to consultants and others instead of cash
compensation are recorded based upon management's estimate of fair value of the
options or the related services provided and expensed over the vesting period,
if any.
We account for income taxes under the provisions of SFAS No. 109, "Accounting
for Income Taxes." We recognize the current and deferred tax consequences of all
transactions that have been recognized in the financial statements, using the
provisions of enacted tax laws. Deferred tax assets are recognized for temporary
differences that will result in deductible amounts in future years and for tax
loss carryforwards, if in the opinion of our management, it is more likely than
not that the deferred tax asset will be realized. SFAS No. 109 requires
companies to set up a valuation allowance for the component of net deferred tax
assets which does not meet the more likely than not criteria for realization. We
have established this valuation allowance for our deferred tax assets.
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings
per Share." The new rules are effective for both interim and annual financial
statements for the periods ending after June 15, 1997. SFAS No. 128 supersedes
APB No. 15 to conform earnings per share with international standards as well as
to simplify the complexity of the computation under APB No. 15. The previous
primary earnings per share calculation is replaced with a basic earnings per
share calculation. The basic earnings per share differs from the primary
earnings per share calculation in that the basic earnings per share does not
include any potentially dilutive securities. Fully dilutive earnings per share
is replaced with diluted earnings per share and should be disclosed regardless
of dilutive impact of basic earnings per share. Accordingly, we have adopted
SFAS No. 128 effective September 30, 1999.
In fiscal 1999, the Company adopted SFAS No. 131, Disclosure about Segments of
an Enterprise and Related Information. SFAS No. 131 supersedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise. Under the new
standard, the Company is required to use the management approach to reporting
its segments. The management approach designates that the internal organization
that is used by management for making operating decisions and assessing
performance as the source of the Company's segments. Based on this approach, the
Company has determined that it operates in one reporting segment.
Year 2000 Issues
The financial markets were essentially unaffected by the issues regarding Y2K,
reporting only a few minor technical problems. The Company and its
counterparties were not adversely affected. However, we will continue monitoring
our systems and those of our vendors to ensure that there is no material
disruption to the Company's operations due to Y2K issues.
Forward Looking Statements
Certain statements contained in this report, including statements regarding the
development of services and markets and future demand for services and other
statements regarding matters that are not historical facts, discuss future
expectations or other forward-looking information. Those statements are subject
to known and unknown risks, uncertainties and other factors that could cause our
actual results to differ materially from those contemplated by the statements.
Factors that might cause a difference include, but are not limited to, customer
trading activity, loss of one or more significant customers, changes in
technology, issues involved in the launch of new or modified software programs,
issues involved in acting as licensor for proprietary software, shifts in
competitive patterns, ability to manage growth effectively, risks associated
with acquisitions including integration risks, risks associated with strategic
partnerships, various project-associated risks, substantial competition, general
economic and securities markets conditions, risks associated with intellectual
property rights, risks associated with international operations and other risk
factors listed from time to time in the Company's filings and reports with the
Securities and Exchange Commission.
11
PART II - OTHER INFORMATION
Item 2. Changes in Securities.
On April 20, 1999, the Securities and Exchange Commission declared the Company's
Registration Statement on Form SB-2 (Reg. No. 333-71783) [the "Registration
Statement"] effective.
From the effective date of the Registration Statement through the date hereof,
the Company (i) repaid indebtedness of approximately $776,800; (ii) used
approximately $3,556,000 for leasehold improvements; (iii) used approximately
$9,167,200 for equipment and software purchases. All of such payments were made
to third parties, except for the repayment of indebtedness of $100,000 to the
father of Eric Steinberg, an Executive Vice President of the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this report:
None.
(b) No reports on Form 8-K were filed during the quarter ended June
30, 2000.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: August 14, 2000
A. B. WATLEY GROUP INC
By: /s/ Steven Malin
----------------------------
Steven Malin
Chairman and Chief Executive Officer
By: /s/ Joseph M. Ramos, Jr.
----------------------------
Joseph M. Ramos, Jr.
Senior Vice President and
Chief Financial Officer
13